Foreign Exchange Regulation by the R.B.I is mainly regulated by the Foreign Exchange Regulation Act (FERA), which was introduced at a time when foreign exchange (Forex) reserves of the country were low. FERA proceeded on presumption that all foreign exchange earned by Indian residents rightfully belonged to the Government of India and had to be collected and surrendered to the Reserve Bank of India (RBI). FERA primarily prohibited all transactions that are not permitted by RBI. The objective of FERA was to regulate certain payment dealings in foreign exchange and securities transactions that indirectly affects foreign exchange of import and export of currency and to conserve precious foreign exchange and to optimize the proper utilization of foreign exchange so as to promote the economic development of the country.
FERA is an act to regulate certain payments dealing in foreign exchange, securities, the import & export of currency and acquisition of immovable property by foreigners. Under Section 31 (1) of the Foreign Exchange Regulation Act (FERA) of 1973, it is mandatory for foreign corporations, which are not incorporated in India to obtain permission from the Reserve Bank Of India (RBI) to acquire, hold, transfer or dispose -off in any manner (expect by way of lease for a period not exceeding five years) any immovable property in India.
FERA was enacted in September 1973 and it came in force from January 1, 1974. It was amended by the Foreign Exchange Regulation (Amendment) Act 1993 and later in 2000, was replaced by FEMA.
- FERA applied to all citizens of India, all over India.
- The idea was to regulate the foreign payments, regulate the dealings in Foreign Exchange & securities and conservation of Foreign exchange for the nation.
Important features of FERA are as follows:
- RBI can authorize a person / company to deal in foreign exchange.
- RBI can authorize the dealers to do transact the Foreign Currencies, subject to review and RBI was given power to revoke the authorization in case of non-compliancy
- RBI would authorize the persons as Money Changers who will convert the currency of one nation to currency of their nation at rates “Determined by RBI”
- NO person, other than “authorized dealer” would enter in any transaction of the foreign currency.
- For whatever purpose Foreign exchange was required, it was to be used only for that purpose. If he feels that he cannot use the currency of that particular purpose, he would sell it to a authorized dealer within 30 days.
- No person in India, without “permission from RBI” shall make payments to a person resident outside India and receive any payment from a person from outside India.
- No person shall draw issue or negotiate any bill of exchange in which a right to receive payment outside India is created.
- No person shall make any credit in an account of a person resident out of India.
- No person except authorized by RBI shall send foreign currency out of India.
- A person who has right to receive the foreign exchange would have not to delay the receipt of the foreign exchange.
FERA applied to all citizens of India. The idea was to regulate the foreign payments that deal the Foreign Exchange & securities and conservation of Foreign exchange for the nation. RBI can authorize a person / company to deal in foreign exchange and also can authorize the dealers to do transact the Foreign Currencies subject to review. RBI was given power to revoke the authorization in case of non-compliancy. RBI authorizes Money Changers who will convert the currency of one nation to currency of other nation at rates determined by RBI. For whatever purpose Foreign exchange is required it has to be used only for that purpose. If he feels that he cannot use the currency for that particular purpose he would sell it to an authorized dealer within 30 days. Some of the rules and restrictions that are followed by RBI are as follows
- Restrictions on import and export of certain currency
- Restrictions on payments that is illegal
- Restrictions on dealing in foreign exchange
- Payment for exported goods are done according to RBI
- Restrictions on issue of bearer securities
- Restriction on settlement in other country
- Restriction on holding of immovable property outside India
- Restrictions on the appointment of certain persons and companies as agents for doing FOREX
- Restrictions on establishment of place of business in India
- Permission of Reserve Bank required for practicing profession, etc. in India by nationals of foreign States
- Restriction on acquisition, holding, etc., of immovable property in India
- RBI has the Power to call for information of any person documents like Indian currency, foreign exchange and books of account.
- Power to search suspected persons and to seize documents.
Extensive relaxations in the rules governing foreign exchange were initiated, prompted by the liberalisation measures introduced since 1991 and the Act was amended as a new Foreign Exchange Regulation (Amendment) Act 1993. Significant developments in the external sector, such as, substantial increase in foreign exchange reserves, growth in foreign trade, rationalisation of tariffs, current account convertibility, liberalisation of Indian investments abroad, increased access to external commercial borrowings by Indian corporates and participation of foreign institutional investors in Indian stock market, resulted in a changed environment. Keeping in view the changed environment, the Foreign Exchange Management Act (FEMA) was enacted in 1999 to replace FERA. FEMA became effective from June 1, 2000.
Any transaction in foreign Exchange is now governed by Foreign Exchange Management ACT 1999(FEMA). FERA was repealed from 1st of June, 2000 and all foreign exchange transactions from this date will be governed by the provisions of the Foreign Exchange Management Act 1999. As per the foreign exchange Management Act 1999 the Reserve Bank of India principally controls the movement of the Foreign Exchange of the country. As per sec 11 (1) of FEMA, the Reserve Bank may for the purpose of securing compliance with the provisions of this act and any rules, regulations, notification or directions made there under give to the authorized person any direction in regard to making of payment or the doing or desist from doing any act relating to foreign security. As per Section 11(2) of the act the Reserve Bank may for the purpose of ensuring the compliance with the provisions of the Act or of any rules regulations notification or order made there under direct any authorized person to furnish such information in such manners as it deem fit. As per Section 11 (3) where any authorized person contravenes any direction given by the Reserve Bank under this act or fail to file any return as directed by the Reserve Bank, the Reserve Bank may after giving reasonable opportunities of being heard impose on the authorized person a penalty which may extent to ten thousand rupees and in the case of continuing contravention with an additional penalty which may extend to two thousand rupees for every day during which such contravention continues. The Exchange control Manual published by Reserve Bank if India gives various directives to authorized dealers in foreign exchange. The authorized dealers in foreign exchange are expected to strictly follow the directives of RBI in exchange control manual without any deviation.
This article is penned by Ashutosh Pandey.