FOREIGN EXCHANGE MANAGEMENT ACT (FEMA)

Managerial Economics

Mentor: Sangita DuttaGuptaLG: 05

Presented by:

Priyanka Datta Raunak Nag Pooja Sharma Sukanta Dey Akash Dutta Kamalika Paul Puspendu Maity Archana Singh Nivedita Prasad

Objective

A study of FERA and FEMA

FEMA : Is it an advantage for Indian economy??

Source: http://en.wikipedia.org/wiki/Foreign_Exchange_Regulation_Act

What is FERA?

Foreign Exchange Regulation Act (FERA) was introduced by the Indira Gandhi Government in the year 1973 and came in force with effect from Jan 1 in1974

Consisted of 81 sections FERA Emphasized strictly on exchange control Control everything that was specified, relating to

foreign exchange Law violators were treated as criminal offenders Aimed at minimizing dealings in foreign

exchange and foreign securities

OBJECTIVES

To regulate certain payments To regulate dealings in foreign exchange and

securities To regulate transactions, indirectly affecting

foreign exchange To regulate the import and export of currency To conserve precious foreign exchange The proper utilization of foreign exchange so

as to promote the economic development of the country

Source: http://en.wikipedia.org/wiki/Foreign_Exchange_Management_Act

What is FEMA?

Foreign Exchange Management Act (FEMA) enacted on 29th December 1999

An act to consolidate and amend the law relating to foreign exchange

Facilitating external trade and payments Promoting the orderly development and

maintenance of Foreign Exchange market in India

OBJECTIVES

Provision regarding dealing and holding in foreign exchange

To promote foreign payments and trade in the country

To encourage the orderly maintenance and development of the foreign exchange market in India

Switch from FERA to FEMA

FERA, in place since 1975, did not succeed in restricting activities such as the expansion of transnational corporations(TNCs)

The concessions made to FERA in 1991-1993 showed that FERA was on the verge of becoming redundant

After the amendment of FERA in 1993, it was decided that the act would become the FEMA.

This was done in order to relax the controls on foreign exchange in India, as a result of economic liberalization.

FEMA served to make transactions for external trade (exports and imports) easier 

Transactions involving current account for external trade no longer required RBI’s permission

The deals in Foreign Exchange were to be ‘managed’ instead of ‘regulated’

Difference

The objective of FERA was to conserve forex and to prevent its misuse

Violation was Criminal Offence and was non compoundable

Definition of authorized person was narrow

The objective of FEMA is to facilitate external trade and payments and maintenance of forex market in India

Violation is a civil offence and is compoundable

Definition of authorized person is widened

FERA FEMA

Contd…

Citizenship was a criteria to determine the residential status of a person under FERA

Terms like Capital Account Transaction, current Account Transaction, person, service etc. were not defined in FERA

while stay of more than 182 days in India is the criteria to decide residential status under FEMA

Terms like Capital Account Transaction, current account Transaction person, service etc., have been defined in detail in FEMA

FERA FEMA

Implementation of FEMA

Based on sections: Section 2:-Authorized person to deal foreign exchange

an authorized dealer, and addresses the permissible exchange allowed for a business trip, for studies and medical treatment abroad, forex for foreign travel, the use of an international credit card, and remittance facility

Section 4:- Holding of foreign exchange, securities etc

Restrains any person resident in India from acquiring, holding or transferring any foreign exchange, security or any immovable property situated outside India except as specifically provided in the Act.

Contd…

Section 5:– deals with current account transactionAny person may sell or draw foreign exchange

to or from an authorized person if such sale or drawl is a current account transaction

Section 6: Deals with capital account transactionsThis section allows a person to draw or sell

foreign exchange from or to an authorized person for a capital account transaction.

Source: http://indianexpress.com/article/business/companies/flipkart-case-ed-finds-fema-violation-r1400-cr-fine-likely/

Case Study

The Enforcement Directorate has found online retail firm Flipkart in violation of FEMA provisions.

Enforcement Directorate (ED) is likely to send a show-cause notice alleging violation of Rs 1,400 crore under Foreign Exchange Management Act (FEMA), reports Indian express.

The agency has been looking into the activities of the e-commerce site since 2012 for possible violation of foreign investment rules.

A source from the ministry told the publication that the directorate now has prima facie evidence that the company flouted the country’s FDI rules.

India does not allow FDI in multi-retail e-commerce when selling to customers.

Flipkart sold its front end retail operations WS Retail to a group of investors led by former OnMobile COO Rajiv Kuchhal in February 2013 and had adopted marketplace model in April 2013.

Is FEMA moving towards the right direction ?

Conclusion

FEMA is more simple and consists of 49 sections

Increase in Foreign Exchange Reserve

Violation was civil offence and is compoundable

Has enhanced the development of MNCs in India