prpri RBI as a regulator to FEMA RBI as a regulator to FEMA

CHAPTER 1 INTRODUCTION

1.1 HISTORICAL BACKGROUND

Foreign Exchange Management Act, 1999 (FEMA) which was enacted by the Parliament has replaced the Foreign Exchange Regulations Act, 1973. 1st June, 2000 was the day when FEMA came into effect. Exchange Control of India since 1939 felt the importance of foreign exchange reserves as there was a huge shortage of it. Various rules for the system of exchange control became a necessity and were brought under the Defense of India Act, 1939. Foreign Exchange Regulation Act, 1947 was adapted on a temporary basis for initial 10 years because the foreign exchange predicament continued for a long time. Though, the purpose of Act for foreign exchange crisis did not bring a change in economic development, nor it brought back to normal. Considering the difficulty, FERA entered perpetually in the law since the year 1957. The Act was a good support to the economic system and shortage of foreign exchange was brought back to normal. There was also need for various amendments as well as new rules to be made; the Act was replaced with Foreign Exchange Regulations Act, 1973 which came into force from 1st January, 1974.

During the 1990s, there was a new approach towards the external sector where the economic reforms brought huge changes. In the year 1991 Financial investments were permitted in various segments because of economic liberalization policy which was brought in by the Government of India. Due to this there was an upturn in the flow of foreign exchange in India as well the foreign reserves. In some kinds of payments FERA prescribed severe rules which were affecting the foreign exchange situation. Due to such rules, Foreign exchange and various securities which were indirectly affected the foreign exchange and the import and export of currency. There was a need for new act where it can regulate payments and also to bring a proper import and export of currency so that the foreign exchange reserves in country grow at a good pace. FERA was than repealed in the year 1999 under the government of Atal Bihari Vajpayee which replaced it by the Foreign Exchange Management Act, 1999 which came into force in 1st day of June, 2000. This Act relaxed foreign exchange controls and even gave some restrictions to some kinds of foreign investments. The research will thereby conclude by the giving certain suggestions as per required.

1.2 OBJECTIVES

FEMA was mainly introduced in India to ease all the import and export trade or payments as well as to safeguard foreign exchange market. Foreign exchange transactions are classified into two parts i.e. Capital Account transactions and Current Account transactions and FEMA outlines the procedures to transact in India. FEMA can even support and amend the law relating to foreign exchange with the objective of properly maintaining the forex market in India. The objective of FEMA is to eliminate inconsistency of payments in India and maintain a proper flow of foreign exchange. With increase of foreign exchange in India it can be utilised efficiently for the country.

1.3 AIM

The aim of the project is to know about FEMA and also about RBI roles towards FEMA as a regulator. It will give the broad area to know about what are the powers under FEMA and also RBI’s various regulations on FEMA. Since RBI being the regulator in FEMA and also foreign exchange transactions, it allows Authorised persons who can deal in foreign exchange.

1.4 STATEMENT OF PROBLEM

RBI having a big role towards the foreign exchange market needs to balance both the import and export of foreign exchange reserves as well stability of the flow in the country so that it does not remain at lower level. After liberalisation in 1991 where foreign exchange had a huge flow in India the FERA made rigid rules towards it and so various regulations had been brought into the Act, where it will be managing foreign exchange. My research is that, are the rules and regulations of FEMA are being strictly followed and is the foreign exchange market bringing a good change in India.

1.5 HYPOTHESIS

The working of FEMA towards the foreign exchange market is bringing what modification in India? Does RBI as a regulator bring a lot of limitations to FEMA?

1.6 RESEARCH METHODOLOGY

The research is a doctrinal study of Foreign Emergency Management Act, 1999. Also RBI as a regulator to FEMA needs to be understand by various regulations which is been made. This project is based from various readings, observation from different authors, journal as well as research articles and analysing statutory provisions. The Library-based Research method will be followed for deriving the Hypothesis. The search will be conducted on the basis of primary sources such as statutes secondary sources such as books, online articles available freely as well as on legal databases. The paper is based on pure theoretical research.

1.7 REVIEW OF LITERATURE

The Author1 stresses on simplifying the meaning of Foreign Exchange Management Act, 1999 by explaining the foreign exchange and importance of foreign exchange reserves. The Author provides brief perspective on historical background as well as the applicability. The Author also places a good explanation on the current and capital account transactions classifying it with the permissible activity to person resident and person resident out of India. The research paper also focused on the various aspects of RBI which is a key regulator of FEMA also upon the machinery which are responsible in various aspects of FEMA such as Enforcement Directorate, Adjudicating Authority and tribunals. Various rules and regulations are mentioned to give a brief about FEMA.

In this the author2 seeks to uphold the rules and regulations of FEMA and also explains in brief about the prohibited activities and allowable activates for investing in India. He also classifies in various sectors about the limit up to which investment can be done with FEMA having broad guidelines. The role of RBI for the functioning and prior approvals for certain type of investments is also explained. The Author gives us the brief about the overview of FEMA and also the importance of investments in India which is important for the development of the economy.

1.8 CHAPTERIZATION

I have divided my project into 6 chapters. The first chapter deals with the introduction under which I have written the historical background of FEMA where how the need for changing provisions of FEMA is stated along with hypothesis, objectives and literature review. Chapter two deals with RBI, where the nature of RBI as well as what are its features towards the FEMA is discussed. The chapter 3 explains what is FEMA and a brief introduction of it followed with its applicability and features with the classification of transactions which take place, i.e., Current Account transactions and Capital Account transactions. It gives an idea about the various limits which RBI has made and also the permissible and non-permissible activities which are stated in brief and also where prior approval of RBI needs to be taken. The importance and regulation of FEMA where RBI manages in various manner is noted. Chapter 4 deals with the role of Foreign direct investment which plays an important role in FEMA for bringing a good inflow in Indian economy. The investment which can be done and also the prohibited activities have been stated in detail. The limits of various sectors which can invest in India and up to what amount allowable have been stated. In chapter 5 the contravention, penalties and the role of various Authorities have been stated during the stages of violation. The method of compounding where, if a contravention takes place whether it can be compounded is stated. Various conditions on compounding, contravention and stages of authority which can handle amount up to what limit are discussed. Finally, in chapter 6 I have given suggestion about what can be done to increase or the development of the Indian economy and finally ended my research project with conclusion.

CHAPTER 2 RBI’s ROLE AND FEATURES

2.1 INTRODUCTION

RBI is the central bank of the country established in the year 1935 under the provisions of Reserve Bank of India Act, 1934. RBI has authority towards the currency regulations in India. The credit control of RBI by analysing the economic environment and also by changing various policies for having a good control on financial stability is also good thing for the banking sector because the norms or various policies which are prepared for the banks need to be fully monitored from time to time and these are some of the functions of Reserve Bank of India.

RBI is also a regulator of Foreign exchange under Foreign Exchange Management Act, 1999 where it issues licenses to act as Authorised person. It also manages deals of the external sector and also looks after the economic development of foreign exchange market. Domestic foreign exchange market is also efficiently conducted meeting with all conditions.

2.2 FEATURES

Foreign Exchange Management Act, 1999 which gave RBI foremost role as a controller has various features which RBI needs to supervise and for proper flow of foreign exchange. It is as follows:

a. All the transactions in foreign exchange can only be carried out through Authorised person which is registered by RBI who has to follow the rules and regulations and whether either general or special permission needs to be taken of RBI. Any payment which is made to a non-resident cannot be made unless it is permitted under FEMA. (Section 33).

b. A citizen of India cannot possess, own or handover any foreign exchange or immovable property outside India. (Section 44)

c. Residents of India are prohibited in possessing of or holding foreign currency more than the limit specified by RBI. After the non-resident Indian is back to India the foreign exchange which is due and if it is more than the limit prescribed, then it needs to be deposited within 180 days from the date of return. (Section 8, 95)

d. RBI also made various regulations in Capital and Current Account transactions.

CHAPTER 3 FOREIGN EMERGENCY MANAGEMENT ACT, 1999

3.1 INTRODUCTION

Foreign Emergency Management Act, 1999 (FEMA) looks after the cross border funds, foreign exchange transactions and even trade between the resident and non-resident of India.

FEMA is a short Act, having 49 sections and the functioning of FEMA is similar to any other commercial law. FEMA has various guidelines and also rules which need to be followed. If the guidelines are not followed or if the transactions fall outside the limit, one needs to obtain approvals for it. If there is any violation to the guidelines then the consequence is penalty. Prosecution can also take place if the penalty is not paid within the specified period of time.

RBI controls the Capital Account transactions and reasonable limitations have been imposed. All the transactions in foreign exchange can only be done through Authorised Person. And the Act has control over exports proceeds. Ruling is also given for any offenses done. Appeal can be made to Special Director and Appellate Tribunal. Directorate of Enforcement is mainly appointed to prevent malpractices of foreign exchange.

3.2 APPLICABILITY OF THE ACT

The Act is stretched to all of India as well as offices, agencies or branches which is located outside the boundaries of India but is managed or held by Indian citizen. The head office of FEMA is located at New Delhi and known as Enforcement Directorate where all the foreign exchange is monitored closely. This Act is also related to any importation of goods and services which are located out of India to India as well exportation of any goods or services from India to outside India. All the trades which are related to foreign exchange or foreign exchange reserves are made applicable to this Act.

3.3 FEATURES

  • Gives power to Central Government for proper flow of outflows to or from the person outside India.
  • No monetary dealings can be carried without the approval. Authorised Person needs to carry out and look after it.
  • Government of India have a right to restrict any authorised person from dealing in foreign exchange.
  • Authorises RBI to restrain any trading from current account although if it is done through authorised person.

CURRENT AND CAPITAL ACCOUNT TRANSACTIONS

In FEMA accounts are broadly classified into two transactions i.e. Current Account transactions and Capital Account transactions. Let us see what the purpose is and how RBI is managing in such accounts.

1. Current Account Transactions

Current Account transactions are the transactions which are not capital transactions but which, without any prejudice to broad view, include:-

  • Payments which is in connection to foreign trade, any short term banking or any other trade in the regular course of business.
  • Payments to parents, child, spouse or any other member.
  • Any other payments which is done for any foreign travel, any emergency or medical care of parents and further education.

As per Section 5 of Foreign Exchange Management Act, 1999 any person can transact in foreign exchange through authorised dealer permitted by RBI if it comes under current account transactions6. RBI under FEMA has even executed limitations which need to be followed in certain current account transactions. Rules are been made and a separate notification under Foreign Exchange Management (Current Account Transactions) Rules7, 2000 which also came into force on 1st day of June, 2000. It is amended and is called Foreign Exchange Management (Current Account Transactions) Amendment Rules, 2015. Under Rule 3 limitations are been given and also Schedule 1 needs to be referred and is stated as follows:-

a. Any Allowance from lottery winnings.

b. Any allowance from racing or any other hobby.

c. Any payment of commission which is made towards equity stock which are either wholly owned of Indian companies.

d. Any allowance of money which is in Non Resident Special Rupee Account Scheme.

e. Travel to Nepal or Bhutan or any transactions done with a person resident over there.

In Schedule 2 the name of the Ministry whose approval needs to be taken by the applicant for any foreign exchange facilities and then the authorised dealers can proceed further. In Schedule 3 individuals can avail of the foreign exchange facility for purposes like gifts, travel to any country (except Nepal & Bhutan), Business travels, any medical treatment, for further studies or any other transactions which would be valid for current account transactions but the limit for an individual is USD 2,50,000. A person other than individual can also avail foreign exchange facility but prior approval of Reserve Bank of India is mandatory. Some of them are –

a. Donations8in education institution by contributing funds or any contributions which is made to a technical institution or association which is company just like donor company the criteria would be if the sum exceeds more than 1% of their foreign exchange earnings during the last three accounting year or USD 5000,000 whichever is less.

b. Any commission which is given to agents abroad for sale of any residential flats or plots which is located in India over the limit of USD 25,000 or 5% on the inward payments which is more.

c. Any transfers higher than amount of USD 10,000,000 with respect of each assignment done relating to consulting facilities in infrastructure and also USD 10,000,000 for each project relating to other consulting facilities which are obtained from outside India prior approval of RBI is must.

2. Capital Account Transactions

Capital Account transactions9 means transactions which alters assets & liabilities as well as contingent liabilities outside India of individual residing in India or assets & liabilities in India of individual residing outside India. Transactions referred under sub-section 2 of Sec 6 is that the RBI has the right with the consultation of Central Government 10that any class or classes can have capital account transactions which are permissible to RBI. RBI have also the right towards the limitations which can be allowed for transactions. Under sub – section 3 of Sec 6 the RBI has given various directions where they can disallow or regulate or restrict some of the following which are as follows-

i. Any transfers of security by a person residing in India or outside India.

ii. Any borrowing or advancing either in foreign exchange or in rupees between a person residing in India & resident outside India.

iii. Any payments or any transfers which is done by offices or any other companies in India to an individual outside India.

iv. Any transfer of immovable property which is done either in or outside India.

v. RBI has the right even when a resident outside India wants to locate new branches or any type of business for carrying on any activity the RBI can restrict or prohibit or regulate as it deems fit.

A. PERMISSIBLE CAPITAL ACCOUNT TRANSACTIONS11

As per the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 200012 the permissible capital account transactions are stated as follows –

I. RESIDENT OF INDIA(Schedule 1 as per Regulation 3 (1) (A) )

a. Investing in foreign securities.

b. Any foreign currency loan which is raised either in India & outside India.

In this if as per the basis of maturity period the amount cannot be more than USD 50 million but the conditions state that if it is for a period of 5 years then limit can be more than the limit specified. And further borrowers such as NBFC, any infrastructure company, investment companies will have the limit of USD 750 million. Secondly software companies & any micro finance activity have a limit of USD 200 million and USD 100 million respectively. Any other entities apart from this cannot have an amount of more than USD 500 million.

c. Transferring of immovable property outside India is permissible within the limits and as per regulation 5 of Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations. 2015. 13The person can do by way of gifts, by way out of purchase from foreign exchange which is in Resident Foreign Currency (RFC) account, by jointly with the help of relative who is a resident of outside India, a company whose main business is in India wants to open new branches outside India may acquire immovable property for its commercial use as well as for residential purposes of its employees with the guidelines which is given by Reserve Bank of India.

d. Guarantee which is allotted in favour of resident outside India if in the case of service importer the limited permitted by RBI is USD 500000 where the Authorised dealer can provide guarantee to the person outside India on behalf of person residing in India who is service importer. Whereas, in the case service exporter the amount cannot be more than USD 100000.

e. If an insurance policy is taken from an insurance company who base is from outside India the limit is USD 250000 per accounting year. The limit is not valid if special permission of Indian Government is taken by the insurer.

f. Remittances which is made outside India for capital assets to a person who resides in India. The limit allowed is USD 1 million per accounting year and prescribed classes of individual is stated under Foreign exchange management (Remittance of Assets) regulations, 2016.

II. RESIDENT OUTSIDE INDIA (Schedule 2 as per Regulation 3 (1) (b) )

a. Investing in securities in India where the guidelines given under Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 201714regulation 5 (1) referred with Schedule 1 that the resident outside India can invest subject to entry routes, sectoral caps which is mentioned in regulation 16. Further the person holding shares will have to invest in accordance with the SEBI Regulations, 2011.

b. Guarantee in favour of person residing in India, the Indian companies can accept this but can take by way in domestic rupees by obtaining credit from international bank or international institutions.

c. Any deposits between person residing in India and resident outside India can be done if RBI being satisfied that it is necessary and also if it is in proper manner as per Regulation 3 of Foreign Exchange Management (Deposit) Regulations, 201615.

CHAPTER 4 ROLE UNDER FOREIGN DIRECT INVESTMENT

Foreign Direct Investment (FDI) has plays a very crucial role in the growth of economy. There is a time where the national capital of economy is not enough for the development of nation. By this foreign capital the gap between the domestic capital and even the investment gets complete. The meaning of foreign direct investment is that investing in other country either by buying the company or expanding by adding branches. Foreign investments play a significant role in a country like India. The foreign capital which will be invested from foreign country gives support to the domestic capital and also savings as well as through this new technology can be motivated and efficiency can be brought in production. India’s GDP has over the last decade has brought an upward turn and poverty was also taken into consideration for bringing India a place for foreign investment.

Services, telecommunications, infrastructure, software facilities and automobile areas brought a huge inflow of FDI in India. The approach for economic reforms and diverting towards foreign investment was mainly introduced in the year 1991 by the then Finance Minister and Ex-Prime Minister Shri. Manmohan Singh, when economic liberalisation and reforms took place. The idea behind this is to bring efficiency and also growth to bring India at a better position in the world economy. There were measures which were taken for foreign investment by RBI in introducing two separate routes of approval i.e., automatic route and Government’s approval route. Bringing liberalisation in technological imports and removing limitations in low technological areas. Non Resident Indians can finance 100% in various sectors. The convention of Multilateral Investment Guarantee Agency (MIGA) was signed for security of foreign investments. The major reason behind the boost is introducing Foreign Exchange Management Act, 1999 where strict regulations and also systematic laws have been made. After amendment was made in 2012 100% FDI was allowed to single brand retails and 51% to several brand retailers. Investments in India by foreign bodies & individuals are all administered under Foreign exchange management (Non-debt instruments rules) Regulations, 2019 issued in manner of the former Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017. The annual foreign direct investment policy circulars have been made by the Department for Promotion of Industry and Internal Trade (DPIIT). With all the new rules and regulations the control for foreign investment in India is under the central bank i.e., Reserve Bank of India. The following are allowed to invest in India16 as follows-

a. A non-resident can invest in India with the guidelines given under FDI policy. However permission needs to be taken by the government for the citizens of Bangladesh and Pakistan or companies registered in those countries.

b. Residents from Nepal and Bhopal are even been allowed for investing in India but some restrictions has been imposed like they have to invest only in repatriation basis and the payment can be done through normal banking channel in free foreign exchange.

c. Foreign Institutional Investors (FII) and Foreign Portfolio Investment (FPI) are even allowed to invest but due to this it limits the individual holdings below 10% of capital of company.

d. Foreign Venture Capital Investors (FVCI) which are registered under Security Exchange Board of India (SEBI) have been allowed to invest 100% of their funds in Indian Venture Capital Undertaking (IVCU). They are allowed as non-resident bodies to invest in India in various companies which are subject to FEMA regulations and FDI policy.

e. The FDI policy which allows FPIs, FIIs, and non-resident Indians to invest in India through registered dealers in stock exchanges is as per Schedule 2, 2A and 3 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

ROUTES TO INVEST

The two routes through which the foreign investors can invest in shares, debentures and preference shares are automatic routes and government route. In automatic route the foreign investor or the Indian company need not take any approval from RBI. The FDI policy permits 100% and the main requirement which is needed that when any shares are issued to foreign entities it needs to filed with RBI with all the relevant documents and also any payment which has been made by the foreign investors by informing the regional office of RBI. Whereas, in government route approval of RBI, Government of India, Foreign Investment promotion Board for investing either by Indian company or the foreign investor in two situations as follows-

a. When the foreign control over the company is involved i.e. the Indian company is commenced with foreign investment and not owned by or is not controlled by the resident company.

b. When the ownership is transferred to foreign control either by way of transferring shares through mergers, amalgamation between them.

As per regulation 1517 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 the following are the activities which is prohibited for investment by person residing outside India-

i. Any lottery business whether it be government of private lottery.

ii. Gambling

iii. Chit funds

iv. Nidhi company

v. Dealing in Transferable Development Rights.

vi. Manufacturing of cigars, cigarettes.

vii. Activities which are allowed for private investments e.g.

viii. Foreign technology which can collaborate in any way like licensing in franchise, management, etc. is also prohibited for lottery dealings.

CHAPTER 5 CONTRAVENTION AND ROLE OF VARIOUS AUTHORITIES

FEMA is not a wholly independent law as RBI is making regulations and have a major role over it. Various penalties18 are been for any contravention under FEMA which are monetary in nature. Under Section 13 (1), if any person tries to violate any rules, regulations will be imposed penalty 3 times of the total amount which is violated and if the penalty is not paid during a specified time it can even be raised up to Rupees two lakhs. And if the contravention goes on continuing the penalty which may be imposed be Rupees five thousand daily from day one from when the violation continues. The authorities have the right also to seize currency or property if any apart from penalty which is imposed. The limit to pay the penalty is 90 days and if the person does not pay than he will be liable to imprisonment. Provisions are also been made under Sec. 17 & 1919 where at every stage appeal can be taken against the order from Adjudicating authority to Special Director and then if the order which is made by Special Director can be appealed to Appellate tribunal. Appeal can be made in High Court against the order of Appellate tribunal.

The following are the role of authorities under FEMA which are as follows –

a. Enforcement Directorate – The Enforcement Directorate have the powers as per the contraventions20which are in Section 13. The function of Enforcement Directorate is to curb the malpractices which take places in foreign exchange. It is under the control of Department of Revenue for functioning related cases and with the Department of Economic Affairs with matter relating to policy or amendments. One more thing of Department of Economic Affairs is that it communicates with RBI any trades or banking part of the Act.

b. Adjudicating Authority21– Section 16 states that notice will be issued to a person who has violated regulations given by RBI or provisions of Foreign Exchange Management Act, rules. Authorities need to look into the matter carefully and dispose matter within a period of one year. The person who violated can appear either in person or can also appoint Chartered Accountants or Legal Practitioner.

c. Special Director22– As per Section 17 one or more special directors can be appointed for Appeal made against the orders of Adjudicating Authority. Further they need to mention in which places Special Director have right to exercise jurisdiction. The appeal can be made within forty five days.

d. Appellate Tribunal23– As per Section 18 the aggrieved person can prefer an Appeal against the order of Special Director or Adjudicating Authority in Appellate Tribunal for foreign exchange.

e. Foreign Exchange Department of RBI – It manages Foreign Exchange Management Act, 1999 also various regulations which is been prepared needs to be properly monitored.

f. Foreign Investment Implementation Authority (FIIA) – it is made to assist for rapid approvals in Foreign Direct Investment and also to provide services to resident outside India relating to operative problems or getting important approvals.

g. Foreign Investment Promotion Board – it is a body that deals the proposals of Foreign Direct Investment giving clearance which is prohibited from automatic route. The Secretaries which are appointed examines the foreign investment made and is it as per the policies of India.

5.1 COMPOUNDING OF CONTRAVENTIONS24

Under Foreign Exchange Management Act, 1999 the provision for compound any contravention is made under section 15 of the Act. The Reserve Bank of India has the power under Section 13 to compound contraventions except for Section 3 (a) of the Act. Section 3 (a) which states that dealing in foreign exchange to a person who is not an authorised person25 in this Directorate Enforcement will have the responsibility to take action in it. When a person who committed such violations under Section 13 made an application under Section 15 will be compounded within one hundred and eighty days from the date of receipt by the compounding officers appointed by the Reserve Bank of India on behalf of Central Government who authorised the officers as may be approved.

The Central Government made Foreign Exchange Management (Compounding Rules) Rules, 200026 which gave effect from 1st June, 2000 for violations under Chapter IV of FEMA and compounding it. RBI has the powers to compound contraventions under Section 7, 8 and 9 of FEMA. Any person violating the provisions of Foreign Exchange Management Act, 1999, compounding can be done if the amount is –

a. Rs. 10,00,000 or below, The Assistant Manager of RBI will have the authority.

b. More than Rs. 10,00,000 but less than Rs. 40,00,000 Deputy Manager of RBI can take action.

c. More than Rs. 40,00,000 but less than Rs. One Crore will be handled by General Manager of RBI.

d. More than Rs, One Crore by the Chief General Manager of RBI.

The Regional offices of Reserve Bank have powers to compound the violations of FEMA which are delay in filing of form FC-GPR, delay in issue of shares more than 180 days, violation in pricing regulations, shares issued without approval of RBI, any delay in form submission of FC-TRS on transfer of shares from Non-resident of India to Resident and vice versa

5.2 PRE-REQUISITE FOR COMPOUNDING

Applications made for compounding should be submitted along with a fee of Rs. 5000/-in Demand draft in favour of Reserve Bank of India and same shall be returned if proper approvals are not received from authorities. With respect to violation by any person of which similar contravention was committed by him and compounded and within a period of three years then it will not be compounded and provisions of FEMA will apply. After the period of three years if any contravention is done then it shall be the first violation which can be compounded. If any violation which is committed in any dealings where necessary approvals are needed to be received by Government, and is not received, then it cannot be compounded unless the approvals are obtained by the Authorities. Contravention in cases such as money laundering, which is against the sovereignty and affecting the nation or when the person who violated and was compounded did not pay within a specified period of time, Directorate of Enforcement will be advised for further investigation or legal action will be taken as per Foreign Exchange Management Act, 1999 as deems fit. If adjudication took place by Directorate of Enforcement and then appeal has been made under Section 17 or Section 19 which is Appeal to Special Director or Appeal to Appellate tribunal respectively than no violation can be compounded as per Foreign Exchange (Compounding Proceedings) Rules, 2000.

5.3 PROCEDURE FOR COMPOUNDING

When the application is received for compounding by Reserve Bank, it verifies the documents and also the application made as well as if the violation which is done can be compounded or not . The main thing then which needs to be checked is the amount of contravention. The authority can ask for any record, documents which need to be submitted within a time specified and failing to may result into returning of compounding application. While passing compounding order the factors such as the gain by unfair means, the amount of loss which is caused to the authority, the nature of violations as well as the history of the contravener needs to be taken into consideration so that a fair order is been passed.

The amount which can be imposed by RBI cannot be more than 300% of the amount violated. Secondly if the amount violated is not more than Rs. one lakh than the amount which can be allowed in penalty cannot be more than the simple interest of 5% of amount of contravention. If a party who was previously compounded and again applies for it, than the amount of the violation can be raised by 50%. The compounding order shall be passed within a period of 180 days. The applicant who wants to appear in the hearing, RBI encourages appearing directly rather than being represented by anyone. The compounding order should be as per the provisions of Foreign Exchange Management Act, 1999 and also it needs to be specified whether it is from rules, regulations and also details of the violation.

CHAPTER 6 SUGGESTION & CONCLUSION

6.1 SUGGESTION

In 1991, Liberalisation of economic reforms encouraged foreign investment in India which gave an upturn in the foreign exchange and due to this the changing of “regulation” to “management” took place. The reason behind this is the certain provisions under Foreign Exchange Regulations Act, 1974 were strict towards the foreign exchange and also import and export of currency, because of which a new act where all provisions which does not affect foreign exchange and also about the import and export currency gave rise to Foreign Exchange Management Act, 1999. In the recent years the increase of foreign exchange is bringing a huge change in the economy. The foreign exchange reserve is now up to USD 19 billion approx. as per recent news.

Economy and also increase in foreign exchange can be increased more if various sectors can be made more flexible such as focusing on manufacturing sector which can be grown by improving infrastructure and also changes in labour laws. The hike in sectoral cap over the years should be again looked on such as real estate, trade, insurance, etc. and encourage more investment from automatic route even. By bringing more areas under automatic route and also reducing the delay in procedural work and various necessary approvals should be focused on. There are some states which need to increase the foreign inflows in the country. Start-ups should be also be supported and encouraged for the development in India. Focus should also be brought more on educational sector. Foreign exchange management act, 1999 as well as the various regulations are been amended as per the requirement. In Capital account transactions the more sectors should be permitted so that inflow in Indian market can develop. RBI as a regulator has focused on various factors and is monitoring in each step and which is good thing towards the import export of foreign exchange.

6.2 CONCLUSION

More than a decade the functioning of Indian foreign market brought good environment and developed at a huge scale. By liberalising foreign exchange careful and proper regulating method is monitored which is needed so that financial uncertainty would not affect. The vision of our Hon’ble Prime Minister where he is encouraging foreign exchange market in a good manner also for bring new technologies as well making a country where investments and also inflow and outflow of currency gradually increased rapidly. In some years Indian market which is a very big market will be developed economy and the foreign investment will be at a very higher level. RBI even though have strict provisions towards the regulation of FEMA but it is necessary for approvals at stages in specific sectors so that no contravention will arise and the work will be more systematic.

The Indian economy is moving rapidly towards the capital account transactions, and a well incorporated foreign market should be of great importance for the development of the nation and because of this market the flow of import and export are focused to other markets globally. By replacing the old Act i.e. Foreign Exchange Regulations Act, 1973 (FERA) to Foreign Exchange Management Act, 1999 (FEMA) it aided in removing the defects i.e. provisions affecting the foreign market and also encouraging the investments in India and outside India. FEMA helped in boosting the Indian economy and as it is flexible as compared to FERA.

BIBLIOGRAPHY

A. PRIMARY SOURCES

1. Foreign Exchange Management Act, 1999.

2. Foreign Exchange Regulations Act, 1973.

3. Reserve Bank of India Act, 1934.

B. SECONDARY RESOURCES

ARTICLES

a. Rajkumar S. Adukia, “Fathoming FEMA (Overview of Provisions of Foreign Exchange Management Act, 1999 (FEMA) and Rules and Regulations there under), ICSI Chartered Secretary, (A-418 A-433), November 2011, https://icmai.in/upload/PPT Chapters_RCs/Nagpur-23012016-Session-IV.pdf .

b. Nishith Desai, “Doing Business in India” Nishith Desai Associates 2020, August 2020, https://www.nishithdesai.com/ fileadmin/user upload/pdfs/Research%20Papers/Doing_B.pdf .

c. Abhishek Vijaykumar Vyas, “An Analytical Study of FDI in India”, International Journal of Scientific and Research Publications, Volume 5, Issue 10, ISSN – 2250- 3153, October 2015.

d. Kaushalya Venkataraman, Megha Pathak, Shivani, “India: Key Changes in Foreign exchange regime of India”,Chandhiok & Mahajan, February 7, 2020.

e. “Role of Reserve Bank of India as a regulator” , Law Teacher , July 17, 2019 https://www.lawteacher.net/free-law-essays/ finance-law/role-of-reserve-bank.php#citethis.

f. Piyali Sengupta, ”Foreign Exchange and Management Act, 1999”, HNLU Raipur, March 19, 2019. https://www.lawctopus .com/academike/foreign-exchange-management-act-1999/

BOOKS REFERRED

a. The Institute of Company Secretaries of India, “Foreign Direct Investment – A Practical Guide”,Page no. 17 – 70, (November 2017).

b. Taxmann’s Foreign Exchange Management Manual.

WEBSITES

  1. http://www.femaindia.in/
  2. https://www.bcasonline.org/Referencer2016-17/Other%20Laws/fema.htm
  3. https://www.dripcapital.com/en-in/resources/blog/all-you-need-to-know-about-rbi-fema-guidelines
  4. https://blog.ipleaders.in/foreign-exchange-management-act-1999/
  5. https://www.legalbites.in/foreign-exchange-management-act/
  6. https://cleartax.in/s/fema-foreign-exchange-management-act
  7. http://indiakanoon.org
  8. http://www.legalblog.in

Note:

1 Rajkumar S. Adukia, “Fathoming FEMA (Overview of Provisions of Foreign Exchange Management Act, 1999 (FEMA) and Rules and Regulations there under) (A-418 – A-433) November 2011.

2 Nishith Desai, “Doing Business in India” Nishith Desai Associates 2020, August 2020.

3 Foreign Exchange Management Act, 1999, § 3, Act of Parliament, 1999, (India).

4 Foreign Exchange Management Act, 1999, § 4, Act of Parliament, 1999, (India).

5 Foreign Exchange Management Act, 1999, § 8, § 9 Act of Parliament, 1999, (India).

6 Foreign Exchange Management Act, 1999, § 5, Act of Parliament, 1999, (India).

7 Reserve Bank of India, “Foreign Exchange Management Act, 1999”, A.D. (M.A Series) Circular No. 11, May 16, 2000 https://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=183 .

8 Sunil Maloo (Jain), “Current & Capital Account transactions under FEMA”, Sunil Maloo & Co., May 31, 2020 (15/01/2021, 11.18)

https://www.sunilmaloo.com/post/current-account-capital-account-transactions-under-fema .

9 Foreign Exchange Management Act, 1999, § 2 (e), Act of Parliament, 1999, (India).

10 Foreign Exchange Management Act, 1999, § 6, Act of Parliament, 1999, (India).

11 Sunil Maloo, Supra note 6.

12 Reserve Bank of India, Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, Notification No. FEMA 1/2000-RB, 3rd May, 2000 (Notified on May 17, 2000).

13 Reserve Bank of India, Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2015, Notification No. FEMA 7 (R)/2015-RB, (Notified on January 21, 2015).

14 Reserve Bank of India, Foreign Exchange Management ((Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, Notification No. FEMA 20 (R)/2017-RB, (Notified on November 7, 2017).

15 Reserve Bank of India, Foreign Exchange Management (Deposit) Regulations, 2016, Notification No. FEMA 5 (R)/2016-RB, (Notified on April 1, 2016).

16 FEMA , “Foreign Direct Investment in Indiá” , http://www.femaindia.in/page/foreign-direct-investment-in-india

17 Reserve Bank of India, Supra note 12.

18 Foreign Exchange Management Act, 1999, § 13 (1), Act of Parliament, 1999, (India).

19 Foreign Exchange Management Act, 1999, § 17 & § 19, Act of Parliament, 1999, (India).

20 Foreign Exchange Management Act, 1999, § 13, Act of Parliament, 1999, (India).

21 Foreign Exchange Management Act, 1999, § 16, Act of Parliament, 1999, (India).

22 Foreign Exchange Management Act, 1999, § 17, Act of Parliament, 1999, (India).

23 Foreign Exchange Management Act, 1999, § 18, Act of Parliament, 1999, (India).

24 Foreign Exchange Management Act, 1999, § 15, Act of Parliament, 1999, (India).

25 Foreign Exchange Management Act, 1999, § 3(a), Act of Parliament, 1999, (India).

26 Reserve Bank of India, Compounding of Contraventions under FEMA, 1999, Notification No. RBI/FED/2015-16 /1 (Notified on January 04, 2021).

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