I. INTRODUCTION

1.1 Foreign Exchange Management Act (FEMA) has replaced Foreign Exchange Regulation Act (FERA). While the FERA was a law which sought to ‘control’ Foreign Exchange (FX) transactions, FEMA seeks to ‘regulate’.

FERA was enacted at the time when there was scarcity of FX. It was inherited from the British government which had passed laws controlling FX, to keep control over its colony. We also needed the law in the early years of FX scarcity. With changed scenario, FX is no longer a “precious & rare” commodity. It is just like any other commodity. There should be proper regulation, but not control. For economic issues, one needs a commercial law.

We have the Company law or Securities Act which lay down the regulations, but do not prevent us from doing something. If we comply with the law, the guidelines, etc., we can do our normal business.

In the days of scarcity, FERA was a sacrosanct necessity, but it is no longer so.

Similarities & Differences between FEMA & FERA

Like FERA, FEMA also will be governed by notifications. The basic statute empowers the government & RBI, to regulate, allow or prohibit transactions. Under FERA, almost all transactions which were permitted, were based on notifications and circulars. The law as such did not allow anything.

Similarly under FEMA, a lot of notifications will have to be issued granting general permissions.

And yet there is a fundamental difference.

Under FERA, a normal operative section would provide that “no person can do the following transactions without a general/special permission”. Thus for example, section 9 prohibited all payments to non-residents. Then several notifications permitted payments subject to certain conditions. It meant that if there was no permission, a payment to a non-resident was prohibited.

Now under section 5, all current account transactions are permitted under FEMA. RBI may regulate certain payments by issuing notifications / circulars. If there is a current account payment on which no notification has been issued, prima facie, it is permitted.

This is an important, positive change in the approach.

Even more radical is proviso to section 6(2), which prevents RBI from imposing any restrictions on loan repayments. This is for the first time that a legal curb is placed on RBI’s powers in its dealing with the citizens.

Scheme of the Critique on FEMA

1.2 Note the following

• The transition from FERA - a “controlling” law to FEMA - a “management” law is discussed in the second chapter.

• Current account convertibility has been already established through several RBI circulars since August, 1994. Now it has been introduced in the Act itself. It is discussed in chapter III.

• The definition of “resident” was unique under FERA. Being conceptually different from the definition under the tax laws, it caused considerable confusion for the layman. FEMA makes the definition comparable with the Income-tax Act; and yet retains flexibility. The concept is discussed in chapter IV.

• Hawala transactions have caused a haemorrhage for the Indian economy. Liberalisation carried out by Indian Government has already diminished the demon. It is discussed in chapter V.

• Relationship between FEMA & Money Laundering legislation is discussed in chapter VI.

• Further scope for liberalisation and other important issues are discussed in chapter VII.

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