Introduction:

Exchange control:
In India, foreign exchange business is governed by the foreign
exchange regulation act 1973. The reserve bank of India administers
the exchange control. A study of exchange control regulations forms
a part of the study of foreign. The types of transaction which are
affected by the foreign exchange regulation act are, in general, all
those having international financial implications. The regulation
framed by the reserve bank in regard to foreign exchange are
contain in the exchange control manual. The manual sets forth the
authority granted to banks to buy and sell foreign exchange and to
do other thing incidental there to, as also the procedures to be
followed by them. It also contains exchange regulation act and
notification issued by central government and reserve bank relating
to exchange control.

Foreign Exchange Market:

We have seen that the origin of foreign exchange is in the foreign
trade. At all times, there exporters who receive foreign currencies
from there overseas buyer settlement of the trade transactions and
there are also importers who have to pay in foreign currencies to
their overseas supplier. Again, there are agencies like bank that
business it is to arrange for exchange of currencies as required by
their customers. The banks would buy foreign currencies from their
customers like exporters who wish to convert their foreign
currencies receipts into Indian rupees the banks would sell
currencies to those customers like importers who have to make
foreign currencies payment. Thus arises the needs for the foreign
exchange market, which play the part of a clearing house through
which purchases and sales of foreign currencies are offset against
each other. The foreign exchange market, however is not a market
in the concrete sense of the term or geographical entity like a fish
market, vegetable market etc. it may not be an actual meeting
place for the participants(sellers & buyers ). The term foreign
exchange market is used in an abstract sense only, meaning a
number of buyers and sellers systematically in contact with each
other for the purpose of transacting foreign exchange business. This
is the sense in which the term ‘market’ is used in economics. In fact,
it is said that the foreign exchange market is fit example of Prof.
Marshall’s definition of a perfect market.

INDIAN FOREIGN EXCHANGE MARKET:

The Indian foreign exchange market may be broadly described as a
three-tiered market. The first tier consists of foreign exchange
transaction between the banks and their customers, mainly
importers and exporters. Secondly, their there is the inter-bank
market wherein there are exchange dealings between banks
themselves, conducted through foreign exchange brokers and
supplemented from time to time by reserve bank of India. The inter-
bank market is mainly established in three important port centers,
namely Bombay, Kolkatta and chennai. The third tier consists of
foreign exchange dealings between banks in India and their
counterparts and branches in foreign countries that have exchange
business to transact with India. In addition, the banks in India also
operate in international markets like London, New York etc. to cover
their foreign exchange dealings with the customers and other banks.
While the first could be compared with the retail market, the second
is in fact a domestic wholesale market. The third is also a wholesale
market but on an international plane. All the three are inter
connected, this is so because after all the customers are the
ultimate suppliers and the consumers (sellers and buyers) of foreign
currencies and their needs and met by the banks either by operating
in the inter-bank market locally or in the international; exchange
market. In 1999, Foreign Exchange Management Act was passed to
replace FERA to manage the Indian Foreign Exchange Market in a
better manner.

FOREIGN EXCHANGE MANAGEMENT ACT, 1999

(FEMA)
A bill based on the recommendations of the Task Force, was
introduced in the Lok Sabha on 4 August, 98. The Bill was referred to
the standing committee on Finance which submitted its report to the
House on 23 December' 98 with suggestion and modifications. The
12th Lok Sabha was dissolved before any decision could be taken on
the bill. The Bill subsequently lapsed.
The bill was again introduced in the 13th Lok Sabha on 25th Oct'99.
The presidential Assent was received on 6th Jan 2000. Finally the
FEMA came into operation w.e.f. 1st June 2000.

The FEMA, is applicable to:

 To the whole of India.
 Any Branch, office and agency, which is situated outside India,
but is owned or controlled by a person resident in India.
 Any contravention of provisions of FEMA, by all those, who are
covered under above two aspects committed outside India.

IMPORTANT PROVISIONS FROM FEMA:

RELEVANT PROVISIONS OF EXCHANGE CONTROL MANUAL FOR THE
PURPOSE OF FEMA
Some of the relevant provisions of Exchange Control Manual under
FEMA, which still exist, are:

 REFUND OF INWARD REMITTANCES:

If a request is made from the overseas for cancellation of Inward
Remittances, Authorized Dealers may do so without referring to
Reserve Bank, if refunds are not to compensate for a loss.

 APPLICATION FOR REMITTANCES IN FOREIGN CURRENCY:

A person firm or bank may apply to an Authorized Dealer for
remittances in any foreign currency to a beneficiary abroad.
Application should be made in FORM -A1, if the purpose of
remittance is import of goods into India.
For any other purpose in Form -A2
The Authorized Dealer may sell the foreign Exchange applied for if
he think fit provided it is within his powers, and the purpose of
remittance is an approved one.

 MODE OF PAYMENT OF RUPEES AGAINST SALE OF

FOREIGN EXCHANGE:
In case of sale of foreign Exchange or remittance foreign Exchange
amounting to Rs. 20,000 or more the payment received by the
Authorized Dealer, from the applicant should be through a crossed
cheque drawn on the applicant bank account or on the bank account
of the Firm/ Company. Payment can also be accepted in the form of
a Banker's cheque / Pay Order / Demand Draft. Receipt of Payment
in cash in case of such sale of foreign Exchange or remittance in
foreign Exchange is strictly prohibited.

EXCEPTION:
However where purpose of sale of foreign exchange is for travel
abroad for business etc, cash may be received by Authorized Dealer
from Applicant upto Rs. 50,000/-
Where the rupee equivalent for drawing foreign exchange exceeds
Rs. 50,000 either for any single installment or for more than one
installment reckoned--- together for a single journey / visit it should
be paid by the traveler by means of a gross cheque / demand draft/
pay order as stated above.

 TRAVELERS CHEQUE NEGOTIABLE ONLY IN INDIA:

Rupee Travelers cheque cannot be encashed outside India, if they
are issued solely for use within India. In such a case they cannot be
taken or sent out of India. Reimbursements should be strictly
refused where such traveler’s cheques have been encashed outside
India.

 REIMBURSEMENT OUTSIDE INDIA:

Rupee Travellers cheque, which are issued by authorized dealers,
encashable outside India, may be reimbursed by Authorized Dealers
or by their selling Agent.

 IMPORT OF FOREIGN CURRENCY NOTES:

When the stock of foreign currency notes with Authorized Dealer is
not adequate for meeting their normal business requirement they
could import foreign currency notes from their overseas branches or
correspondents.

 RECONVERSION OF INDIAN CURRENCY:

Foreign currency may be sold against Indian Rupees held by persons
who are not resident of India but are passing through or leaving
India after a visit, at the time of their departure from India.
For this purpose, a Bank or Encashment certificate issued by
Authorized Dealer, exchange bureau or Authorized Money changer
in form BCI, ECF OR ECR, is required to show that the rupee had
been acquired by sale of foreign Exchange to an Authorized Dealer
or money changer in India. Such a certificate is valid for such
reconversion i.e. a period of three months is not over from the date
of sale of the foreign currency by the traveller.
 RATES OF EXCHANGE:
Authorized dealers and their Exchange bureau may buy from and
sell to public foreign currency notes and coins at rates of exchange
determined by market conditions. Dealings in foreign currency notes
and coins between authorized dealers and between authorized
dealers and money changers would also be at rates determined by
market conditions.

COMPARISION OF FERA AND FEMA:

1. SIMILARITIES:
 The similarities between FERA and FEMA are as follows:
 The Reserve Bank of India and central government would
continue to be the regulatory bodies.
 Presumption of extra territorial jurisdiction as envisaged in
section (1) of FERA has been retained.
 The Directorate of Enforcement continues to be the agency
for enforcement of the provisions of the law such as
conducting search and seizure

2. DIFFERENCES BETWEEN FERA AND FEMA:

Sr.
DIFFERENCES FERA FEMA
No
1 PROVISIONS FERA consisted of 81 FEMA is much simple,
sections, and was more and consist of only 49
complex sections.
2 FEATURES Presumption of negative These presumptions
intention (Mens Rea ) of Mens Rea and
and joining hands in abatement have been
offence (abatement) excluded in FEMA
 existed in FEMA
3 NEW TERMS IN Terms like Capital Terms like Capital
FEMA Account Transaction, Account Transaction,
current Account current account
Transaction, person, Transaction person,
service etc. were not service etc., have
defined in FERA. been defined in detail
in FEMA
4 DEFINITION OF Definition of The definition of
AUTHORISED "Authorised Person" in Authorised person
PERSON FERA was a narrow one has been widened to
( 2(b) include banks, money
changes, off shore
banking Units etc. (2 (
c)
5 MEANING OF There was a big The provision of
"RESIDENT" AS difference in the FEMA, are in
COMPARED definition of "Resident", consistent with
WITH INCOME under FERA, and income Tax Act, in
TAX ACT. Income Tax Act respect to the
definition of term "
Resident". Now the
criteria of "In India for
182 days" to make a
person resident has
been brought under
FEMA. Therefore a
person who qualifies
to be a non-resident
under the income Tax
Act, 1961 will also be
considered a non-
resident for the
 purposes of
application of FEMA,
but a person who is
considered to be non-
resident under FEMA
may not necessarily
be a non-resident
under the Income Tax
Act, for instance a
business man going
abroad and staying
therefore a period of
182 days or more in a
financial year will
become a non-
resident under FEMA.
6 PUNISHMENT Any offence under Here, the offence is
FERA, was a criminal considered to be a
offence , punishable civil offence only
with imprisonment as punishable with some
per code of criminal amount of money as
procedure, 1973 a penalty.
Imprisonment is
prescribed only when
one fails to pay the
penalty.
7 QUANTUM OF The monetary penalty Under FEMA the
PENALTY. payable under FERA, quantum of penalty
was nearly the five has been
times the amount considerably
involved. decreased to three
times the amount
involved.
8 APPEAL An appeal against the The appellate
order of "Adjudicating authority under FEMA
office", before " Foreign is the special Director
Exchange Regulation ( Appeals)Appeal
Appellate Board went against the order of
before High Court Adjudicating
Authorities and
special Director
(appeals) lies before
"Appellate Tribunal
for Foreign
Exchange.” An appeal
from an order of
Appellate Tribunal
would lie to the High
Court. (sec 17,18,35)
9 RIGHT OF FERA did not contain FEMA expressly
ASSISTANCE any express provision recognises the right
DURING LEGAL on the right of on of appellant to take
PROCEEDINGS. impleaded person to assistance of legal
take legal assistance practitioner or
chartered accountant
(32)
10 POWER OF FERA conferred wide The scope and power
SEARCH AND powers on a police of search and seizure
SEIZE officer not below the has been curtailed to
rank of a Deputy a great extent
Superintendent of
Police to make a search
3. A STEP AHEAD FROM FERA TO FEMA:
Enactment of FEMA has brought in many changes in the dealings of
Foreign Exchange, as compared to FERA. Some of them are
restrictive, and some has widened the scope.
However some of the relevant progresses made, from FERA to
FEMA, are as follows:
 DRAWAL OF FOREIGN EXCHANGE
Now, the restrictions on drawal of Foreign Exchange for the purpose
of current Account Transactions, has been removed. However, the
Central Government may, in public interest in consultation with the
Reserve Bank impose such reasonable restrictions for current
account transactions as may be prescribed.
FEMA has also by and large removed the restrictions on transactions
in foreign Exchange on account of trade in goods, services except
for retaining certain enabling provisions for the Central Government
to impose reasonable restriction in public interest.

 OMISSION OF CRIMINAL PROCEEDINGS

Under FERA, any contravention was a criminal offence and the
proceedings were governed by the code of Criminal Procedure.
Moreover the Enforcement Directorate had powers to arrest any
person, search any premises, seize documents, and initiate
proceeding.
Now all these have been done away with, and contravention of
FEMA is no more a Criminal offence, and only monetary penalty, i.e.
civil proceedings are applicable. Civil imprisonment is provided, only
in case of default to pay fine.

 RESIDENTIAL STATUS
The definition of "Residential Status" under FEMA has gone through
considerable change. It has now been made compatible with the
definition provided under "Income Tax" Act.
The residential status is now based on the physical stay of the
person in the country. The period of 182 days as provided, indicates
that it is not necessary that there should be a continuous period of
stay. The period of stay would be calculated by adding up all the
days of stay of the individual in the country. An Indian resident
becomes a non-resident when he goes abroad and takes up a job or
engages in business. A major change in the definition of residential
status of partnerships and firms in worth noticing. Earlier, under
FERA, a branch was considered a resident of a place where it was
situated. Now, under FEMA, an office, branch or agency outside
India owned or controlled by a person resident in India will be
considered a resident in India for the purposes of this Act.
For example, a person residing in India has a branch in Mauritius;
such branch will be considered a resident in India.

 IMMOVABLE PROPERTY OUTSIDE INDIA

Earlier, under FERA, there was no restriction placed on foreign
citizens who were residents of India, for acquiring immovable
property outside India.
Now FEMA prohibits a resident to acquire, own process, hold or
transfer any immovable property situated outside India. This
restriction applies irrespective of whether the resident is an Indian
citizen or foreign citizen. With this provision being effective a foreign
citizen who is a resident in India has to take approval of Reserve
Bank of India for selling or buying any immovable property situated
outside India.

 IMMOVABLE PROPERTY IN INDIA

Earlier, under FERA, a foreign citizen could acquire or transfer
immovable property in India only after seeking permission from the
Reserve Bank. Now, under FEMA, the control of Reserve Bank is
determined by the residential status of a person. Only a non-
resident as defined within the meaning of FEMA would require
permission of the Reserve Bank to acquire or transfer an immovable
property in India. The distinction based on citizenship has been
abolished and that based on residentship has been introduced.

 EXPORT OF SERVICES
FERA had no provision for export of services. Now, FEMA has
included payment received by an Exporter of Services in its ambit.
Every Exporter, who receives payment from outside India, for his
services rendered is obliged to furnish details of payment to the
'Reserve Bank.
For example; a Doctor, or Engineer or Lawyer or Accountant or any
other professional may give opinions or consultation to people
outside India, via internet or mail, and his fees may be credited to
his credit account. Then he is obliged to furnish details of such
payment to Reserve Bank.

 INCLUSION OF NEW TERMS

Some new terms like "Capital Account Transactions, Current
Account Transactions"; have been included in FEMA. Reserve Bank
has been confirmed with powers and with consultation with central
government to specify maximum permissible limit upto which
exchange is admissible for such transactions.

WHAT TYPE OF OFFENCES?

Although under FEMA, offences pertain to transactions in foreign
Exchange only. However relevant offences are as follows:

DETAILS IN FOREIGN EXCHANGE:

 Only a person Authorized by Reserve Bank can deal in foreign
Exchange. An "Authorised Person" under FEMA, is a person who is
authorised by Reserve Bank to deal in Foreign Exchange. For
being registered as an "Authorised Person", necessary application
along with relevant documents has to be furnished to Reserve
Bank. An "Authorised Person" is also, not given a free hand to
deal in foreign Exchange. He has to furnish details and
information, to Reserve Bank from time to time as may be
required by it.
 No one can make a payment to a person resident outside India,
without permission of Reserve Bank.
 No one receives any payment from a person resident outside
India, without permission of Reserve Bank.
 A person resident in India cannot deal in foreign exchange,
foreign security or any immovable property situated outside
India, without permission of Reserve Bank. (sec 4)
 Similarly a person resident outside India cannot acquire
immovable property in India without permission.

EXPORTER OF GOODS AND SERVICES

Every exporter of goods and services is under an obligation, to give
details to Reserve Bank regarding value of export, mode of
payment, and amount of payment received etc.

REPATRIATION OF FOREIGN EXCHANGE

Where any amount of foreign exchange has become due or accrued
to any person who is a resident in India, he shall realise and
repatriate (Bring Back) such amount, within the time specified by
Reserve Bank and in such manner as may be specified by the
Reserve Bank.

AUTHORISED PERSON
An "Authorised Person" under FEMA, is a person who is authorised
by Reserve Bank to deal in Foreign Exchange.
For being registered as an "Authorised Person", a necessary
application alongwith relevant document has to be furnished to
Reserve Bank.
An "Authorised Person" is also, not given a free hand to deal in
foreign Exchange. He has to furnish details and information, to
Reserve Bank from time to time as may be required by it.

PROSECUTION OF OFFENCES COMMITTED

Before detailing the procedure for prosecution, it is important to
mark out the Adjudicating Agencies. They are:

 ADJUDICATING AUTHORITY
The inquiry of any contravention of FEMA is conducted by an
Adjudicating Authority appointed by the Central Government.
 APPEAL TO SPECIAL DIRECTOR (APPEALS)
The special Director (Appeals) is authorised to hear the
appeals arising out of in order of the Adjudicating Authority.
 APPEAL TO THE APPELLATE TRIBUNAL
The Appellate Tribunal is entitled to hear appeals made in
accordance, from an order made by Adjudicating Authority or
special Director (Appeals).
 DIRECTOR OF ENFORCEMENT
The Director of Enforcement and other officers has power to
conduct investigation, search and seize any articles.

PROCEDURE
INQUIRY BY ADJUDICATING AUTHORITY (14)
The inquiry of any contravention of FEMA is conducted by an
Adjudicating Authority.
  When, an inquiry is to be conducted against a person for any
contravention; the Adjudicating Authority shall issue a notice
to such person.
 The notice will also indicate the date on which the offender is
required to appear before authority, and will also mention the
nature of offence committed by him.
 Such person (offender) will have a right to give reasons or
explanation, and then a date will be fixed for his appearance.
He can appear either personally or through an Advocate or
chartered accountant.
 On the date of appearance, the Adjudicating Authority shall
present its case, and explain the reason and type &
implications of offence committed by offender.
 Then in turn, such person will also be given an opportunity to
put up his case, and to produce documents and evidence.
 Finally, if Adjudicating Authority is convinced, that the
offender has committed an offence, then it will impose such
fine and penalty, as it thinks fit.

APPEAL TO SPECIAL DIRECTOR (APPEALS) (17)

Appeal from an order of "Adjudicating Authority" lies before" special
Director (appeal)"
 The appeal shall be made in "Form No. 1", along with three
copies of the order appealed against and the requisite fees.
 The appeal should be filed within 45 days, from the date of
receipt of receipt of impugned order.
 On the date of hearing the appeal the applicant may appoint a
legal practitioner or a chartered accountant to appear, plead
and act on their behalf before the special Director (Appeal)
 The order of the special Director (Appeals) made at the
conclusion of the proceedings shall be in writing and shall
state briefly the grounds for the decision.
APPEAL TO THE APPELLATE TRIBUNAL (19)
"Appellate Tribunal" is entitled to hear appeal arising out of an order
from "Adjudicating Authority" and "special Director (appeal)."
 The appeal shall be made in Form No. 2, along with three
copies of the impugned order and requisite fees.
 The appeal shall be made within 45 days, from the date on
which copy of the impugned order is received.
 A copy of the order and appeal shall be sent to the opposite
party, i.e. "Director of Enforcement," and a date shall be fixed
for hearing of the appeal.
 The appellant shall have the right to present his case / appeal
through a legal practitioner or chartered Accountant.
 On the fixed date of hearing, the "Appellate Tribunal" shall
pass its order in writing and the reasons therefore.

APPEAL TO HIGH COURT (35)

 An appeal from the decision of "Appellate Tribunal" lies before
High Court.
 The appeal shall be filed within "60 days" from the date of
communication of the decision or order of the Appellate
Tribunal to him on any question of law arising from the
impugned order.

AMOUNT OF PENALTY
Any contravention, under FEMA, may invite following kinds of
penalties:
 If, the amount against which offence is quantities, then
penalty will be "THRICE" the sum involved in contravention.
 Where the amount cannot be quantified the penalty may be
imposed upto two lakh rupees.
  If, the contravention is continuing everyday, then Rs. Five
Thousand for every day after the first day during which the
contravention continues.

Further in addition to the penalty, any currency, security or other

money or property involved in the contravention may also be
confiscated.