FERA, 1973

FEMA 1999

DOMINANCE OF MNCS IN INDIA

MNCs controlled 53.7% of the assets of large sector in India till the end of decade of seventies;

In 1966, 48 companies out of total 112 with assets of 10 crores or more were either foreign branches or Indian subsidiaries of foreign companies;

14 more companies had extremely heavy loans and equity capital and therefore were virtually foreign controlled;

These 62 companies had Rs1370 crore worth of assets which constituted 54 per cent of the total assets of India’s giant sector;

A number of other companies were also under foreign dominance in one way or the other;

Some companies were heavily dependent on international financial institutions for economic assistance;

Thus western foreign capital dominated the country’s big business and controlled the apex of India’s industrial pyramid in the mid sixties.

DOMINANCE OF MNCS…….. MNCs raised major part of investment resources from within the Indian

economy;

As per a study (Sudip Choudhury) of 50 largest foreign subsidiaries for the period 1956-75 revealed that foreign share capital and foreign loans contributed only 5.4%of the financial resources of these companies and 94.6 % was contributed by the domestic sources;

As per another study (John Martinussen) the amount of capital issues consented with foreign participation declined from 61.5% in 1976 to 29.5% in 1980;

Study further says that 20 TNCs affiliated companies even reduced their foreign funding;

Several of these companies obtained no foreign funds at all during the period from 1974 to 1983;

These facts about the financing behavior of MNCs explode the myth that they bring in large amounts of foreign capital with them;

The real position was that MNCs collected most of the capital from within the country itself but repatriated the large amounts of the profits to their home countries.

HARMFUL EFFECTS OF MNCS

Payment of Dividend and Royalty;

Distortion of Economic Structure;

Political Interference;

Technology transfer not conducive to development.

CONTROL OVER MNCS

No inessential articles to be produced;

No technology be imported where domestic technology is adequate;

Maximum rates of Royalty laid down (In case of import of technology);

Foreign investment was allowed after due approval on case by case basis.

CONTROL……

The period of technology agreement was reduced from 10 years to 5 years without any further renewal;

Export of some part of production was insisted upon;

Permission to sub-license the technology clause was inserted in the agreement;

CSIR was authorized to examine import of technology;

Enactment of FERA in 1973.

FERA, 1973 (Effective from January1,1974)

Section 29 of this act referred directly to the operations of MNCs in India;

As per sec 29., all non-banking foreign branches and subsidiaries with foreign equity exceeding 40 per cent had to obtain permission to establish new undertakings, to purchase shares in existing companies, or to acquire wholly or partly any other company;

Guidelines to administer this section were issued in 1973 and later amended in 1976;

All foreign companies or branches to convert as Indian companies with minimum 60% local equity;

All foreign companies or branches to bring down foreign equity share to 40% or less;

Three level of foreign equity (1976): 74%, 51% and 40 %

FERA……

Companies allowed to retain foreign equity holdings above 40% and up to 74% if engaged in:

- Core industries - Predominantly export oriented production - Activities requiring sophisticated technology or

specialized skills - Tea plantation activity

Companies were allowed have up to 74% F.E., If, the turn over of above all combined activities or any of the above activities exceeded 75% of the total turn over of the company;

The same rule applied to the companies exporting 40% of their own production.

Implementation of FERA

Substantial delays in implementation;

Large number of companies did not implement guidelines;

Govt. exempted some companies;

249 companies exempted by Govt. from 40% non-resident interest stipulation;

132 companies were allowed with more than 40% f. equity;

116 companies were allowed with more than 51% and up to 74% F.E.

Imp…..

One company was allowed with 100% F.E.;

Companies which did not implement FERA belonged to Tea Plantation, Manufacturing of drugs and pharma products or were affiliated to large TNCs.

New Concession to FERA Companies

New concessions announced in Nov.,1991, Jan., 1992 and Jan., 1993;

Removed large number of restrictions on FERA companies with more than 40% Non-resident equity;

Removed FERA controls on Indian firms establishing J.Vs. abroad and allowed Indian firms to hold immovable property abroad;

Companies with Foreign shareholding were allowed to increase FE to 51% by remittances in FE in specified high priority industries;

Sections 28 & 29 were revoked (Trademark);

Section 31 was revoked (Immovable property);

Section 27 was scrapped (JVs & Individuals).

Concessions…….

Restrictions regarding assets held in India by non- residents were scrapped;

Indians were allowed to keep FC upto $500 or equivalent Rs 15000;

Import and Export in gold and silver was exempted under FERA;

Section 17 was deleted (use of imported gold); Restrictions on transfer of shares by a non-resident to

another non-resident were removed; Foreign nationals were exempted from obtaining prior

permission under FERA before taking up employment in India.

Concessions…….

“ It is no longer appropriate to deify foreign exchange as something special and maintain a

burdensome and highly regulated structure around this deity”

(Excerpts from FM’s speech Union Budget 1998-99)

Consequently the Govt. adopted FEMA where the emphasis is on ‘management’ rather than ‘regulation’

FEMA, 1999 (Effective from 1st Jan., 2000)

FEMA introduced on August4, 1998 in Parliament and was adopted in 1999;

FEMA applies to whole of India, all branches, offices, agencies outside India owned or controlled by a person or firm resident in India.

Objectives:

To facilitate external trade and payments;

To promote the orderly development and maintenance of foreign exchange market.

(The bill aims, “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 in India”).

Dealing in foreign exchange (Sec. 3)

No person shall;

deal in foreign exchange or foreign security with any person other than an authorized person;

Make any payment to or for the credit of any person resident outside India in any manner;

Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside in any manner;

Enter into any financial transaction in India as a consideration for or in association with acquisition or creation or transfer of a right to acquire any asset outside India by any person;

Finally if, other wise provided in this act, no person resident in India shall acquire, hold, own posses or transfer any foreign exchange foreign security or any immovable property situated outside India.

Major Provisions

Current Account and Capital Account transactions

Realization and repatriation of foreign exchange

Contraventions and penalties

Establishment of Directorate of Enforcement

Adjudication and appeal

Miscellaneous

FERA & FEMA – A Comparison

1. In FEMA only specified acts relating to foreign exchange are regulated while in FERA any thigh and everything that has to do any thing with foreign exchange was controlled;

2. The aim of FEMA is to facilitate trade as against that of FERA, which was to prevent misuse of foreign exchange;

3. The theme of FERA was ‘everything that is specified is under control while the theme of the FEMA is everything other than what is expressly covered is not controlled (lot of deregulation)

4. FEMA is a much smaller enactment – only 49 sections as against 81 of FERA;

5. In the process of simplification, many of the laid downs of the erstwhile FERA have been withdrawn;

6. Many provisions in FERA like Indians taking employment abroad, employment of foreign technicians in India have no place in FEMA.