Skip to main content

How is foreign exchange regulated and managed according to FEMA, 1999?

The Foreign Exchange Management Act, 1999 (FEMA) has been in force with effect from 1.6.2000, thus replacing the old Foreign Exchange Regulation Act (FERA) 1973. Strict forex restrictions hailing from closed door economy era became outdated the day India embraced globalisation. Therefore India removed draconian provisions of FERA and put in place a forward-looking legislation covering foreign exchange matters in form of FEMA. There is sea change in the outlook of FEMA in comparison with FERA but reasonable restrictions with regard to foreign exchange transactions with a view to facilitate them in a regulated manner find a place in FEMA, 1999 and connected rules and regulations. The preamble to FEMA lays down that purpose of 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. Rationale for strict regulations under FERA 1973After Independence India was left with little forex reserves and during the oil –crisis of seventies ballooning oil import bills further drained foreign exchange reserves. Unsatisfactory reserves made it imperative to put in place stringent controls to conserve foreign exchange and to utilise it in the best interest of the country. This was the sole objective for which FERA was legislated by Indian parliament and by handing over central government complete monopoly over foreign exchange flow same was achieved. The act allowed government to artificially manage foreign exchange rate, regulate foreign business in India, restrict foreign investments by Indian residents and reduce imports of non-essential items. FEMA and FERA-A Comparison The aim of FERA was to control everything that was specified, relating to foreign exchange whereas FEMA lays down that ‘everything other than what is expressly covered is not controlled'. The overriding objective of FERA was to regulate and minimise dealings in foreign exchange and foreign securities while FEMA on the other hand aims to aid in creation of a liberal foreign exchange market in India. This difference in terminology reflects seriousness of government towards deregulation of foreign exchange and promotion of free flow of international trade. To facilitate external trade is concerned, section 5 of the Act removes restrictions on withdrawal 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 is no need for seeking RBI permissions in connection with remittances involving external trade. This is a marked deviation from FERA that under section 6 restricted imports and regulated exports, despite the government commitment to push for exports. The emphasis of FEMA is on Reserve Bank of India laying down the regulations rather than granting permissions on case-to-case basis. This transition has 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 from ‘Foreign Exchange Regulation Act' to ‘Foreign Exchange Management Act'. The main change that has been brought is that FEMA is a civil law, whereas the FERA was a criminal law. In simple word, for contravention of provisions under the FEMA arrest and imprisonment would not be resorted whereas it was the norm under the previous act. Drastic tenor of FERA can be gauged from the fact that it provided for imprisonment for violation of even very minor offenses. Under 1973 act, a person was presumed guilty unless he proved himself innocent whereas under FEMA a person is presumed innocent unless he is proven guilty. In simple words, earlier onus of proving innocence lay with the individual held guilty by enforcement authorities whereas now the onus of proving a person guilty lies with the enforcement authorities and until the authorities are unable to do so, the person is presumed innocent in the eyes of the law. FERA vested unrestrained powers to the office of Directorate of Enforcement .In FEMA powers of the directorate have been slashed down to considerably. Even the word "offence" is conspicuous by its absence in the substantive provisions of FEMA and has been replaced by the word "contravention" Contravention under FEMA now attract only monetary fines and that to have been reduced to three times the amount involved as compared to five times under the FERA. FEMA is a much simpler and smaller legislation in comparison to the previous act. There are 49 sections in all in FEMA of which 12 sections cover operational part and the rest contravention, penalties, adjudication, appeals, enforcement directorate, etc. Most distinguishing features of FEMA is that there is a provision for compounding of penalty as contained in Section 15 of FEMA. This could not have been imagined earlier under FERA. 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.

Conclusion: In comparison with African and Latin American countries, India has managed well. Whereas compared to the Asian tigers, India has done poorly. However, that is on the front of economic development. As far as exchange rate stability is concerned, we have done reasonably well.


Popular posts from this blog

Case Study: A perfect competition

In 1997, over $700 billion purchases were charged on credit cards, and this total is increasing at a rate of over 10 per cent a year. At first glance, the credit card market would seem to be a rather concentrated industry. Visa, MasterCard and American Express are the most familiar names, and over 60 per cent of all charges are made using one of these three cards. But on closer examination, the industry seems to exhibit most characteristics of perfect competition. Consider first the size and distribution of buyers and sellers. Although Visa, Mastercard and American Express are the choices of the majority of consumers, these cards do not originate from just three firms. In fact, there are over six thousand enterprises (primarily banks and credit unions) in the US that offer charge cards to over 90 million credit card holders. One person's Visa card may have been issued by his company's credit union in Los Angeles, while a next door neighbour may have acquired hers from a Miami …

What is the responsibility of business towards society? Why is social responsibility at a low pitch in India?

Responsibility of business towards society
A society consists of individuals, groups, organizations, families etc. They all are the members of the society. They interact with each other and are also dependent on each other in almost all activities. Thus, it has certain responsibilities towards society, which may be as follows:
to help the weaker and backward sections of the societyto preserve and promote social and cultural valuesto generate employmentto protect the environmentto conserve natural resources and wildlifeto promote sports and cultureto provide assistance in the field of developmental research on education, medical science, technology etc.
In other words, the responsibility of business towards society are:
Protection of environment.Better living conditions like housing, transport, canteen, crèches etc.Promotion of sports and culture.Opportunity for better career prospectsRegular supply of goods and servicesProper working conditions and welfare amenitiesGoods and services at…

Discuss the relationship between economics and management functions. How does the former contribute to the latter?

Economics and Management are ideal intellectual partners, each particularly fitted to strengthen and cross-fertilize the other. Economics provides the broader understanding of economic activity within which all organizations function; management in turn analyses the character and goals of that functioning. The management economics is often a subsection of the economic science and thus in broader sense a special form of the social, culture and Geisteswissenschaften. Like the economic science it is based in principle on the fact that most goods are limited and must by the participants be managed. It describes the economic functions of the enterprise within a national economy. In addition above all the optimal organization of the factors of production belongs apart from the company targets and the economical functions. In the broader sense also all households are enterprises.