Progression / Transfer of FERA to FEMA

Foreign Exchange Regulation Act, 1973 (FERA) in its existing form became ineffective, therefore, increasingly incompatible with the change in economic policy in the early 1990s. While the need for sustained husbandry of foreign exchange was recognized, there was an outcry for a less aggressive and mellower enactment, couched in milder language. Thus, the Foreign Exchange Management Act, 1999 (FEMA) came into being.

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 1st 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.

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,

  • 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).
  • 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 liberalization will be known when all notifications & circulars are finalized & published.

Need for FEMA

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

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 utilize 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.

Repeal of draconian provisions under FERA

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.