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Fema -- Salient features and critical aspects 

NR MOORTHY  
FEBRUARY 7: Foreign Exchange Management Act 1999, (Fema) awaiting the assentof the President) will soon come into force. This Act will consolidate andamend foreign exchange law to aid external trade and payments and to promoteorderly development and maintenance of forex markets. Fema indicates achange in the perception from the regulation of foreign exchange to itsmanagement which is a concept compatible with the policy of globalisationand liberalisation of trade.

Fema has made significant departures from the erstwhile Foreign ExchangeRegulation Act (Fera) and certain changes may have far reaching effects.Section 2(v) defines "a person resident in India" to mean a person residingin India for more than 182 days during the course of the preceding financialyear.

This definition is analogous to that under Section (6) of the Income-taxAct. Conversely, Section 2 (p) and (q) of Fera determines the status of aperson based on the purpose or intention of a person's stay rather than theduration of his stay. The I-T Act was a revenue collection machinery whereasFera/ Fema is a regulatory mechanism for forex dealings and financialtransactions between residents and on non-residents.

Implications of residential status
The above definitions under Fema will lead to a situation where an Indianresident going abroad to take up employment, business or profession willhave to undergo a gestation period of 182 days to attain NRI status andavail of the liberal FCNR and repatriable investment facilities which ispresently available to NRIs. Consequently there will be delay in forexinflows from such NRIs.

Similarly, NRIs coming back to India to take up employment, business orprofession will have to wait at least 182 days to acquire residential statusand in the interregnum they will have to suffer the rigors of relevantstatutory provisions. In contrast Fera considered Indians returning to Indiaas residents immediately on their arrival.

Vice-versa NRIs visiting India temporarily for business, social or otherpurpose would lose their non-resident status if their stay exceeds 182 daysin a financial year. Fera definitions for determination of residentialstatus have stood the test of times for decades without encountering anymajor problems or serious difficulties. And the rationale behind changingthe definitions under Fema is intriguing.

Another departure is that not only has Fema changed the definition of personresident in India but has also delinked it from citizenship. Unlike Fera,Fema recognises even capital account transactions. Overseas offices/ branchesSection 2(v)(iv) treats offices, branches and agencies outside India ownedor controlled by Indian residents as "persons resident in India" andconsequently such outfits would be subject to Fema restrictions and rulesand regulations that may be framed thereunder.

Presently for all intents and purposes overseas offices and branches ofcorporates including banks in India are treated as non-residents and theyhave full freedom to carry on their business operations abroad and if theseoffices and branches are treated as persons resident in India the provisionsof Fema and the relevant rules and regulations that may be framed thereunderfor normal "residents" would apply to such outfits.

Also, rupee accounts in India of overseas branches of Indian banks would betreated as "resident accounts" and would therefore cease to be eligible forsettlement of international transactions involving inward/outwardremittances.

In order to become eligible to deal in forex, under Section 3 of Fema as"authorised person" the person concerned would have to make a specificapplication to RBI in terms of Section 10. Under this dispensation RBI canno longer grant "general permission" to individuals, corporates or to aclass of persons as provided under Fera.

Section (6)(3)(b) of Fema seeks to regulate "transfer or issue of anysecurity by a person resident outside India". Therefore companiesincorporated outside India, being non-resident cannot obviously be broughtwithin the ambit of this provision and they can freely issue shares orsecurities to any persons, including those resident in India; obligations toobtain necessary permission under Fema to acquire or otherwise deal inforeign currency, securities can be placed only on persons resident in Indiaand not on overseas firms issuing or transferring their securities.

Contravention, penalties and appeals
Section 13 of Fema provides for a penalty for contravention of provisions,regulations etc up to thrice the sum involved upon adjudication. Section 15empowers the central Government to compound offences. Section 17 providesfor appeals to special director appointed by the Centre against theadjudicating officer's orders and Section 18 provides for the appointment ofan appellate tribunal to hear the appeals against the adjudicating officers'orders and special director and Section 35 provides for an appeal againstthe order of the tribunal before the high court.

The Act also contains provisions that a legal practitioner or a charteredaccountant can present the case before the relevant authority hearing theappeal on behalf of the appellant. It is a pity the Institute of CompanySecretaries of India has not made any progress for getting this recognitionfor practicing company secretaries.

Summing up, Fema represents a major departure from past policies in twoimportant aspects. Firstly, it can be seen as an initial step towardscapital account convertibility. Secondly, by removing the Fera from thestatute book the government seems to register a correct signal about itslenient attitude towards the control of foreign capital. This is a welcomesign and will go a long way in improving the economy of the country.

Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.

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