30.3.00 taxmanns guide to fema 1999

TAXMANN’S

Foreign Exchange Management Act, 1999

A Brief CritiqueBy

Rashmin Sanghvi -Naresh Ajwani -

K.G. Chaudhari –Retired General Manager,Exchange Control Department,

Reserve Bank of India.

Published By :Taxmann Publications Private Ltd.

P R E F A C E

Government of India has taken decisive and quick steps towards further liberalisation. FEMA has become a reality.

FEMA is a landmark step in the continuing process of liberalisation. Current account convertibility has now become a part of the law itself - rather than a concession given through circulars.

At the same time, the prima facie impression is that FEMA is a précis of FERA retaining almost all powers for the RBI. Real quality of liberalisation will be known when all the circulars & notifications under FEMA are published. We believe, these notifications will be a pleasant surprise.

This is a quick commentary on FEMA.

We propose to present a comprehensive commentary once the new Exchange Control Manual is published. Like FERA, under FEMA also, the major provisions will be made in the notifications & circulars. Hence the present commentary remains a brief commentary not even touching upon several issues. Covering all important issues will be done in the comprehensive commentary.

All comments & suggestions from the readers are most welcome. We will try to cover them appropriately in the comprehensive commentary.

Rashmin Sanghvi,Naresh Ajwani,K. G. Chaudhari, Retired G.M., ECD, RBI

The date from which it will be effective, has to be notified. There is a delay in the notification of the date, as:

(i) the rules and Exchange Control Manual are being framed by officials of Reserve Bank of India and the Government. Unless these are also issued, FEMA by itself with be insufficient.

(ii) the Prevention of Money Laundering Act (PMLA) has yet to be passed. The bill has been referred to a select committee of the Parliament. Both PMLA & FEMA may be made effective simultaneously.

It is expected that FEMA will be made effective within a two to four months.

Serious Omissions

A quick reading of FEMA shows some omissions.

1. Immovable Property

For Purchase etc. of immovable properties, earlier, the control was by citizenship. Now the control will be by residential status.

Acquiring Indian residential status is easy. If a foreigner comes to India and takes up an employment, he will become Indian resident from the first day. Then he can buy 100 acres of land, agricultural property, or a tower in Nariman Point. After six months he can resign from the job & go away.

Neither RBI nor GOI may be able to prevent.

Please see paragraph (para) 7.2 for details.

2. Definition of Residential Status.

There is no provision for determining residential status of a firm, HUF, AOP - or any other unincorporated body.

Please see para 4.6 for details.

3. Business Activity.

Under FERA, regulations were in place for foreigners and non-residents doing commercial activities in India. S.30 covered professional activities. S. 29 covered business activities.

Now provisions of both these sections have been deleted.

Under FEMA, section 6(6) authorises RBI to prevent non-residents from establishing business offices in India. But if someone does business without establishing an office; RBI has no power to deal with him.

Please see para 7.6 for details.

C O N T E N T S

Under FEMA, section 6(6) authorises RBI to prevent non-residents from establishing business offices in India. But if someone does business without establishing an office; RBI has no power to deal with him.

Chapter Titles Page No.

I. Introduction 1 - 2

II. Transition from FERA to FEMA 3 - 6

III. Convertibility of Rupee 7 – 9

IV. Residential Status 10 – 17

V. Hawala Transactions 18 – 22

VI. FEMA & Money Laundering 23 - 24

VII. Certain other Important Issues 25 – 31

VIII. Comparison 32 - 36

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INTRODUCTION

Chapter I

1.1 Foreign Exchange Management Act (FEMA) has replaced Foreign Exchange Regulation Act (FERA). While the FERA was a law which sought to ‘control’ Foreign Exchange (FX) transactions, FEMA seeks to ‘regulate’.

FERA was enacted at the time when there was scarcity of FX. It was inherited from the British government which had passed laws controlling FX, to keep control over its colony. We also needed the law in the early years of FX scarcity. With changed scenario, FX is no longer a “precious & rare” commodity. It is just like any other commodity. There should be proper regulation, but not control. For economic issues, one needs a commercial law.

We have the Company law or Securities Act which lay down

the regulations, but do not prevent us from doing something. If we comply with the law, the guidelines, etc., we can do our normal business.

In the days of scarcity, FERA was a sacrosanct necessity,

but it is no longer so.

Similarities & Differences between FEMA & FERA

Like FERA, FEMA also will be governed by notifications. The basic statute empowers the government & RBI, to regulate, allow or prohibit transactions. Under FERA, almost all transactions which were permitted, were based on notifications and circulars. The law as such did not allow anything.

Similarly under FEMA, a lot of notifications will have to be

issued granting general permissions.

And yet there is a fundamental difference.

Under FERA, a normal operative section would provide that “no person can do the following transactions without a general/special permission”. Thus for example, section 9 prohibited all payments to non-residents. Then several notifications permitted payments subject to certain conditions. It meant that if there was no permission, a payment to a non-resident was prohibited.

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Now under section 5, all current account transactions are permitted under FEMA. RBI may regulate certain payments by issuing notifications / circulars. If there is a current account payment on which no notification has been issued, prima facie, it is permitted.

This is an important, positive change in the approach.

Even more radical is proviso to section 6(2), which prevents RBI from imposing any restrictions on loan repayments. This is for the first time that a legal curb is placed on RBI’s powers in its dealing with the citizens.

Scheme of the Critique on FEMA

1.2 Note the following

The transition from FERA - a “controlling” law to FEMA - a “management” law is discussed in the second chapter.

Current account convertibility has been already established

through several RBI circulars since August, 1994. Now it has been introduced in the Act itself. It is discussed in chapter III.

The definition of “resident” was unique under FERA. Being

conceptually different from the definition under the tax laws, it caused considerable confusion for the layman. FEMA makes the definition comparable with the Income-tax Act; and yet retains flexibility. The concept is discussed in chapter IV.

Hawala transactions have caused a haemorrhage for the Indian

economy. Liberalisation carried out by Indian Government has already diminished the demon. It is discussed in chapter V.

Relationship between FEMA & Money Laundering legislation is

discussed in chapter VI. Further scope for liberalisation and other important issues are

discussed in chapter VII.

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Transition from FERA to FEMA

Chapter II

2.1 The scheme of FERA provided for obtaining Reserve Bank’s permission either special or general, in respect of most of the regulations there under. The general permissions have been granted by Reserve bank under these provisions in respect of various matters by issuing a large number of notifications from time to time since the Act came into force from 1st January 1974. Special permissions were granted upon the applicants submitting prescribed applications for the purpose. Thus, in order to understand the operative part of the regulations one had to refer to the Exchange Control Manual as well as the various notifications issued by RBI and the Central Government.

FEMA has brought about a sea change in this regard and

except for section 3, which relates to dealing in foreign exchange, etc. no other provisions of FEMA stipulate obtaining RBI permission. It appears, that this is a transition from the era of permissions to regulations. The emphasis of FEMA is on RBI laying down the regulations rather than granting permissions on case to case basis. This transition has also taken away the concept of “exchange control” and brought in the era of “exchange management”. In view of this change, the title of the legislation has rightly been changed to FEMA.

The preamble to FEMA lays down that the Act is to

consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. As far as facilitating external trade is concerned, section 5 of the Act removes restrictions on drawal of foreign exchange for the purpose of current account transactions. As external trade i.e. import / export of goods & services involve transactions on current account, there will be no need for seeking RBI permissions in connection with remittances involving external trade. The need to remove restrictions on current account transactions was necessitated as the country had given notice to the IMF in August, 1994 that it had attained Article VIII status. This notice meant that no restrictions will be imposed on remittances of foreign exchange on account of current account transactions.

Section 5, however, contains a proviso that the Central

Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current

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account transactions as may be prescribed. It appears that this is an enabling provision for the Central Government to impose restrictions on current account transactions in case the situation warrants such restrictions probably due to foreign exchange crisis in future. This proviso seems to have been added keeping in view the lessons learnt by certain South-East Asian countries during the 1997-98 crisis which required stricter exchange controls till the crisis was over.

Similarly, section 7 retains controls on exporters.

Though the preamble to FEMA talks about promoting the

orderly development and maintenance of foreign exchange market in India, there are no specific provisions in the Act to attain this objective.

2.2 FERA contained 81 sections (some were deleted in the

1993 amendment of the Act) of which 32 sections related to operational part and the rest covered penal provisions, authority and powers of Enforcement Directorate, etc. FEMA contains 49 sections of which 12 sections cover operational part and the rest contravention, penalties, adjudication, appeals, enforcement directorate, etc. What was a full section under FERA seems to have been reduced to a sub-clause under FEMA in some cases.

For example,

(i) Section 13 of FERA provided for restrictions on import of

foreign currency & foreign securities. Now this restriction is provided through a sub-clause 6(3)(g).

(ii) Section 25 of FERA provided for restrictions on Indian

residents holding immovable properties outside India. Now the restriction is under sub-clause 6(4).

Reduction in the number of sections means nothing. Real

quality of liberalisation will be known when all notifications & circulars are finalised & published.

Need for FEMA

2.3 The demand for new legislation was basically on two main

counts. 2.3.1 The FERA was introduced in 1974when India’s foreign

exchange reserves position was not satisfactory. It required stringent controls to conserve foreign exchange and to utilise in the best interest of the country. Very strict restrictions have

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outlived their utility in the current changed scenario. Secondly there was a need to remove the draconian provisions of FERA and have a forward-looking legislation covering foreign exchange matters.

Has FEMA met the demands 2.4 Has FEMA met these demands? As far as transactions on

account of trade in goods and services are concerned, FEMA has by and large removed the restrictions except for the enabling provision for the Central Government to impose reasonable restrictions in public interest. The capital account transactions will be regulated by RBI / Central Govt. for which necessary circulars / notifications will have to be issued under FEMA.

Repeal of draconian provisions under FERA

2.5 The draconian regulations under FERA related to unbridled

powers of Enforcement Directorate. These powers enabled Enforcement Directorate to arrest any person, search any premises, seize documents and start proceedings against any person for contravention of FERA or for preparations of contravention of FERA. The contravention under FERA was treated as criminal offence and the burden of proof was on the guilty.

FEMA has reduced the rigors of exchange control by

removing / diluting these provisions. The contravention has been treated as civil offence. Primarily , for an offence, the accused cannot be arrested. He can be arrested only for non-payment of the penalty imposed for contravention. Specific provision has been made by fixing a time limit of twenty-four hours for bringing the arrested person before the Adjudicating Authority. Similarly, in respect of appeals filed before the Appellate Tribunal, a period of 180 days has been stipulated for final disposal of the appeals. No such time limit was laid down under FERA. The powers of Enforcement Directorate have been substantially reduced and new provisions for Adjudicating Authority and Compounding of cases have been introduced.

2.6 Civil Law

Foreign Exchange Regulation Act had its genesis in the Defence of India Rules. The British Government had enacted the rules to exercise control over its colonies. Hence FERA was like a criminal law.

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Section 35 empowered any officer of Enforcement Directorate to arrest a person, if he had a reason to believe that the person is guilty of violation of FERA.

There are several reported cases of human rights violations

by the Enforcement Directorate. Such laws do not have a place in a democratic country like ours.

FEMA is a civil law. Primarily there is no imprisonment for

violation of the law. Only penalty can be levied u/s. 13. However, if the person cannot pay the penalty, then he can be arrested.

Under FERA, there was a presumption regarding mental

culpable state. Mental culpable state means the existence of a guilty mind. The accused person had the intention, motive or knowledge of the violation of law. A court had to presume the existence of such a guilty mind, unless the accused proved that he had no guilty mind.

Under FEMA, this presumption is not there. The prosecution

will have to prove that the person has committed a violation of the law.

2.7 FEMA has stipulated sunset period of two years for

transition from FERA to FEMA as far as contravention of the provisions of erstwhile FERA are concerned.

2.8 The real test of the new forward looking legislation will rest

on the legal interpretation of the various provisions and the clarifications / circulars / notifications issued by RBI/ Central Govt. during this transition period. Reducing the rigors of FERA should not mean that one can contravene the provisions of FEMA and get away with it by paying the penalty.

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CONVERTIBILITY

Chapter-III 3.1 Indian Rupee is now partly convertible. It is convertible on

“current” account and non-convertible on “capital” account.

This partial convertibility was brought in August 1994 by RBI circulars. RBI informed the International Monetary Fund (IMF) that India has adopted article VIII. Status under the IMF regulations. This was followed up by circular No. 18 dated 19 th

August, 1994. Now the concept has been introduced in the Act itself by defining the terms “capital account transaction” and “current account transaction”, and by providing for convertibility in Section 5.

The concept of current vs. capital account is different under

FEMA from the concept in accounts and income-tax. Under accounts a machine purchased by a factory would be considered a capital account transaction. It would be a fixed asset lasting for more than the year of purchase. If that machine were imported, under FEMA, it would become a current account transaction. Import of goods (any goods), and payment of the import price completes the transaction. There is no carry forward. If the machinery were imported on credit and liability were created, then it would be a capital account transaction under FEMA. For FX purposes the classification base is borrowed from IMF. The two classes are made for the purpose of reporting Balance of Payments to IMF. Now of course definitions are provided within FEMA.

3.2 In one sense, rupee is already almost fully convertible. (i)

Rupee rates in the FX market are market determined and not RBI prescribed. (ii) Most of the transactions for inward foreign investment are liberalised. (iii) For outward investments, upto U.S. $ 15 million, automatic permission is available. Larger outward investments are also permissible if one can satisfy RBI about the project.

Now there are a few areas left because of which one has to use the word “almost” fully convertible.

(i) Speculation in FX is not free.

This is a blessing for India.

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(ii) There are still some procedural issues which can be simplified.

Hopefully, the new ECM will take care of it.

(iii) There are still some “business decisions” which RBI monitors. Like valuation of shares in case of sale by collaborators.

World wide trend is that statutory authorities are leaving business decisions to businessmen.

(iv) Still, all FX dealing in India can be done only by “authorised persons” only. This may have to be continued for some more time.

3.3 South-East Asian crisis:

Many people had strongly recommended that the whole of FERA should be scrapped. Western nations were particularly strong in “persuading” the Indian Government in making rupee fully convertible. At least twice central government ministers on visit outside India had made announcements to the press that on their return to India, FERA would be scrapped. However, the conservative forces within India did not allow full convertibility.

The South-East Asian crisis destroyed the economies of -

Thailand, Malaysia, Indonesia, Phillipines and South Korea. Even strong economies like Hongkong and Singapore met with powerful attacks by foreign exchange (FX) gamblers. They were followed by absolute collapse of Russian currency. Brazil was affected.

In all this crisis India and China were not seriously affected.

There were attacks on Chinese currency. There were rumors about Indian rupee. However, both currencies survived the crisis.

Today, international financial circles at the highest level

grudgingly admit that (i) IMF had failed. Its prescriptions to the South East Asian Countries only aggravated the crisis. (ii) it was because of the exchange controls that India and China were saved. Expert handling of the crisis by the Reserve Bank of India and the finance ministry was of great help. Post crisis analysis shows that most of the countries affected by the crisis did not have central banks and finance ministries as competent as in India.

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There are some experts on international economics who are now considering the danger posed by FX gamblers as the biggest danger to world financial system. These gamblers can destroy a small currency within a few weeks. They would do it for their profits irrespective of the fundamentals of the currency. The sustained attacks on Hongkong gives ample evidence.

The only protection from these gamblers lies in

reintroducing exchange controls.

While Malaysia has with tremendous moral courage reintroduced exchange controls, no other country has expressed similar courage.

In this situation to call for full convertibility of Indian rupee

would be premature. It is probably in the light of this background that the finance minister Mr. Yashwant Sinha gave an assurance in the parliament while moving the FEMA bill (December, 99) that the government will not take risk by making the rupee convertible on capital account.

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RESIDENTIAL STATUS

Chapter-IV

4.1 Residential status - definition :

The definition of a resident for an individual is now made comparable with the definition under income tax. Earlier, the two definitions were totally different causing considerable confusion.

The FEMA bill, 1998 had proposed a change in the

definition. The new definition would determine the residential status based on physical stay rather than other detailed provisions.

However, this definition would have created problems for

people changing residential status. They would have incurred avoidable problems during the year in which -

(i) A resident becomes a non-resident: or,(ii) A non-resident becomes a resident.

This matter was brought to the attention of “Murli Deora

Committee” and the Reserve Bank of India. The final Act now removes this problem.

4.2 Intention:

There was a misunderstanding in some circles about residential status under FERA. They claimed that a person’s residential status is determined solely by his intentions. Even if he stayed within India for long periods, if he had an intention to settle abroad, he would still be a non-resident. This understanding was incorrect. Even under FERA, the intention had to be supported by facts and circumstances.

The term “intention” was given a “go-bye” in the FEMA bill,

1998. FEMA Act reintroduces the term. It should be noted that the term “intention” must be accompanied by facts. A person cannot stay in India and say that - “he has an intention of working abroad, so he is a non-resident”. He must go abroad, stay abroad and take-up employment or business abroad to say that he is a non-resident.

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4.3 Resident Individual - definition u/s. 2(v) - Simplified

The definition in the section is difficult to understand. Language is complex using two negatives in one sentence. For the sake of easier understanding a simplified version is given below.

(i) A person resident in India means a person who resided in India for a period of 182 days during the previous financial year.

A. Following persons will not be considered as a “resident in India”.

A person who has gone out of India; or, a person who stays outside India-

In any of the following circumstances -

(a) for employment outside India; or

(b) for carrying on a business or vocation outside India; or

(c) for any other purpose - if the circumstances show that he has an intention of staying abroad for an uncertain period.

B. A person who had resided abroad for 183 days or more during the preceding financial year, is a non-resident.

In the following circumstances, he becomes Indian

resident.

When he has come to India; or, if he stays in India -

In any of the following circumstances -

(a) for employment in India, or

(b) for carrying on business or vocation in India, or

(c) for any other purpose - if the circumstances show that he has an intention of staying in India for an uncertain period.

4.4 Analysis : 4.4.1 It may be noted that when it comes to employment,

business or vocation, the length of the period is not relevant. A

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resident may go abroad and take up employment. On the first day itself he becomes a non-resident.

4.4.2 In case a person comes to India for a purpose other

than commercial purpose (like employment or business), situation is different. For example, a tourist comes to India. If he comes with a definite plan for returning after two years; then he is not a resident in India.

4.4.3 Mr. A comes to India for family marriage etc. Then

some other cause prevents him from returning. Then a third cause causes his continuous stay in India. Like that he stays here for more than six months. If he has no employment and no business in India; and he has substantial employment or business abroad plus house / office etc. abroad; he will be able to establish that he is still, a non-resident. It should be noted that his intention of remaining a non-resident has to be supported by facts.

4.5 Notes4.5.1 The concept of financial year is brought into FEMA for

the first time. The term “Financial Year” has not been defined. Prima facie it should mean the period commencing from the 1st

day of April in a year and ending on the 31st day of March in the next year.

This term can have different meanings. It would be better if

the term is defined in rules / notifications. 4.5.2 Period of 182 days

The language used in the section makes it clear that it is not necessary that there should be a continuous period. All different periods during the year have to be totaled up. Altogether if the stay in India is more than 182 days, the person would be an Indian resident.

Departure / Arrival

If a person has traveled to and from India several times in a

year, should all the days of departure and arrival be counted as “in India” or “outside India”!

There is, no guideline to this effect under FEMA. Even

under Income-tax Act, the law does not provide a guideline.

Ideally, the FEMA rules should clarify.

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A safe position to be adopted until rules clarify the position can be - consider the date stamped by the immigration office at the airport / port. For both the dates stamped on the passport, the person is in India even for a fraction of time. Count him as “in India”.

If a rule clarifies the position, more reasonable position can

be adopted. For example, for the day of departure, the person is considered “outside India” whereas for the date of arrival, he is considered “inside India”.

4.5.3 Under FERA, the position was, that the moment a

person goes abroad for taking up foreign employment / business, he became a non-resident. Under FEMA bill, 1998; that position was given a “go-bye”. Professional bodies represented that this would create difficulties in the year of change in residential status.

FEMA Act, 1999 reintroduces the concept. Now an Indian

resident becomes a non-resident immediately when he takes up a foreign job and goes abroad.

4.6 Definition of Resident - Probable Errors 4.6.1 There is a gap between the definition of “person”

under section 2(u) and the definition of a “person resident in India” under section 2(v).

The person is defined to include individual, HUF, firm,

association of persons (AOP) etc. Each of these categories are separate and independent categories.

While defining a person resident in India no separate

definition for HUF, firm, AOP etc. are given. Clause (ii) defines residential status of a body corporate. If it is registered or incorporated in India, it is resident in India. However, an HUF and an AOP are not bodies corporate. They do not require any registration or incorporation. Their status is still separate from the status of their members. Legally, an HUF’s status cannot be determined by the status of its Karta or any or all of its members. There must be a separate criteria for determining the status of an HUF. Similar is the case for all other unincorporated bodies like AOP, trust etc. Even a partnership firm may or may not be registered. For all these entities, “control and management” criteria maybe adopted.

4.6.2 Can the Reserve Bank make provision for residential

status of HUF etc. by notifications or circulars?

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RBI derives its powers to regulate from FEMA. It cannot

independently make provisions without substantive provision in the law. Correctly speaking, all FEMA provisions should fail as far as HUF, trust etc. and other unincorporated bodies are concerned.

4.6.3 The position under FERA was also similar. Entire

definition for a “resident” under section 2(p) was pertaining to an individual. Firm was covered under section 73(1)(c). A branch was also covered under section 73(1)(d). However, a limited liability company incorporated under the Companies Act in India or incorporated outside India was not covered by any definition as far as its residential status was concerned. For all these years nobody challenged RBI’s powers to regulate a company under FERA and the position continued. More detailed discussion on the subject will be given in the detailed commentary to be published later on.

4.6.4 Another mistake made under FERA has been

continued under FEMA.

Section 2(p) of FERA defined the residential status as… “a person resident in India…” . Entire definition provided for citizenship, marriage, etc. These provisions established beyond doubt that the definition covered only an individual. A non-individual person cannot get married. This means that for a non-individual person, it could not be decided whether it is a resident or non-resident. However, somehow, RBI continued to regulate non-individuals also.

Section 2(v)(i) of FEMA stills defines … “a person residing

in India … “ . Here also the definition makes provisions for physical stay, taking up employment etc. All these provisions can be applied only to an individual. Hence the definition clause should have been - “an individual residing in India …”. When a “person” is defined to include non-individuals, it is incorrect to make a definition pertaining to individuals and using the term “person”.

4.6.5 Under FERA, section 73 made provision for partnership

firm. Under FEMA there is no such separate provision for the residential status of a firm.

4.7 Assuming that the financial year means the period April to

March, let us see further.

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If one has to determine a residential status of a person as on say 1st July 1999, one has to look at the period 1st April 98 to 31st March 99. If a person resides in India for more than 182 days, he will be considered as a resident in India.

There are however two exceptions given in clauses A and B

of the section 2(v). 4.7.1 The first exception in clause A talks about a person

who is in India, but goes out or stays out of India for:

- employment outside India, or

- business outside India, or

- any purpose which indicates his intention to stay outside India for an uncertain period.

Such persons are not included in the definition of a “person

resident in India”. i.e. they will be considered as non-residents.

This brings us to an issue - whether the residential status of a person applies for a year, or from a particular date.

4.7.2 We may consider the issue as under:

The starting point is the number of days in the preceding financial year. If a person is in India for more than 182 days in a preceding financial year, he is a resident.

However,

If he goes out of India, then from that time, or If he stays out of India, then for that period, he is a non-

resident.

Let us see some examples 4.7.3 A person goes out of India for employment on 1st July,

1999. He was in India for 182 days in 1998-99.

To determine his residential status in 1999-2000, we have to see the days in 1998-99. As it exceeded 182 days, he is a resident. However, from 1.7.99, he becomes a non-resident as he “goes” out of India, for employment abroad.

Upto 30th June, he is a resident.

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If a view is taken that the residential status is for a year, and not from a particular time, then one will have to wait for nine more months (upto 31st March 2000) to determine his status. This will create difficulties as a person should know at a point of time whether he is a resident or a non-resident.

Hence a harmonious view will be to treat a person resident

from the date he takes up employment abroad.

In 2000-2001, we have to see the number of days the person is in India during 1999-2000. As he will be in India for less than 182 days, he will be a non-resident.

4.7.4 In the above example, assume that the person goes

out for employment on 1st January, 2000.

Primarily, he is a resident in 1998-99, as he was in India for more than 182 days.

In 1999-2000 also, he is in India for more than 182 days.

Therefore, in 2000-2001, he will be again a resident.

However, he has left for employment on 1st January 2000. Therefore for 1999-2000, he is a resident upto 31st December, 1999. From 1st January 2000, he is a non-resident since a person who goes out of India for employment is a non-resident.

In 2000-2001, as he “stays” outside India for employment,

he is a non-resident from 1st April 2000, although he was in India for more that 182 days in 1999-2000.

4.7.5 The second exception is covered in Clause B. It

speaks about persons who were outside India, & have come to India.

If a person comes to India for any purpose other than the

ones mentioned below, he will not be “included” in the definition of resident :

- Employment in India, or- business in India, or- any purpose which indicates his intention to stay in India for uncertain period.

Therefore he will be a non-resident.

Thus if a person comes as a tourist, or to do charity work,

or any purpose (not for employment or business in India), AND ,

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he comes for a certain period of time (say 2 or 3 years), he will be a non-resident.

Thus a person may come to India and stay in India

regularly for more than 182 days for 10 years. He may claim that his stay is not certain. He is sure to go back. Further he may not do any business or undertake any employment in India. Still he may be a non-resident in India.

Only if he comes for employment, business or for uncertain

period, he will be “included” as a person resident in India.

Is this the intention? By bringing in the criteria of “intention” within the definition, the controversies under FERA continue. A clarity in law would have helped.

4.8 Residential Status of Partnership firms, etc.

A person other than individual, will be considered as a resident, if it is registered or incorporated in India. (S.2(v)(ii).

An office, branch or agency in India, which is owned or

controlled by a person resident outside India, will be considered as resident in India. (S.2(v)(iii)).

An office, branch or agency outside India owned or

controlled by a person resident in India, will also be considered as resident in India. (S.2(v)(iv)).

This is different from the situation under FERA. Under

section 73(1)(c), a branch was considered as a resident where it was situated. If a resident in India opened a branch in U.K., under FERA, the branch was a non-resident. Under FEMA the branch is a resident and therefore it will be subject to FEMA controls, making it difficult to operate outside India.

4.9 When does a non-resident become a resident ?

A person resident outside India comes to India on 1.8.2000, does he become a resident from 1.8.2000 ?

Yes. On the day he takes up employment and comes to

India, he becomes Indian resident.

As discussed earlier, change in residential status becomes effective from the date of travel and employment. The position will be the same whether an Indian resident goes abroad or a non-resident comes to India.

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Getting Indian citizenship is a difficult and time consuming

process. Becoming Indian resident is very easy.

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Hawala Transactions

Chapter V

An important objective of exchange regulation is to prevent hawala transactions.

We may briefly consider ‘hawala’ from two angles.

(i) legal; and (ii) Economic.

Legal restrictions on hawala.

5.1 Under FERA, sections 8 & 9 provided detailed legal

prohibitions on hawala market. Section 8 provided the restrictions on transactions in foreign currency as well as conversions between Indian currency & foreign currency, Section 9 covered rupee transactions. Section 9(1)(f) provided specific prohibition on hawala. Rest of the clauses in section 9 were direct / indirect support to the main target of preventing flight of capital outwards through any channel.

5.2 FEMA bill 1998 had made a précis of all provisions of FERA.

In the process, section 9(1)(f) was dropped. 5.3 FEMA 1999 has reintroduced the concept through section

3. Section 3 (a) of FEMA covers S.8 of FERA. Section 3(b) to 3(d) of FEMA cover S.9 of FERA.

5.4 Sections 9(1)(f)(FERA) and 3(d)(FEMA) are difficult to

interpret and understand. Following example will explain one of the several forms of hawala transactions and make it easier to understand S.9(i)(f).

5.4.1 Illustration

Mr. LNRI employed in London.

HDL Hawala dealer operating in London.

Mr. FFather of Mr. L Staying in India.

HCBritish Hawala dealer’s counter part in India.

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5.4.2 Explanations

Assume that Mr. F is an Indian resident, settled in India. His son Mr. L has gone to London for employment. He has become a non-resident of India (NRI). Mr. L wants to send a regular monthly remittance to his father in India. If he sends pounds 100 through the banking channel, his father will get Rs. 7,000 in India. If he sends pounds 100 through the hawala channel, his father will get Rs. 7,700. Hawala premium is assumed @ 10%.

What transactions actually take place!

Hawala dealers do not send money to India in gunny bags.

Mr. L. will pay pounds 100 to Mr. HDL in London. As a compensatory payment, on the instructions of Mr. HDL; Mr. HC in India will pay Rs. 7,700 to Mr. F.

The clearing between HDL & HC is compensated by

transactions with the smugglers.

These facts reduced to legal language would mean -

(i) HC, an Indian resident, makes a payment of Indian rupee, within India, to Mr. F, an Indian resident.

(ii) in compensation of ; (iii) Payment in U.K., by Mr. L a British resident; of British

pounds to Mr. HDL another British resident.

Transactions under clauses (i) and (iii) above are independently, perfectly legal transactions. No one can prohibit them.

The fact that they are compensatory payments makes

them illegal.

This is the essence of S.9 (i)(f) of FERA.

Same purpose is achieved by S.3 (d) under FEMA - but by a different language.

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5.5 Hawala Market - Economic aspects

Note: In this chapter, we are dealing with some fundamental

issues in FX economics. These are touched upon very briefly. Some issues are simply listed & then not discussed at all.

The present commentary is a brief and quick commentary.

In the next commentary we will strive to deal with all these issues elaborately.

5.5.1 Economic Ground Reality

Despite the strictest legal provisions, hawalas have actually been most routine transactions. Several people have transferred capital in or outside India through hawala at their sweet will. For them, rupee has always been "fully convertible".

This aspect of FERA is a classical example of the theory

that "where strong commercial interests tempt; no amount of legal restrictions will be successful".

Since rupee keeps continuously depreciating, wealthy

people seeking to protect the value of their wealth have a strong economic interest in transferring their wealth outside India.

Since there is almost always, in India, a premium on foreign exchange, some NRIs may have a strong interest in sending their remittances to India through the hawala route; rather than through the banking channel.

5.5.2 How can this hawala market be eliminated? There are two

ways.

(i) Abolition of import controls, especially gold import; and

(ii) Stability of Indian rupee in FX market. 5.5.3 Gold control legislation was the strongest benefactor

of the smugglers. They had a vested interest in continuation of gold control & ban on import of gold.

Gold smuggling into India; and hawala market for NRI

remittances into India were complementary to each other. 5.5.4 Government of India considerably liberalised import

controls & placed several items on OGL (open General licence to import). Customs duties on most import items have been

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drastically reduced. Gold control Act has been abolished and gold import has been liberalised. All these matters have dealt a severe blow to smuggling and hence a second blow to the hawala market. The hawala premiums have come down.

As India continues to liberalise more, smuggling and

hawala will keep reducing.

The next necessary step is to remove all restrictions on import of gold, and on payment for imported gold.

5.5.5 So far, it has been the policy of government of India

and RBI to continuously devalue the rupee.

IMF and USA have always "advised" and sometimes "pressurised" India into devaluing the currency.

In the early nineties, it was the declared policy of RBI that

if, in the open market, rupee depreciates, RBI would not intervene. However, if rupee appreciates, RBI would intervene, sell FX and stabilise rupee.

Exporters' lobby has always wanted to increase exports by

undercutting prices by asking for cheaper rupee. They have always pressurised the Government into devaluing / depreciating the rupee.

This has ensured that wealthy Indians & NRIs have

continued vested interest in the hawala market. 5.5.6 Depreciation of Indian rupee means higher profits for

the exporters.

However, no one realised that it means huge losses to -

(i) Indians at large;(ii) Indian Government; and(iii) Foreign investors.

Consider the following:

Indian rupee rates Vs. U.S. dollar were as under.

Year 1981 Rs. 8 per dollar. Year 1991 Rs. 18 per dollar. Year 1999 Rs. 43 per dollar.

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(All figures are rounded off) India's total FX debt was as under -

Year 1991U.S. $ 100

billions.

Year 1999U.S. $ 100

billions.

For the sake of Simplicity in calculations, the figures are approximated for both the years. The differences are minor.

This FX debt converted into Indian rupee would mean that –

In the year 1991 it was Rs. 1800 billions. In the year 1999 it is Rs. 4300 billions. A net loss to

Government of India & hence to ALL of us-

Rs. 2,500 billions

This is a very substantial loss ignored by everyone.

Compare this loss with the fiscal deficit for the Government of India for the financial year 1998-99 - which was around Rs. 910 billions. And this has been the highest deficit in India’s history.

Summary : Devaluation / depreciation of rupee is bleeding

Indian economy AND encouraging hawala market. 5.5.7 Fortunately for India, it seems that the Government &

RBI have realised this fact around year 1997. Attracting foreign investments & preventing the haemorrhage of Indian economy is more important than providing cheaper rupee to the export lobby.

5.5.8 If we ever reach a position that the Indian rupee

stops depreciating & in fact appreciates by even a nominal 2% per year; then the whole hawala market will be wiped out.

However, this cannot be achieved by GOI & RBI alone.

Entire Indian business community has to understand this and

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make strategic & strong efforts for achieving a very difficult & highly rewarding target.

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FEMA and Money Laundering

Chapter VI

6.1 Are the Foreign Exchange Management Act (FEMA) and Prevention of Money Laundering Act (PMLA) connected?!

Apparently, certain lobbies were preventing FEMA replacing

FERA unless and until PMLA was passed. Some persons believed that while FX offences would attract lower penalties under FEMA, they would be covered by PMLA.

This belief does not seem to be correct.

6.2 The purpose of PMLA is to prevent the mafia from investing

their wealth into the economy and acquiring control over the economy. Converting their dirty wealth into official wealth is called “Money Laundering”.

The dirty money is called “Proceeds of Crime” (POC).

Anything becomes Proceeds of Crime if the crime alleged is

a crime specified in the schedule to the PMLA. If an offence is a crime under a particular law which is not listed in the schedule; then the gains of that offence are not POC. They are not dirty money as far as PMLA is concerned.

6.3 For example, Mr. A does not pay income-tax on his income

of say Rs. 1,00,000. The entire amount is black money. He has gained Rs. 33,333 in income-tax. However, an offence under Income-tax is not covered in the PMLA schedule. Hence neither Rs. 33,333 nor Rs. 1,00,000 is covered by PMLA. Any attempt in converting the black money into white is NOT money laundering.

6.4 Similarly, sales tax, excise or octroi evasion is not covered

under PMLA. 6.5 Similarly, offences under FEMA are not listed in the PMLA

schedule. This means that an offence under FEMA is not covered by the PMLA.

This was the position right from the stage of introduction of

PMLA bill, 1998.

In other words from inception, the two laws are independent.

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6.6 There is a specific reason for selecting only the most violent / important crimes under PMLA. The mafia dealing in murder, extortion, terrorism and prostitution have immense liquid wealth. With this power of wealth, they get best of the professional and physical (arms and goondas) support. This help can prevent action being taken against the mafia. Hence PMLA gives massive powers of arrest and deeming provisions to the statutory authority under PMLA.

Under normal circumstances, such massive powers have to

be restricted, to be used only against the most dangerous criminals. The powers are draconian. If they are used against ordinary criminals, they loose their significance and sharpness. Corrupt statutory officers can be more dangerous than criminals - as far as the common man is concerned.

To prevent such a crisis, the list under PMLA schedule has

to be kept a careful, short list.

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Certain Other Important Issues

Chapter VII

7.1 Immovable property outside India

7.1.1 Section 4 of FEMA prohibits a resident to acquire, hold, own, possess or transfer Immovable property situated outside India.

This is similar to section 25 of FERA. There are however two

important differences. 7.1.2 Section 25 of FERA, did not place any restriction on

foreign citizens who are residents of India, acquiring immovable property outside India. FEMA now restricts such persons. (In fact under FERA, for immovable properties, restrictions were based on citizenship. Whereas under FEMA, restrictions are based only on residential status). Now a foreign citizen who is resident in India, may have to take approval of RBI for buying and selling foreign properties.

7.1.3 There can be a difficulty.

Section 6(4) of FEMA permits residents in India to hold immovable property situated outside India, if it was acquired while he was a NR. Thus continuing to hold the property outside India after returning to India is permitted under FEMA.

Consider a variation. Say an NRI (foreign citizen) has

become a resident of India. He buys property outside India after becoming a resident. Under FERA, he did not require approval of RBI.

Now under FEMA, under section 4, a resident cannot hold

or ‘own’ property outside India (unless it was acquired while being a non-resident). Further, under section 6(4) of FEMA, exemption is not available to him, as the property was acquired while he was a resident. Such person theoretically will be deemed to commit a FEMA violation the day the act is passed, -- unless RBI comes out with a notification exempting the same.

7.2 Immovable property in India 7.2.1 Section 31 of FERA provided for control over

transactions pertaining to immovable property in India. The control was based on citizenship rather than on residential status.

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A citizen of India, could acquire or transfer Immovable property in India without any approval. (Residential status was immaterial). The concept of "Sons of Soil" was the guiding principle.

Under FEMA, the control will depend on residential status. If

a person is a non-resident, he will require approval of RBI to do any transaction pertaining to Immovable Property in India.

7.2.2 This removal of restriction based on citizenship

suggests a change in the policy of the Government. It can however cause a serious implication.

Say, a foreign citizen comes to India for employment and

becomes a resident. He can buy immovable property in India. As the person is a resident & is acquiring an Indian asset, it is not a capital account transaction u/s. 2(e). As it is not a capital account transaction, no controls under FEMA can be imposed. Sections 6(1) and 6(3) also do not apply.

After acquiring the property, the person can leave India &

become a NR. Under S. 6(5), such person can hold the property. No approval is required.

He can also sell it. No approval is required U/s. 6(5).

7.2.3 He can remit out of these funds, amounts for living

expenses, etc. as these are current account transactions.

Thus an outright foreigner (say an Arab Sheikh) can acquire an immovable property in India as above. This can have important implications. It may be necessary for the government to clarify whether there is a change in the policy.

7.3 Capital Account transaction 7.3.1 Section 6 of FEMA imposes controls over capital

account transactions. It empowers RBI to specify:

- the transactions which are permissible, and- the amounts upto which transactions will be permitted.

The government has thought it fit to keep control over

Capital Account transactions.

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7.3.2 However for two types of transactions, RBI cannot impose any restrictions for drawing foreign exchange.

- one is for amortisation of loan; and

- second for depreciation of direct investments in the ordinary course of business.

7.3.3 Thus if loan instalments have to be repaid, RBI

cannot impose any restrictions. Taking of a fresh loan can be regulated. However, once a loan is permitted and taken, repayments have to be allowed. This is keeping in line with the Indian principle of not defaulting on loans. Here amortisation would mean repayments which have been agreed to as per a schedule. Where, however an early repayment is to be made, RBI can impose restrictions.

7.3.4 The second condition however poses difficulties.

Depreciation of direct investments is something which RBI may have to clarify.

7.4 Returning Indians

Earlier, returning Indians were permitted to own assets abroad and deal with them in almost any manner. There was no need to declare to, or take any approval from RBI.

This policy has been continued u/s. 6(4) of FEMA. If a

person has acquired any Foreign currency, foreign security or immovable property outside India, while he was a NR, he can continue to hold, and transfer the same, even after he becomes a resident.

However, this section will have to be supplemented by

notifications or circulars for two issues. Under FERA, such returning Indians could continue to operate foreign bank accounts, make payments from the account, purchase shares & property, etc. Under FEMA, the holding & operation of bank account, purchase of shares or property is not permitted.

Further under FERA, if they sold any foreign assets, they

could hold FX or deposit the same abroad. This has not been provided for under FEMA. Thus conversions from one foreign asset into another, are not permitted.

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7.5 Issue of Shares

Section 6(2) permits RBI to specify (a) any class or classes of capital account transactions which are permissible and (b) the limits upto which foreign exchange shall be admissible for such transactions. Section 6(3) stipulates that without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank may, by regulations, prohibit, restrict or regulate among other things, transfer or issue of any security by a non-resident. An Indian branch of a non-resident cannot issue shares in India. These provisions do not place restrictions on Indian companies for issuing their shares to non-residents. Thus, though there are explicit provisions for transfer of security to / by non-residents, the issue of shares by Indian companies to non-residents is not covered by these specific provisions.

7.6 Business Activity. 7.6.1 Under FERA, section 29 specifically provided for

restrictions on business activity within India by all non-residents, foreigners and foreign companies. The language used is:

No person shall … “carry on in India, or establish in India a

branch, office or other place of business…”. Thus, carrying on business activity as well as establishment of business offices where regulated for specified categories of persons.

Under FEMA the only section controlling business activities

is section 6 (6). This sub-section empowers the Reserve bank to regulate, prohibit etc. establishment in India of any branch, office etc. by a non-resident.

7.6.2 The implications are as under:

(i) A foreign citizen is not covered under the regulation. If he becomes resident then there is no restriction.

(ii) If a person does business without establishing any branch,

office or other place of business in India, provisions of section 6(6) would not be attracted. In other words, any body can do business in India without establishing an office. This is possible in two manners.

(a) A person may visit India, do business and go back. Nobody

can prevent him. (b) With the internet facilities, one does not have to be

physically present in India to do business in India.

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7.6.3 Consider a few examples.

(a) Mr. A, a doctor practising in U.S.A., may regularly visit India. He may go to different cities in India, stay at different hotels, and do his consultancy practice.

Doing professional activities without creating any assets or liabilities does not amount to a “capital transaction”. Hence Mr. A can do his practice. He will immediately receive his fees. So no assets (book debts) will be created. After payment of hotel rent, whatever profits are left, he can remit them abroad. This would be a revenue profit, a current account transaction and hence permissible under FEMA.

(b) Mr. B having his office outside India may purchase goods in

India and sell them in India. Both operations would be done through brokers. Since sales and purchase both would be completed within India on a regular basis, it would amount to doing business in India. All instructions can be given on - telephone, internet and video conferences. RBI will have no powers to prevent such business.

Advent of e-commerce will dilute powers of statutory authorities in several manners.

7.7 Export of Services:

Under FERA, export of services were not covered by Section 18. Under FEMA, export of services is also covered. Now that, services form the largest part of India’s GDP, there is no reason why services should be treated differently from goods.

However, there may be several transactions which were

not intended but might have been covered.

A chartered accountant raising a bill on his foreign client may be “exporting” services. He would then be liable under Section 7 of FEMA to follow the necessary procedure.

A computer savvy collegian may work on internet and earn

a few dollars on the internet. He also might be covered under Section 7(3).

To prevent harassment to people with small transactions, a

reasonable limit may be provided. People having transactions under the limit may be exempted from any declaration or other procedures. Thus, for example, any person exporting services

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worth less than Indian Rs. 1,00,000 (or say U.S. $ 2,500) need not fulfill any procedures.

7.8 Further Liberalisation

Under FEMA, we may move forward to filing annual returns & doing away with “prior” permissions. There will be a time, hopefully very soon, when we realise that FX management is as important as corporate management, taxation etc. FEMA - current account regulations should be as important - nothing more, nothing less - as Companies Act, Income-tax Act etc. It need not be all pervasive, penetrating intrusion in normal business life.

Companies Act provides for all the guidelines according to

which directors are supposed to manage the Companies. They are supposed to file annual return with the Registrar of Companies ((ROC) and submit annual audit report to the shareholders. If the directors do something wrong, the ROC can take necessary action. But directors do not have to take “prior permissions”. When they want to do something radical - like selling off company’s undertaking, they need prior permissions & this is proper.

Income-tax Act provides that we pay 30% tax. Department

has vested interest in people doing business and earning more. But no one has to take a permission from Income-tax department for doing business or for entering into individual transactions. Normally, we are expected to “pay tax as we earn”. At the end of the year, file a return if our income is more than Rs. 50,000. If department finds that there is something wrong, department will take necessary action. Radical transactions involving high tax issues - like sale of immovable property valuing more than Rs. 75 lakhs need “prior clearance”.

Similarly, under FEMA most transactions can be regulated

by simple guidelines. Everyone is expected to act within the guidelines. It can be provided that everyone spending or earning FX valued at more than Rs. 5,00,000 (or say U.S. $ 10,000) per year should file on annual return with the Exchange Control Department. Any other alternative method for monitoring FX transactions may also be considered. No “prior” permission may be required for all normal activities in the current account. For radical uses of FX, prior permissions may be called for. Rupee may continue to remain non-convertible for capital transactions.

This would be a great step forward liberalising the Indian

people. As an experiment, it may be started with Indian residents

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and NRIs. Next step after experience may be for foreigners, FIIs and MNCs.

7.9 Monitoring

It is important to remember that when the Indonesian rupiah crashed in the year 1997; the Central bank had no clue as to the real size of foreign debts and foreign assets. There was no monitoring at all. We must have some monitoring. Some guidelines. But minimum controls.

7.10 Implications for Other Statutory Authorities

Earlier, several policies of the Government were exercised through exchange control. For example, employment in India was controlled U/s. 30 of FERA. That section has been dropped. Now it is for the home ministry issuing visa do take care of Government policy regarding foreigners working in India. Similarly, the issues regarding “transfer pricing” & “Controlled Foreign Companies” will have to be addressed by tax authorities.

The decade of nineties will remain historical for

Independent India. Earlier, businessmen complained that with too many regulations, they found it impossible to run an honest and clean business. As a result, manipulators succeeded and technocrats failed. With the liberalisation of this decade, people will find it possible to do honest and clean business. Technocrats and geniuses will succeed and flourish in India. We are optimist that good future lies ahead for India.

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Comparison

TABLE SHOWING SECTIONS OF FERA, 1973 AND CORRESPONDING PROVISIONS OF FEMA, 1999

Sr.No Subject

Fera 1973

Fema1999

Remarks(see notebelow)

1 Object of the Act Preamble Preamble I

2Short title, extent, application and commencement

1 1 I

3 Definitions 2 2 I3.01

Appellate Board 2(a) 2(b) M

3.02

Authorised Dealer 2(b) 2(c) I

3.03

Bearer Certificate 2(c) - -

3.04

Certificate of Title to a Security 2(d) - -

3.05

Coupon 2(e) - -

3.06

Currency 2(f) 2(g) M

3.07

Foreign Currency 2(g) 2(l) N

3.08

Foreign Exchange 2(h) 2(m) I

3.09

Foreign Security 2(i) 2(n) I

3.10

Indian Currency 2(k) 2(p) N

3.11

Indian Custom Waters 2(l) - -

3.12

Money-changer 2(m) - -

[However, see 2(c)]

3.13

Overseas Market 2(n) - -

3.14

Owner 2(o) - -

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3.15

Person resident in India 2(p) 2(v) S

34

3.16

Person resident outside India 2(q) 2(w) N

3.17

Precious Stone 2(r) - -

3.18

Prescribed 2(s) 2(x) N

3.19

Reserve Bank 2(t) 2(z) M

3.20

Security 2(u) 2(za) M

3.21

Transfer 2(w) 2(ze) M

4 Classes of officers of Enforcement 3 - -

5Appointment . & powers of officers of Enforcement

4 36 M

6Entrustment of functions of Director or other officer of Enforcement

5 36 M

7Authorised dealers in foreign exchange

6 10 M

Sr.No Subject

Fera 1973

Fema1999

Remarks

(see note

below)8 Money-changers 7 10 M

9Restrictions on dealing in foreign exchange

8 3, 4, 9 S

10 Restrictions on payments 9 3,5, 6 S11 Blocked accounts 10 - -

3512 Restrictions on import and export

of certain currency13 6(3)(g) -

13 Acquisition by Central Government of foreign exchange

14 - -

14 Duty of persons entitled to receive foreign exchange

16 8, 9 S

15 Payment for exported goods 18 7 S16 Payment for lease, hire or other

arrangement18A - -

17 Regulation of export and transfer of securities

19 6(3)(h) S

18 Restrictions on issue of bearer 22 - -

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securities19 Restriction on settlement etc. 24 - S20 Restriction on holding of

immovable property outside India25 6 S

21 Certain provisions as to guarantee in respect of debt or other obligation

26 6 S

22 Joint Venture abroad 27 3,4,8(Section 27 was deleted.) 8,9,16,19

23 Restrictions on the appointment of certain persons and companies as agents

28 - -

36

24Restrictions on establishment of place of business in India

29 6 S

25

Prior permission of Reserve Bank required for practising profession, etc. in India by nationals of foreign States.

30 - -

26Restriction on acquisition, holding etc., of immovable property in India

31 6 S

27 Power to call for information 33 - -

28Power to search suspected persons and to seize documents

34 36

of 36

Sr.No Subject

Fera 1973

Fema1999

Remarks

(see notebelow)

29Power to arrest for violation ofthe provisions --

35 - -

30Power to arrest for non-payment of penalty

57 13

31Power to stop and search conveyances

36 36

32 Power to search premises 37 3633 Power to seize documents, etc. 38 3634 Power to examine persons 39 38

35Power to summon persons to give evidence and produce documents

40 38

36 Custody of documents, etc. 41 3837

37Encashment of cheque, draft, etc.

42 - -

38 Inspection 43 38

39Prohibition of disclosure of documents or information except in certain cases

44 38

40Power of police officers and other officers to enter, search etc.

45 38

41Procedure in respect of foreign exchange or any other goods seized by police officers

46 - -

42 Contracts in evasion of the Act 47 - -43 False statements 48 - -

44

Failure to comply with conditions subject to which permissions or licences have been given or granted under the Act to be contravention of the provisions of the Act.

49 - -

45 Penalty 50 13 S46 Power to adjudicate 51 13 S47 Appeal to Appellate Board 52 17, 18

48Powers of the adjudicating

officer and the Appellate Board to summon witnesses, etc.

53 13, 18

38

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49 Appeal to High Court 54 35

50Continuance of proceeding in the event of death or insolvency

55 43

Sr.No Subject

Fera 1973

Fema1999

Remarks

(see notebelow)

51 Offences and prosecutions 56 13

52

Penalty for contravention of order made by adjudicating officer, Appellate Board and High Court

57 13

53Vexatious search etc., by officers of Enforcement

58 - -

54Presumption of culpable mental state

59 - -

55Power to tender immunity from prosecution

60 - -

56 Cognizance of offences 61 - -

57Certain offences to be non-cognizable

62 - -

58Confiscation of currency, security, etc.

63 13(2) -

59 Preparation, attempt, etc. 64 - -60 Correction of clerical errors, etc. 65 - -

3961 Application of section 360 of the

Code of Criminal Procedure, 1973 and of the Probation of Offenders Act, 1958

66 - -

62 Application of the Customs Act, 1962

67 - -

63 Offences by companies 68 42 N64 Power of court to publish name,

place of business, etc., of companies convicted under the Act.

69 - -

65 Recovery of sums due to Government

70 - -

66 Burden of proof in certain cases 71 - -67 Presumption as to documents in

certain cases72 39 N

68 Supplemental provisions 73 11, 12 I69 Penalty for contravention of

direction of Reserve Bank or for failure to file returns

73A 11 I

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70 Delegation 74 - -71 Power of Central Government to

give directions75 - -

40

of 36

Sr.No

Subject Fera 1973

Fema1999

Remarks(see note

below)72 Factors to be taken into account

by the Central Government and the Reserve Bank while giving or granting permissions or licences under the Act.

76 - -

73 Certain officers to assist officers of Enforcement

77 38

74 Bar of legal proceedings 78 44 N75 Power to make rules 79 46 I76 Power to remove difficulties 80 45 I77 Repeal and saving 81 49 I

41

NOTES:I means changes are Important though the changes are not

substantial to change the meaning of the section.

S. means the changes are Substantial or the section is totally overhauled.

M. means the changes are Minor or there are gramatical changes, but by and large the meaning of the section has not been changed. It is possible the section may be new but it only represents a new name for the old provision. e.g. definition of "Appellate Board" under FERA is known as "Appellate Tribunal" under FEMA. In such cases also, 'M' is shown.

N. means there is No change.

Clarifications:The above are based on the personal views of the authors and are meant to be only a guide.

This is a comparision based on only the FEMA Act. Real picture will emerge after all circulars and notifications under FEMA are available.

30.3.00 taxmanns guide to fema 1999

Documents

pmla fema

quick reading of fema

quick commentary

comprehensive commentary

brief commentary

present commentary

exchange control department

indian residential status