An analysis of the Regulation of Foreign Exchange by RBI

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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:

  1. RBI can authorize a person / company to deal in foreign exchange.
  2. 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
  3. 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”
  4. NO person, other than “authorized dealer” would enter in any transaction of the foreign currency.
  5. 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.
  6. 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.
  7. No person shall draw issue or negotiate any bill of exchange in which a right to receive payment outside India is created.
  8. No person shall make any credit in an account of a person resident out of India.
  9. No person except authorized by RBI shall send foreign currency out of India.
  10. 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.