FERA and FEMA

If individuals or organisations have failed to comply with foreign exchange regulations, they should voluntarily approach the RBI to regularise the contraventions and minimise the penal consequences.

The Foreign Exchange Management Act (FEMA) was enacted in 1999, replacing the Foreign Exchange Regulation Act (FERA), to consolidate and amend the laws related to foreign exchange and facilitate external trade and payments, besides promoting the orderly development of the foreign exchange market. FEMA regulates two types of foreign exchange transactions — capital account and current account. In general, all current account transactions under FEMA are permitted except those specified. Additionally, all capital account transactions are prohibited or regulated except those specified.

As FEMA is intended to manage foreign exchange (and not regulate it like FERA), parties undertaking cross-border transactions should adhere to the prescribed compliances or seek approval, where needed. For example, when shares of an Indian company are transferred by a resident to a non-resident, the price cannot be less than the value computed on the basis of the DCF (discounted free cash flow) method. Further, the transfer details should be filed with the Reserve Bank of India through an authorised dealer in Form FC-TRS within 60 days from receipt of consideration.

Although FEMA, unlike FERA, does not carry draconian provisions, any contravention could result in penalty. FEMA prescribes a penalty up to thrice the sum involved where it is quantifiable, or up to Rs 2 lakh where it is not quantifiable. Further, if the contravention continues, an additional penalty of Rs 5,000 a day is levied.

Given the penal implications, FEMA contains provisions permitting compounding of contraventions. Compounding refers to the process of voluntarily admitting to contravention, pleading guilty and seeking redressal. The compounding provisions are designed to provide comfort to citizens and the corporate community by minimising transaction costs, even while taking a severe view on wilful, mala fide, and fraudulent transactions.

A compounding application is made to the RBI Compounding Authority in the prescribed format, along with the necessary documents and a demand draft for Rs 5,000. It is important to note that compounding is possible only after rectifying the records by obtaining post-facto approvals or unwinding the transactions that are not permissible under FEMA. Accordingly, all requisite approvals/ compliances should be completed before seeking compounding.

The Compounding Authority decides, on a case-to-case basis, whether the contravention is technical, material, or sensitive in nature. Where it is technical, the applicant may be issued a cautionary advice. When it is material, the contravention is compounded by imposing a penalty after giving the contravener an opportunity for a personal hearing. However, where the contravention is sensitive in nature and requires further investigations, it is referred to the Directorate of Enforcement. Prima facie, sensitive contraventions include money laundering and national and security concerns involving serious infringement of the regulatory framework.

In passing the compounding order and determining the quantum of penalty, the factors taken into consideration include

the amount of unfair advantage gained, where quantifiable;

the loss to any authority/ agency/ exchequer;

economic benefits accrued from delayed compliance or avoidance;

history of non-compliance;

contravener’s conduct in undertaking the transaction, and disclosure of full facts in the submissions during the personal hearing;

whether contravener suo motu approached the RBI with the defaults; and so on.

The process concludes when the Compounding Authority passes an order indicating the provisions of FEMA contravened, along with the sum payable for compounding it. It is pertinent to note that an offence cannot be compounded if a similar contravention was committed within three years.

The RBI is keeping a watchful eye on non-compliances. In practice, it is observed that where a personsuo motu approaches the RBI for compounding, the Authority generally takes a pragmatic view, subject to the nature of the contravention. Accordingly, it is vital for individuals and organisations to identify their non-compliances and thereafter voluntarily approach the RBI to regularise the contraventions — this could help minimise the penal consequences.

Contravention: Breach of provisions and norms under FEMAMar 8, 2011

What is contravention and compounding of contraventions?Contravention is the breach of provisions and norms under the Foreign Exchange Management Act, or FEMA 1999. Compounding of contraventions refers to the process where the individual or the corporate entity can admit the contravention and seek redress from the Reserve Bank, restricted to a specific sum.

What is the nature of these contraventions and how far can the central bank go?The applications for compounding contraventions are categorised into technical, material or sensitive by the Reserve Bank of India. The contravention involving money laundering, national and security concerns involving serious infringement of the regulatory framework, etc., are sensitive contraventions. RBI has no power to compound cases which are sensitive in nature. Such cases will then have to be directed to the Directorate of Enforcement. If technical, the applicant is issued a cautionary advice.

How does compounding of contraventions help?When the contravention is material in nature, the individual or the corporate entity is given an opportunity for a personal hearing by the compounding authority, which is optional. By admitting the contraventions, the erring entity can save on the transaction costs as it would get away by paying a smaller penalty levied by RBI. In not doing so, the individual remains exposed to the action that can be taken by the central bank under FEMA. The penalty after compounding the contravention, though much reduced, can be up to thrice the sum involved, in cases where the amount if quantifiable and it can be up to 2 lakh in cases, where it is not quantifiable and for a continuing contravention, RBI charges 5,000 each day, till the resolution of the case.

All these matters related to compounding are handled by the Cell for effective implementation of FEMA (CEFA), which has to be kept informed about matters of compounding at all times.

What is the fee to be paid for applying for compounding and how long do the cases last?The individuals are required to furnish all the details of the contravention along with the application form which costs 5,000. The person, in his application, is also required to mention if the case is under the investigation of the Directorate of Enforcement or under the Prevention of Money Laundering Act (2002).

The contravention penalty has to be paid up within 15 days of the compounding order being signed. If the erring individual fails to pay the penalty within three days, it is treated as if the individual never applied for compounding contravention, thus he would be liable for the legal action under FEMA (1999). The compounding process is normally completed within 180 days of the receipt of compounding application.

FEMA NOTIFICATION BY RBI

The wait for international retail majors to set up shop in India may be extended.

While refusing to stay foreign direct investment (FDI) in the retail sector, the Supreme Court on Monday said the government policy on the issue didn’t have a legal sanction. It added this could be resolved by the Reserve Bank of India (RBI) amending regulations in the Foreign Exchange Management Act (Fema).The court has given the Centre two weeks to get the regulations amended.

An RBI spokesperson explained the role of the central bank in enabling multi-brand retail FDI: RBI has to come out with a circular, which could be done immediately. A Fema notification also has to be issued. As the notification would be a legal amendment, RBI would require the government’s permission for this. While RBI would approach the finance ministry for approval, other ministries, too, may be consulted. After the government nod, the central bank would place the notification on the gazette.

How quickly the regulations are amended would depend on the time the government takes to approve the Fema notification. The amendment doesn’t require the Parliament’s approval.

Last month, the Cabinet had cleared 51 per cent FDI in multi-brand retail. But lawyer M L Sharma had filed a public interest litigation challenging the Centre's policy on the grounds that retail trading was strictly prohibited under Fema, for which the power to come out with a circular was vested with RBI. The central bank hadn’t issued any regulation in this regard after 2008.

On Monday, judges R M Lodha and A R Dave said the policy suffered from “curable” irregularity, as RBI had not amended Fema regulations, which should have been done before the Centre had issued its notification. The judges said, “It is a legal process which has to be taken to the logical conclusion.”

Foreign investors in the retail sector have already raised concern over the conditions on investment. Contentious issues in the sector include a state-wise roll-out of FDI, the criterion that only cities with a population of more than a million can allow foreign retail set-ups and the clause of at least $100-million fresh investment, 50 per cent of which would have to be in back-end infrastructure.

NRIs can transfer funds from NRO to NRE a/cMay 8, 2012 

The Reserve Bank on Monday allowed non-resident Indians to transfer funds from a non-resident ordinary (NRO) account to a non-resident external (NRE) account subject to a ceiling of $1 million in a financial year. The decision came after the K J Udeshi committee recommendation to facilitate persons under the Foreign Exchange Management Act, 1999, it said.

Individuals cannot trade in forex market: RBI Feb 21, 2011

The Reserve Bank today said resident Indians cannot trade in forex market as per the existing regulation.

The existing regulations under Foreign Exchange Management Act (FEMA), 1999, do not permit residents to trade in foreign exchange in domestic or overseas markets, RBI said in a statement.

The clarification of the RBI assumes significance in the light of several people losing heavily in forge trade through internet portals in the recent past.

It also said, remittance in any form towards overseas foreign exchange trading through electronic/internet trading portals is not permitted under the FEMA.

RBI cautioned investors against advertisements issued by certain electronic and internet portals offering trading or investing in foreign exchange with guaranteed high returns.

Many companies even engage agents who personally contact gullible people to undertake forex trading and investment schemes and entice them with promises of disproportionate or exorbitant returns, it said.

Fema to apply to reverse overseas M&As, says RBIOctober 9, 2009 

The Reserve Bank of India has said Indian companies merging with overseas firms will continue to be treated as entities resident in the country under the Foreign Exchange Management Act (Fema).

There is no provision for such a merger under the current Companies Act. But a Bill to amend the Act tabled in the Budget session of Parliament proposes to allow Indian companies to merge with

overseas companies, under section 205, a move that could introduce greater flexibility in cross-border merger and acquisitions (M&As).The amendment to allow Indian companies to merge with foreign companies was first suggested in 2005 by an expert committee on company law chaired by Tata Sons Director J J Irani. If this amendment goes through, it will meet a key demand of many multinationals investing in India.

Under Fema, an entity resident in India will be treated on a par with a person resident in India, who is defined as somebody who has stayed in the country for more than 240 days.

In its feedback to the Ministry of Corporate Affairs a couple of weeks ago, the central bank said the Indian entity, after its merger with the foreign company, will operate as its branch in India, and therefore has to comply with all provisions of Fema for inward remittance of funds, investments by the foreign company through its Indian entity in any Indian ventures, dividend payment besides repatriation of profit to the foreign company.

The central bank has also clarified that payment by the foreign company to shareholders of listed Indian companies being merged can be made in the form of cash, shares or Indian Depository Receipts (IDRs) issued by the overseas companies.

In this case, RBI has clarified that Fema will have to amended suitably. Besides, IDRs in their existing form do not have voting rights and the law has to be changed to incorporate this change. This will be important if the merger involves allotting voting rights to Indian shareholders or some sort of management control.Sources familiar with the developments said, "Currently there is no provision in Fema for share transfer by a foreign company beyond 5 per cent in a company based in India”.

The Central Board of Direct Taxes (CBDT) is also working on its views on the tax implications, the sources said.

A tax official said even if the Indian company ceases to exist in India, it will continue to operate as a branch or Indian office of the foreign company and will be taxed in the same way as any Indian branch of foreign company gets taxed on the basis of being a permanent establishment.

A permanent establishment is a concept that allows Indian tax authorities to derive taxes from local offices of a foreign company on the basis that income is accruing from operations in India.

Legal experts said the merger of an Indian company with a foreign one can help structure M&A deals in many ways. For example, if an overseas company has acquired another foreign company that has a subsidiary in India, the new provision will allow the acquirer to merge the Indian operations with it, instead of retaining it as a separate entity.

Relief in Fera cases likely

April 18, 2008

The government has asked the Reserve Bank of India to review the pending cases of alleged violation of theForeign Exchange Regulation Act so that these can be dealt with under the more liberal Foreign Exchange Management Act (Fema), which replaced the earlier law. The initiative could help a large number of the alleged Fera violators get away with just financial penalties instead of criminal charges. The government's advisory, informed sources said, will not apply to all the cases as the RBI will decide on a case-to-case basis. The government wants the RBI to take up cases which do not have major ramifications on foreign exchange management and deal with minor repatriations matters. The Reserve Bank is in the process of collating such cases and making a rough estimate of the amount of foreign exchange involved. Officials clarified that this will not result in Fera cases being dropped. "What would happen is that if RBI realises that the violation is not significant, its views will be forwarded to the courts for examination and the offender could get away through compounding of offence under Fema instead of facing criminal charges under Fera," an official said.  LIFE UNDER FEMA Offence no longer a criminal offence, punishable with a financial penalty

For a quantifiable offence, penalty could be up to twice the sum involved

In non-quantifiable cases, the penalty can go up to Rs 100,000.

In cases where contravention is a continuing offence, a further penalty of up to Rs 5,000 for a day can be levied from the day the offence first took place As a precedent, they cited the long-pending share transfer case of Surachan Chawla, a Thailand-based NRI, who was to acquire a 38 per cent stake in Catholic Syrian Bank. Permission for the deal had been withheld since he had a pending Fera case. Recently, RBI and the Enforcement Directorate have approved the share transfer and forwarded their views to the Supreme Court. The official said that the agency did not have the precise number of the cases which were yet to be decided, though there were nearly 3,000 cases pending in various courts and only 300-400 cases were to be decided.

FEMA revamp to allow Dhaka firms likelyMarch 31, 2006

India is considering amendments to the Foreign Exchange Management Act to allow corporate entities from Bangladesh to invest in India. But restrictions on individual investments from the country are likely to continue because of security concerns. The proposal is under active consideration of the finance ministry and the Reserve Bank of India. Sources close to the development said a final decision would be taken at the highest level. At present, corporate entities from Bangladesh and Pakistan are barred from investing in India under FEMA rules. The rules also prohibit setting up of a branch or liaison office, without the RBI's approval, by Pakistani, Sri Lankan, Afghan, Iranian and Chinese citizens. The investment restrictions for citizens from Sri Lanka were lifted in September 2004. The move is being considered as a sweetener for Bangladesh, where several Indian companies, including Tata Power and the Gas Authority of India Ltd, are keen to invest. The Bangladesh government is yet to clear the investments. Officials said the move was also being considered as a precursor to finalising a bilateral investment protection agreement with Bangladesh. The agreement was expected to be signed during the recent visit of Bangladesh Premier Khaleda Zia to India. However, it was held up on account of the restrictions on corporate investments from Dhaka. According to Akash Gupt, principal consultant, PricewaterhouseCoopers the proposed relaxation will encourage direct investment. "In practical terms, entrepreneurs from Bangladesh and even Pakistan have made investments in India through other intermediate jurisdictions like Mauritius and Cyprus. The removal of these prohibitions will encourage more direct investment," he said.

Fema flouters can settle through monetary penaltyFeb 2, 2005

The Reserve Bank of India (RBI) on Tuesday said persons who have flouted the Foreign Exchange Management Act (Fema) will be allowed to settle the offence by paying monetary penalty and will not have to go for litigation if such a eprson acknowledges contravention. This, however, will not apply to hawala transactions, the RBI said in a release. The government has, in consultation with the RBI reviewed the procedures for compounding of contravention under the Fema, the central bank said. "The procedures have been reviewed to provide comfort to the citizens and corporate community by minimising transaction costs, while taking severe view of wilful, malafide and

fradulent transactions," it said. Hence, the responsibility of administering compounding of contravention cases under Fema has been vested with the RBI, with the exception of havala transactions, which will be dealt with by the Directorate of Enforcement. Clubbed under Section 3 (a) of Fema, these offences will continue to be dealt with by the Enforcement Directorate. As per the new norms, the RBI will be required to conclude case proceedings within 180 days from the receipt for application for compounding and the sum worked out after compounding has to be paid within 15 days from the order of compounding. The RBI has graded the contraventions. Offences involving up to Rs 5 lakh will be handled by an officer in the rank of assistant general manager; more than Rs 5 lakh by deputy general manager; Rs 20 lakh and above by general manager; and contravention above Rs 50 lakh by chief general manager. The order passed by RBI will be applicable for a period of three years. If a second offense is committed after the expiry of three years, it will be deemed as a fresh contravention and not a repetition of the earlier one. Similarly, for offences to be dealt by the Enforcement Directorate, the guidelines specify that offenses will dealt by officers in the rank of deputy director who will handle contravention of up to Rs 5 lakh. Offences above Rs 50 lakh will be dealt either by the special director or deputy legal adviser of the directorate of enforcement. In between, the offences of more than Rs 5 lakh, up to Rs 10 lakh and more will be handled by additional director and special director, respectively. No contravention shall be compounded unless the amount involved in such contravention is quantifiable.

RBI to deal with Fema violations Feb 2, 2005

MUMBAI: From now on, individuals and corporates will have to deal with the Reserve Bank of India, and not the Enforcement Directorate, to settle most violations of foreign exchange regulations.

While ED will continue to decide on cases pertaining to hawala transactions (or irregular foreign currency dealings), the move is viewed as a partial dilution of ED's powers.

Other than hawala, all other forex violations relating to export and import would be handled by the banking regulator.

According to a RBI release, the Central bank can compound the violations of foreign exchange regulation rules under Foreign Exchange Management Act (FEMA), enabling the party to settle the matter within six months, and probably with a lower rate of penalty.

The RBI was vested with this power after the government reviewed the existing procedures for compounding, the release said. 

Under FEMA, a violation can attract penalty of up to 300% of the amount involved, but if the party involved chooses to compound — in other words, the party admits the violation and is ready to fork out a fine — it may get away with a penalty that could be less than 100% or 50%, depending on the seriousness of the offence.Besides, the violation will be compounded within 180 days of filing the application. Once an application is made before the compounding authority, all other procedure on this matter will be suspended till the offence is compounded.

However, compounding order is not binding on the party. If the amount determined by the compounding authority is not paid within 15 days of the order, the order will become null and void.

Also, all other proceedings suspended with the beginning of compounding process will resume automatically. The party can make an application before the compounding authority, either on being advised of a contravention under FEMA or on itself after being aware of a contravention.

Fema has more of fines & jailJun 13, 2002,

Fema should be more liberal than Fera on all counts, right? Not really. According to officials, the Foreign Exchange Management Act (Fema) which is now in force, is soft on preventive action, but tough on penalties, as compared to the law it has replaced, the Foreign Exchange Regulation Act.

Hence, if a company or individual fails to pay up the penalty imposed on them, they are liable to imprisonment.

This was not the case earlier, where the ED saw itself as a preventive department rather than a revenue generating arm of the government. This meant that it used its powers to deter violations through fear, rather than bother to prove guilt and punish through penalties.

The government too saw this as ED's role. Hence, Fera itself did not hold the ED responsible for the collection of the penalties imposed. Instead, it empowered district collectors to collect the penalties imposed by the adjudicators on violators. The net result was poor collection of dues, resulting in the Comptroller and Auditor General of India (CAG) passing strictures against the ED for poor collection of penalties in one of its reports.

This position has now changed. Fema not only provides for severe penalties, but also provides for imprisonment when the penalties are not paid within 90 days of imposition.

Under Fema, the adjudicator (an officer with the ED) can impose a penalty three times the size of the contravention involved where the sum is quantifiable. In case the contravention is not quantifiable, the penalty is set at Rs 2 lakh. Further, where the violation is a continuing one, an additional penalty of Rs 5,000 per day of contravention can be imposed. The adjudicating officer can also order the confiscation of the property, security, foreign exchange etc involved in the contravention by the Central government.

It can also order the repatriation of the foreign exchange involved.

Interesting, while these penalties are considered to be reasonable, Fema packs a punch as far as the

failure to comply with the penalties is concerned. Defaults can attract civil imprisonment, subject to certain safeguards.

The adjudicating authority can order arrest and detention of the defaulter in a civil prison, provided he has a notice and followed it up with a show cause asking why the defaulter should not be imprisoned for not appearing before the adjudicating authority.

Experts voice concern over FEMA provisions

July 8, 2000

THE Foreign Exchange Management Act (FEMA), which replaced the Foreign Exchange Regulation Act (FERA) on June 1, is by and large acclaimed to be a better piece of legislation.

However, at a seminar on Saturday by the Forex Association of India (Southern Chapter), experts voiced their concerns about some of its provisions.

Mr. A.V. Rajwade, a Mumbai-based forex consultant, wondered if the legislation and the regulator -- RBI -- were moving in different directions.

Mr. Rajwade wanted to know why the RBI clamped down on imports, in the wake of the rupee weakening against the dollar in the first week of June, when FEMA was a liberal statute by intent and purpose.

He added that the 50 per cent interest surcharge on import finance was a sort of a subsidy to the banking industry, which could lead to endless disputes.

``Would these measures be truly temporary?,'' he asked, adding that the exchange controls introduced for the first time in India in 1939 were also meant to be temporary, but have continued till date.

Mr. Rajwade criticised the prohibition on drawal of foreign exchange for the purpose of ``payment related to call back services of telephones'', saying that the measure was perhaps brought in only to protect VSNL.

He was supported in this contention by Mr. P. Yesuthasen, forex consultant and former RBI official, who said that if VSNL could be protected, then Air India could demand a prohibition on remittance of foreign exchange for the purpose of buying a ticket f rom some other airline.

Ms. Devaki Muthukrishnan, General Manager, RBI (Chennai), observed that payment related to call back services of telephones was a current account transaction.

For all current account transactions, it was the Government of India which framed the rules, and not the RBI, she pointed out.

Mr. Rajwade said that FEMA had done away with the `draconian

provisions' of FERA -- such as putting the burden of proof on the accused, powers to the Enforcement Directorate to `search and seize', powers to arrest, no time limit for deciding the cases -- but cautioned that it remained to be seen whether these provisions would be retained in the Money Laundering Bill, which is under Parliament's consideration.

Mr. Yesuthasen wondered FEMA was needed at all, as all the changes could have been effected in FERA itself. He added that over the years, FERA had by itself become liberal, because the RBI could give general purpose approvals, even on post-facto basis.

Mr. Yesuthasen and Ms. Muthukrishnan said that there had been no problem with FERA as a law, but only in the enforcement part.

While the RBI could give post-facto approvals to transactions under FERA, FEMA allows no post-facto approvals. ``If you have violated, you have violated,'' Mr. Yesuthasen said, adding that to this extent, FEMA was not keeping in line with the spirit of l iberalisation.

FEMA requires authorised dealers (renamed in the Act as authorised persons) to satisfy themselves that the purpose for which foreign exchange was being drawn was really current account in nature.

Unlike earlier, the RBI does not prescribe documents or forms for the drawee to fill up. Instead, designing such forms is up to the authorised dealer.

However, the authorised dealers were required to keep the documents, such as a letter of declaration of purpose for which foreign exchange was being drawn. Inspectors from the RBI would inspect such documents.

Mr. AL. Alagappan, Assistant General Manager, Indian Overseas Bank (Chennai), who is also an office-bearer of Federation of Authorised Dealers of India (FEDAI), said that this aspect would lead to problems between the authorised dealers and the RBI.

On one hand, the authorised dealers only had to satisfy themselves about the genuineness of the transaction for which foreign exchange was being sought -- which could be technically done by word of mouth. But on the other hand, the RBI would inspect docu ments.

FEMA effective from June 1

NEW DELHI: The Government has notified that the

Foreign Exchange Management Act (FEMA) 1999 which has been approved by Parliament will come into force from June 1.

The RBI is now expected to shortly specify the permissible class of capital account transactions, the manner and form in which the declaration is to be furnished by every exporter of goods, the period and the manner of repatriation of foreign exchange an d the permissible limits up to which foreign currency, foreign coins and foreign exchange may be acquired or retained.