Historical Background of Law relating to Foreign Exchange

I. Foreign Exchange Regulation Act, 1947 and Foreign Exchange Regulation Act, 1973

Scarcity of Foreign Exchange in India led to its control since the beginning of World War II. Exchange control was introduced in India under the Defence of India Rules on September 3, 1939 on a temporary basis. The statutory power for exchange control was provided by the Foreign Exchange Regulation Act (FERA) of 1947.

Foreign Exchange Regulation Act, 1947 was enacted initially for a period of ten years in temporary basis. However, 10 years of economic development did not ease the foreign exchange constraint, FERA permanently entered the statue book in the year 1957. Subsequently, Foreign Exchange Regulation Act, 1947 was replaced by the Foreign Exchange Regulation Act, 1973 (FERA, 1973),which came into force with effect from January 1, 1974. FERA, 1973 came into force, for regulating certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and the proper utilization thereof in the interests of the economic development of the country.

II. Foreign Exchange Regulation Act, 1973, ‘The Major Constraints’

a. In the year 1974, FERA was completely overhauled with all violations being considered as criminal offences with mens rea. The Enforcement Directorate was empowered to arrest any person without even an arrest warrant.

b. In 1991 government of India initiated the policy of Economic Liberalization, Privatization and Globalization. Foreign investments in many sectors were permitted. This resulted in increased flow of foreign exchange in India and foreign exchange reserves increased substantially, hence the government engaged itself in framing a law containing a comprehensive framework for dealing and regulating the foreign exchange inflow and outflow in India.

c. In 1997, the Tarapore Committee on Capital Account Convertibility (CAC) constituted by the Reserve Bank, which recommended change in the legislative framework governing foreign exchange transactions.

d. 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. The philosophical approach was shifted from that of conservation of foreign exchange to the management of foreign exchange, facilitating trade and payments as well as developing orderly foreign exchange market.

III. Authorities governing the enforcement of FEMA

a. Foreign Exchange Department of Reserve Bank of India (RBI) – fema.rbi.org.in

b. Directorate of Enforcement, Department of Revenue, Ministry of Financehttp://directorateofenforcement. gov.in

c. Capital Markets Division, Department of Economic Affairs, Ministry of Finance – http:// finmin.nic.in/the ministry/dept eco affairs/

d. Investment Division, Department of Economic Affairs, Ministry of Finance – https://dea.gov.in/divisionbranch/investment-division#IT

e. Foreign Trade Division, Department of Economic Affairs, Ministry of Finance – http://finmin.nic.in/theministry/dept eco affairs/

IV. Machinery responsible for various aspects of FEMA

a. Enforcement Directorate

b. Adjudicating Authority

c. Special Director (Appeals)

d. Appellate Tribunal

e. Foreign Exchange Department of RBI

f. Foreign Investment Promotion Board*

g. Department for Promotion of Industry and Internal Trade (DIPP)**

*Erstwhile FIPB was mandated to play an important role in the administration and implementation of the Government’s FDI policy. The Central Government has since abolished the Foreign Investment Promotion Board, and the work of granting of approval for foreign investment has been entrusted to the concerned Administrative Ministry/Department vide office Memorandum issued by Ministry of Finance F.No. 01/01/FC12017 –FIPB dated 5th June, 2017.

**The Department for Promotion of Industry and Internal Trade (DIPP) was established in 1995 and has been reconstituted in the year 2000 with the merger of the Department of Industrial Development. DIPP is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view the national priorities and socio-economic objectives. The government has notified changed the name of the Department of Industrial Policy & Promotion (DIPP) to the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry. The DPIIT shall also be responsible for (a) the promotion of internal trade (including retail trade); (b) the welfare of traders and their employees;(c) matters relating to facilitating Ease of Doing Business; and (d) matters relating to start-ups.

V. Type of transactions under FEMA

Capital account transaction (CAT)

These transactions are of capital nature. It alters assets or liabilities including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India,. CAT are regulated by Foreign Exchange Management (Permissible Capital Account Transactions) regulations, 2000 and covers, among others, the following transactions:

a. Foreign Direct Investment (FDI);

b. Overseas Direct Investment (ODI);

c. External Commercial Borrowings (ECBs);

d. Sale and purchase of Immovable property either in or Outside India;

e. Investment in firms or proprietary concerns in India.

Current account transaction (CuAT)-

These transactions other than capital account transactions. CuAT are regulated by Foreign Exchange Management (Current Account Transaction) rules, 2000. Most of the current account transactions do not require the Reserve Bank’s prior approval. Approval of the Reserve Bank is required for those transactions listed in Schedule–III to the Foreign Exchange Management (Current Account Transactions) Rules, 2000, where the remittance to be made is beyond the stipulated limit.

VI. Important change under FEMA regulating governing CAT

The Finance Act, amended Section 6 (Capital Account Transaction), Section 46 (Power of Central Government to make rules) and section 47 (Power of RBI to make rules) of the Foreign Exchange Management Act, 1999 (FEMA, 1999). These amendments has the effect of altering the powers of the Central Government and Reserve Bank of India (RBI).

In terms of amended prosions of FEMA, the Central Government has made Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) on October 17, 2019 superseding the erstwhile Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 (“TISPRO”) and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018, whereas RBI has notified Foreign Exchange Management (Debt Instruments) Regulations, 2019 superseding TISPRO, and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, which provides for reporting requirements in relation to any investment made under the NDI Rules.

Non-Debt Instruments:

All investments in equity in incorporated entities (public, private, listed, unlisted)

Capital participation in LLPs

Instruments of investment as in FDI policy

Investment in units of Alternative Investment Funds, Real Estate Investment Trust and Infrastructure

Investment Trusts;

Investment in units of mutual funds and Exchange-Traded Fund which invest more than fifty per cent in equity;

Juniormost layer (e.g. equity tranche) of securitization structure

Acquisition, sale or dealing directly in immovable property

Contribution to trusts

Depository receipts issued against equity instruments

Debt Instruments

Debt Instruments means all instruments other than non-debt instruments enumerated above.

Hybrid Securities: A definition of “hybrid securities ” has been included in the Non-Debt Rules.

Hybrid securities means s instruments such as optionally or partially convertible preference shares or debentures and other such instruments as specified by the Central Government from time to time, which can be issued by an Indian company or trust to a person resident outside India.

However, the Non Debt Rules, as notified by the Central Government do not contain any provision regarding FDI in the hybrid securities. For the reason not apparently clear Reserve Bank of India have yet frame directions regarding the Non Debt incorporated Rules and Debt Regulations

VII. Key Changes in Reporting Machanism of Foreign Direct Investment in India since 1973 till March 2020

Physical Form

From the time of introduction of the FERA and FEMA, 1999 and till 2016, reporting was to be made in physical form.

e-Biz platform

Later, with a view to promote the ease of reporting of transactions related to Foreign Direct Investment (FDI), RBI has enabled online filing of the returns through the e-Biz portal. On 1st February 2016, RBI vide AP (DIR) Series Circular No. 40 (Ref Notification No. RBI/2015-16/303) introduced the concept of online filing/ reporting through e-Biz platform (http://www.ebiz.gov.in). which was made effective from 8th February 2016.

FIRMS (Foreign Investment Reporting and Management System)

With the objective of integrating the extant reporting structures of various types of foreign investment in India, RBI vide A.P (DIR) Circular No. 30 dated 7th June 2018 (Ref Notification No. RBI/2017-18/194) introduced Single Master Form (SMF), which shall be filed online. This form provides facility for reporting of total foreign investment in an Indian entity as per FEMA FDI Regulations, 2017. SMF is a master form containing 9 reports. They are FC-GPR, FC-TRS, LLP-I, LLP-II, CN, ESOP, DRR, DI and InVi. which was made effective from 1st September 2018.

Disclaimer : The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

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