Transition from FERA to FEMA

Chapter II

2.1 The scheme of FERA provided for obtaining Reserve Bank’s permission either special or general, in respect of most of the regulations there under. The general permissions have been granted by Reserve bank under these provisions in respect of various matters by issuing a large number of notifications from time to time since the Act came into force from 1^st January 1974. Special permissions were granted upon the applicants submitting prescribed applications for the purpose. Thus, in order to understand the operative part of the regulations one had to refer to the Exchange Control Manual as well as the various notifications issued by RBI and the Central Government.

FEMA has brought about a sea change in this regard and except for section 3, which relates to dealing in foreign exchange, etc. no other provisions of FEMA stipulate obtaining RBI permission. It appears, that this is a transition from the era of permissions to regulations. The emphasis of FEMA is on RBI laying down the regulations rather than granting permissions on case to case basis. This transition has also taken away the concept of “exchange control” and brought in the era of “exchange management”. In view of this change, the title of the legislation has rightly been changed to FEMA.

The preamble to FEMA lays down that the Act is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. As far as facilitating external trade is concerned, section 5 of the Act removes restrictions on drawal of foreign exchange for the purpose of current account transactions. As external trade i.e. import / export of goods & services involve transactions on current account, there will be no need for seeking RBI permissions in connection with remittances involving external trade. The need to remove restrictions on current account transactions was necessitated as the country had given notice to the IMF in August, 1994 that it had attained Article VIII status. This notice meant that no restrictions will be imposed on remittances of foreign exchange on account of current account transactions.

Section 5, however, contains a proviso that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed. It appears that this is an enabling provision for the Central Government to impose restrictions on current account transactions in case the situation warrants such restrictions probably due to foreign exchange crisis in future. This proviso seems to have been added keeping in view the lessons learnt by certain South-East Asian countries during the 1997-98 crisis which required stricter exchange controls till the crisis was over.

Similarly, section 7 retains controls on exporters.

Though the preamble to FEMA talks about promoting the orderly development and maintenance of foreign exchange market in India, there are no specific provisions in the Act to attain this objective.

2.2 FERA contained 81 sections (some were deleted in the 1993 amendment of the Act) of which 32 sections related to operational part and the rest covered penal provisions, authority and powers of Enforcement Directorate, etc. FEMA contains 49 sections of which 12 sections cover operational part and the rest contravention, penalties, adjudication, appeals, enforcement directorate, etc. What was a full section under FERA seems to have been reduced to a sub-clause under FEMA in some cases.

For example,

(i) Section 13 of FERA provided for restrictions on import of foreign currency & foreign securities. Now this restriction is provided through a sub-clause 6(3)(g).

(ii) Section 25 of FERA provided for restrictions on Indian residents holding immovable properties outside India. Now the restriction is under sub-clause 6(4).

Reduction in the number of sections means nothing. Real quality of liberalisation will be known when all notifications & circulars are finalised & published.

Need for FEMA

2.3 The demand for new legislation was basically on two main counts.

2.3.1 The FERA was introduced in 1974when India’s foreign exchange reserves position was not satisfactory. It required stringent controls to conserve foreign exchange and to utilise in the best interest of the country. Very strict restrictions have outlived their utility in the current changed scenario. Secondly there was a need to remove the draconian provisions of FERA and have a forward-looking legislation covering foreign exchange matters.

Has FEMA met the demands

2.4 Has FEMA met these demands? As far as transactions on account of trade in goods and services are concerned, FEMA has by and large removed the restrictions except for the enabling provision for the Central Government to impose reasonable restrictions in public interest. The capital account transactions will be regulated by RBI / Central Govt. for which necessary circulars / notifications will have to be issued under FEMA.

Repeal of draconian provisions under FERA

2.5 The draconian regulations under FERA related to unbridled powers of Enforcement Directorate. These powers enabled Enforcement Directorate to arrest any person, search any premises, seize documents and start proceedings against any person for contravention of FERA or for preparations of contravention of FERA. The contravention under FERA was treated as criminal offence and the burden of proof was on the guilty.

FEMA has reduced the rigors of exchange control by removing / diluting these provisions. The contravention has been treated as civil offence. Primarily , for an offence, the accused cannot be arrested. He can be arrested only for non-payment of the penalty imposed for contravention. Specific provision has been made by fixing a time limit of twenty-four hours for bringing the arrested person before the Adjudicating Authority. Similarly, in respect of appeals filed before the Appellate Tribunal, a period of 180 days has been stipulated for final disposal of the appeals. No such time limit was laid down under FERA. The powers of Enforcement Directorate have been substantially reduced and new provisions for Adjudicating Authority and Compounding of cases have been introduced.

2.6 Civil Law

Foreign Exchange Regulation Act had its genesis in the Defence of India Rules. The British Government had enacted the rules to exercise control over its colonies. Hence FERA was like a criminal law.

Section 35 empowered any officer of Enforcement Directorate to arrest a person, if he had a reason to believe that the person is guilty of violation of FERA.

There are several reported cases of human rights violations by the Enforcement Directorate. Such laws do not have a place in a democratic country like ours.

FEMA is a civil law. Primarily there is no imprisonment for violation of the law. Only penalty can be levied u/s. 13. However, if the person cannot pay the penalty, then he can be arrested.

Under FERA, there was a presumption regarding mental culpable state. Mental culpable state means the existence of a guilty mind. The accused person had the intention, motive or knowledge of the violation of law. A court had to presume the existence of such a guilty mind, unless the accused proved that he had no guilty mind.

Under FEMA, this presumption is not there. The prosecution will have to prove that the person has committed a violation of the law.

2.7 FEMA has stipulated sunset period of two years for transition from FERA to FEMA as far as contravention of the provisions of erstwhile FERA are concerned.

2.8 The real test of the new forward looking legislation will rest on the legal interpretation of the various provisions and the clarifications / circulars / notifications issued by RBI/ Central Govt. during this transition period. Reducing the rigors of FERA should not mean that one can contravene the provisions of FEMA and get away with it by paying the penalty.

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