Any transaction in foreign Exchange is governed by Foreign Exchange Management ACT 1999. The FERA had its origin by defense of India rules (DIR) 1935. This control was exercised in order to ensure the foreign exchange particularly due to severe constraints on exchange reserve due to Second World War. Later on 23 March 1947 this rule became in the State Book as Foreign Exchange Regulation Act 1947. Later this act modified with certain amendments in 1973 and become effective from 01.01.1974. Further relaxation of this affect was effected since 1994. The same was repealed from 1st June, 2000 and all foreign exchange transactions from this date will be governed by the provisions of the Foreign Exchange Management Act 1999.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.