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MET Institute of Management
Academic year: 2013-15

Project Report On

Progression of FERA to FEMA has
facilitated development of FOREX
markets in India

Table of Contents

Sr
...


Chapter

Page
no
...


FERA to FEMA………………………………………
...
1
...
2
...
3
...
4
...
5
...
6
...
7
...


12
1

3

External Commercial Borrowings (ECBs)

19

4

Guidelines On Imports and Exports of Services

31

5

Capital Account

42

6

South east countries crisis

48

7

Impact of FERA on FOREX (Broad Indicators)

55

8

Case studies

60

9

Conclusion

66

10

Bibliography

69

1
...
1 Introduction
The Foreign Exchange Regulation Act (FERA) was legislation passed by the Indian
Parliament in 1973 by the government of Indira Gandhi and came into force with effect from
January 1, 1974
...
The bill was formulated with
the aim of regulating payments and foreign exchange
...


2

To sum up, in FERA "anything and everything" that has to do something with Foreign
Exchange was regulated
...
The Important aspect of FEMA, in contrast with FERA
is that it facilitates Trade, while that of FERA was that it "prevented" misuse
...

FERA :


Regulated in India by the Foreign Exchange Regulation Act(FERA),1973
...




FERA Emphasized strict exchange control
...




Law violators were treated as criminal offenders
...


FERA was introduced at a time when foreign exchange (Forex) reserves of the country were
low, Forex being a scarce commodity
...
FERA primarily
prohibited all transactions, except one’s permitted by RBI
...




To regulate dealings in foreign exchange and securities
...




To regulate the import and export of currency
...




The proper utilization of foreign exchange so as to promote the economic development of
the country
...
2 Why FERA was required?

The Foreign Exchange Regulation Act, 1947, was enacted as a temporary measure and later
placed permanently in the year 1957
...
The country attained freedom in 1947,
after two centuries of foreign rule and protracted freedom struggle stretched over decades
...
Initial approach on foreign
capital was negative to a not-interested attitude
...
"
However after initiation of a process of rapid industrialisation of the country, the need to
conserve foreign exchange was keenly felt
...
This in
turn led to the need to tap the donors or Foreign Aid Givers
...
The Foreign Exchange Regulation Act, 1973, (hereinafter
referred to as FERA) was drafted with the object of introducing the changes felt necessary for
the effective implementation of the Government policy and removing the difficulties faced in
the working of the previous enactment
...
Any offence under FERA was a criminal offence liable
for imprisonment
...
3 Important features of FERA

1: RBI can authorize a person / company to deal in foreign exchange
...


5: For whatever purpose Foreign exchange was required, it was to be used only for that purpose
...


6: No person in India, without "permission from RBI" shall make payments to a person resident
outside India and receive any payment from a person from outside India
...


8: No person shall make any credit in an account of a person resident out of India
...


10: A person who has right to receive the foreign exchange would have not to delay the receipt
of the foreign exchange
...
4 Conditions that lead to change from FERA to FEMA
Foreign Exchange Regulation Act, 1973 (FERA) in its existing form became ineffective,
therefore, increasingly incompatible with the change in economic policy in the early 1990s
...
Thus, the
Foreign Exchange Management Act, 1999 (FEMA) came into being
...
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 1 st January 1974
...
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
...
no other provisions of FEMA stipulate obtaining RBI
permission
...
The
emphasis of FEMA is on RBI laying down the regulations rather than granting permissions on
case to case basis
...
In view of this change, the title of the legislation
has rightly been changed to FEMA
...
As
far as facilitating external trade is concerned, section 5 of the Act removes restrictions on drawl
of foreign exchange for the purpose of current account transactions
...
e
...
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
...

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 account
transactions as may be prescribed
...
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
...

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
...
FEMA contains 49 sections of which 12 sections cover
6

operational part and the rest contravention, penalties, adjudication, appeals, enforcement
directorate, etc
...

For example,


Section 13 of FERA provided for restrictions on import of foreign currency & foreign
securities
...




Section 25 of FERA provided for restrictions on Indian residents holding immovable
properties outside India
...


Reduction in the number of sections means nothing
...

1
...

The FERA was introduced in 1974when India’s foreign exchange reserves position was not
satisfactory
...
Very strict restrictions have outlived their utility in the current
changed scenario
...

Repeal of draconian provisions under FERA
The draconian regulations under FERA related to unbridled powers of Enforcement
Directorate
...
The contravention under FERA was treated as
criminal offence and the burden of proof was on the guilty
...




Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has
been retained
...
6 Differences between FERA and FEMA

Sr
...


Presumption of negative intention These

presumptions

(Mens Rea ) and joining hands in of Mens Rea and abatement
2

offence (abatement) existed in have been excluded in FEMA
FERA

NEW TERMS IN Terms

Capital

Account Terms like Capital Account

Transaction,

FEMA

like

current

Account Transaction, current account

Transaction, person, service etc
...


etc
...
(2
(c)

MEANING

OF There was a big difference in the The provision of FEMA, are in

"RESIDENT" AS definition of "Resident", under consistent with income Tax
5

COMPARED

FERA, and Income Tax Act Act, in respect to the definition

WITH INCOME

of term" Resident"
...


criteria of "In India for 182
8

days"

to

make

a

person

resident has been brought
under FEMA
...

PUNISHMENT

Any offence under FERA, was a Here, the offence is considered
criminal offence , punishable with to be a civil offence only
imprisonment as per code of punishable with some amount

6

criminal procedure, 1973

of

money

Imprisonment

as

a

penalty
...

QUANTUM OF The monetary penalty payable Under FEMA the quantum of
7

PENALTY
...


decreased to three times the
amount involved
...
" An appeal
from an order of Appellate
Tribunal would lie to the High
Court
...

POWER
10

SEARCH
SEIZE

right

of expressly recognizes the right

of

legal

practitioner

or

chartered accountant (32)

OF FERA conferred wide powers on The scope and power of search
AND a police officer not below the rank and seizure has been curtailed
of a Deputy Superintendent of to a great extent
Police to make a search

1
...
Some of them are restrictive, and some has widened the scope
...
However, the Central Government may, in public interest in
consultation with the Reserve Bank impose such reasonable restrictions for current account
transactions as may be prescribed
...


2
...
1 Schematic representation

11

2
...
Automatic Route
FDI is allowed under the automatic route without prior approval either of the Government or
the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy,
issued by the Government of India from time to time
...
Government Route
FDI in activities not covered under the automatic route requires prior approval of the
Government which are considered by the Foreign Investment Promotion Board (FIPB),
Department of Economic Affairs, Ministry of Finance
...
3 Prohibited sectors

i) Atomic Energy
ii) Lottery Business
iii) Gambling and Betting
iv) Business of Chit Fund
v) Nidhi Company
vi) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal
Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc
...

ix) Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes
...
4 Modes of Investment under Foreign Direct Investment Scheme
A
...
Acquisition by way of transfer of existing shares by person resident in or outside India






Transfer of shares by a Person resident outside India
Transfer of shares/convertible debentures from Resident to Person Resident outside
India
Transfer of Shares by Resident which requires Government approval
Prior permission of the Reserve Bank in certain cases for acquisition / transfer of
security
Escrow account for transfer of shares
12

C
...
Issue of shares under Employees Stock Option Scheme (ESOPs)
E
...
5 Types of instruments
i)Indian companies can issue equity shares, fully and mandatorily convertible debentures
and fully and mandatorily convertible preference shares subject to the pricing guidelines
...

iii) Foreign investment through preference shares is treated as foreign direct investment
...
Investment in other
forms of preference shares requires to comply with the ECB norms
...
6 Pricing guidelines
i) Issue of shares
Fresh issue of shares: Price of fresh shares issued to persons resident outside India under the
FDI Scheme, shall be :



On the basis of SEBI guidelines in case of listed companies
...


ii) Preferential allotment: In case of issue of shares on preferential allotment, the issue price
shall not be less than the price as applicable to transfer of shares from resident to non-resident
...

iv) Right Shares: The price of shares offered on rights basis by the Indian company to nonresident shareholders shall be:
13




In the case of shares of a company listed on a recognized stock exchange in India, at
a price as determined by the company
...


2
...

(ii) debit to NRE / FCNR account of a person concerned maintained with an AD
category I bank
...

(iv) conversion of import payables / pre incorporation expenses / share swap can be
treated as consideration for issue of shares with the approval of FIPB
...


FIPB Route
FIPB stands for Foreign Investment Promotion Board which approves all other cases where the
parameters of automatic approval are not met
...
FIPB
has Secretary, Department of Economic Affairs as its chairman
...

The government has set up Foreign Investment Implementation Authority (FIIA) to facilitate
quick translation of FDI approvals into implementation by providing a pro-active one stop after
care service to foreign investors, help them obtain necessary approvals and by sorting their
operational problems
...
The cluster concept has rapidly attracted attention from
governments, consultants, and academics since it was first proposed in 1990 by Michael
Porter
...
As a
result, a large number of cluster initiative organizations were started during the 1990s, and the
trend continues
...
g
...
g
...

More specifically, cluster initiatives are organizations or projects that are organized as
collaborations between a diverse number of public and private sector actors, such as firms,
government agencies, and academic institutions
...
g
...


Differentiating elements in cluster development strategies

The timing of cluster development policies has differed in the two clusters in question
...
In the Marine engineering services cluster, the role of
the state is more supportive and state involvement took place when the original shipbuilding
15

and repair cluster (from which the offshore engineering cluster was developed) was at a mature
stage
...

There was a notable difference in the role played by indigenous firms versus the role of foreign
MNCs in the two clusters
...

For both clusters, R&D and innovation were important elements of their development paths
...
For BMS, the establishment of R&D capabilities, generation of IP and their
subsequent commercialization were critical right from the start in the cluster development
process
...
The role of public R&D

The Singapore case

The precursor of the Economic Development Board of Singapore [EDB] was the Industrial
Promotion Board which had been created by the British colonial regime in 1957 to
stimulate the manufacturing industry
...
Industrial estates were planned, together with factory buildings,
including flatted ones
...
The Plan also
envisaged an eventual common market with Malaya and also endorsed the policy of giving
tax incentives to private, especially foreign investors in manufacturing
...
Its primary function was to promote the
establishment of new industries in Singapore and to accelerate the growth of existing ones
...
Investment Promotion Division: its function was to attract foreign and local
entrepreneurs and to encourage co-operation between domestic and foreign industries,
especially in the field of technical know-how
...
Efforts were to be made to reach them in their own
countries as well as by receiving them in Singapore and rendering assistance
...
Finance Division: it was responsible for the financial activities of the Board, including
its investments and lending
...
Projects Division and Technical Consultant Service: its job was to evaluate the
technical and economic feasibility of projects
...


Growth trajectory:
Among developing economies, Singapore has achieved one of the most impressive
economic growth records in the last four decades since her political independence in 1965,
averaging 7 per cent GDP growth per annum over the 1960-2006 period
...

The rapid economic growth of Singapore has been achieved through continuous industrial
re-structuring and technological upgrading
...
In the two subsequent decades, it was
propelled by the growth of increasingly technology-intensive manufacturing activities by
foreign MNCs, with high-technology products contributing an increasing share of total
value added
...
Nevertheless, manufacturing has
remained important to the economy, with its share of GDP remaining above 25 per cent for
most years in the last two decades
...
7% of Singapore’s GDP was
contributed by the manufacturing sector, and another 26
...
Within the manufacturing sector, the key industries of electronics, chemicals,
engineering and the biomedical sciences together accounted for $219 billion (93%) of total
manufacturing output
...
Many have made Singapore their regional operating and
manufacturing base
...
Singapore

17

is also fast becoming a regional hub for multimedia companies like ABACUS, broadcasting
companies like ESPN and business information providers like Reuters
...
EXTERNAL COMMERCIAL BORROWINGS (ECB)
Indian companies are allowed to access funds from abroad in the following methods:
(i) External Commercial Borrowings (ECB) : ECBs refer to commercial loans in the form of
bank loans, securitized instruments (e
...
floating rate notes and fixed rate bonds, nonconvertible, optionally convertible or partially convertible preference shares), suppliers’ credit
availed of from non-resident lenders with a minimum average maturity of 3 years
...
The bonds are required to be issued in accordance with the scheme
viz
...
The
ECB policy is applicable to FCCBs
...
e
...
Accordingly, all the norms
applicable for ECB, viz
...
shall apply
...

(iv) Foreign Currency Exchangeable Bonds (FCEBs): FCEBs means a bond expressed in
foreign currency, the principal and interest in respect of which are payable in foreign currency,
issued by an Issuing Company and subscribed to by a person who is a resident outside India,
in foreign currency and exchangeable into equity share of another company, to be called the
Offered Company, in any manner, either wholly, or partly or on the basis of any equity related
warrants attached to debt instruments
...
The guidelines governing ECBs are
also applicable to FCEBs
ECB can be accessed under two routes
...
e
...

I
...

i) Eligible Borrowers:
(a) Corporates, including those in the hotel, hospital, software sectors (registered under the
Companies Act, 1956), Non-Banking Finance Companies (NBFCs) Infrastructure Finance Companies (IFCs), NBFCs - Asset Finance companies (AFCs), Small
Industries Development Bank of India (SIDBI) except financial intermediaries, such as banks,
financial institutions (FIs), Housing Finance Companies (HFCs) and Non-Banking Financial
Companies (NBFCs), other than those specifically allowed by Reserve Bank, are eligible to
raise ECB
...

(b) Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement
...

(c) NBFCs-IFCs are permitted to avail of ECBs for on-lending to the infrastructure sector as
defined under the ECB policy
...

(d) Non-Government Organizations (NGOs) engaged in micro finance activities are eligible
to avail of ECB
...

(f) NGOs engaged in micro finance and MFIs registered as societies, trusts and co-operatives
and engaged in micro finance (i) should have a satisfactory borrowing relationship for at least
3 years with a scheduled commercial bank authorized to deal in foreign exchange in India and
(ii) would require a certificate of due diligence on `fit and proper’ status of the Board/
Committee of management of the borrowing entity from the designated AD bank
...

(h) Corporates in the services sector viz
...

(i) Companies in miscellaneous services sector (only from overseas direct / indirect equity
holders and group companies) engaged in training activities (but not educational institutes),
research and development activities and companies supporting infrastructure sector
...

(k) Holding Companies / Core Investment Companies (CICs) coming under the regulatory
framework of the Reserve Bank are permitted to raise ECB for project use in Special Purpose
Vehicles (SPVs) provided the business activity of the SPV is in the infrastructure sector
...
In case of Holding Companies, the ECB should be within the ceiling
of leverage stipulated for CICs and in case of CICs with asset size below Rs
...

ii) Recognised Lenders:
(1) Borrowers can raise ECB from internationally recognized sources, such as (a) international
banks, (b) international capital markets, (c) multilateral financial institutions (such as IFC,
ADB, CDC, etc
...

(2) NGOs engaged in micro finance and MFIs registered as societies, trusts and co-operatives
can avail of ECBs from (a) international banks, (b) multilateral financial institutions, (c) export
credit agencies (d) overseas organizations and (e) individuals
...
/ regional financial institutions/international banks / foreign equity holders and
overseas organizations
...

(5) For ECB up to USD 5 million - minimum paid-up equity of 25 per cent held directly by the
lender (all outstanding ECBs including the proposed one),
For ECB more than USD 5 million - minimum paid-up equity of 25 per cent held directly by
the lender and ECB liability-equity ratio not exceeding 4:1(all outstanding ECBs including the
proposed one),
ECB from indirect equity holders is permitted provided the indirect equity holding in the Indian
company by the lender is at least 51 per cent
...

Besides the paid-up capital, free reserves (including the share premium received in foreign
currency) as per the latest audited balance sheet shall be reckoned for the purpose of calculating
the ‘equity’ of the foreign equity holder in the term ECB liability-equity ratio
...
For
calculating the ‘ECB liability’, not only the proposed borrowing but also the all outstanding
ECBs shall be reckoned
...
The certificate of due diligence should comprise the following (i) that the lender
maintains an account with the bank for at least a period of two years, (ii) that the lending entity
is organised as per the local laws and held in good esteem by the business/local community and
(iii) that there is no criminal action pending against it
...
Other
evidence /documents such as audited statement of account and income tax return, which the
overseas lender may furnish, need to be certified and forwarded by the overseas bank
...

iii) Amount and Maturity
a
...

21

b
...
hotels, hospitals and software sector and miscellaneous
services sector are allowed to avail of ECB up to USD 200 million or its equivalent in a
financial year for meeting foreign currency and/ or Rupee capital expenditure for permissible
end-uses
...

c
...

d
...

e
...

f
...

g
...

h
...

iv) All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, and fees payable in Indian Rupees
...
The existing allin-cost ceilings for ECB are as under:
All-in-cost Ceilings over 6 month
Average Maturity Period
LIBOR*
Three years and up to five
350 basis points
Years
More than five years
500 basis points
* for the respective currency of borrowing or applicable benchmark
In the case of fixed rate loans, the swap cost plus margin should be the equivalent of the floating
rate plus the applicable margin
...

v) End-use

22

a
...
hotel,
hospital and software and miscellaneous services sector
...



Transport which will include (i) railways (ii) roads and bridges (iii) ports, (iv) inland
waterways, (v) airport (vi) urban public transport
...
200 crore and above,
convention centres with fixed capital investment of Rs
...
Overseas Direct Investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS)
subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad
...
Utilization of ECB proceeds is permitted for first stage as well as subsequent stages of
acquisition of shares in the disinvestment process to the public under the Government’s
disinvestment programme of PSU shares
...
Interest during Construction (IDC) for Indian companies which are in the infrastructure
sector
e
...

f
...
NBFC-AFCs can avail of ECBs only for financing the import of infrastructure equipment
for leasing to infrastructure projects
...
Maintenance and operations of toll systems for roads and highways for capital expenditure
provided they form part of the original project
i
...
SIDBI may on-lend either in INR or in
foreign currency (FCY)
...

j
...
ECB is allowed for Import of services, technical know-how and payment of license fees
...

l
...

(ii) Availing of short term foreign currency loan in the nature of bridge finance for the purpose
of making upfront payment and replace the same with a long term ECB subject to condition
that the long term ECB is raised within a period of 18 months from the date of drawdown of
the bridge finance
...

(iv) Such ECB cannot be raised from overseas branches / subsidiaries of Indian banks
...

ix) Security
The choice of security to be provided to the lender/supplier is left to the borrower
...
AD Category - I banks have been delegated powers
to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA), 1999 for
creation of charge on immovable assets, financial securities and issue of corporate or personal
guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the
borrower
...

The proceeds of the ECB raised abroad meant for Rupee expenditure in India, such as, local
sourcing of capital goods, payment for spectrum allocation, etc
...
In other words, ECB proceeds meant
only for foreign currency expenditure can be retained abroad pending utilization
...

ECB proceeds parked overseas can be invested in the following liquid assets
(a) Deposits or Certificate of Deposit or other products offered by banks rated not less than AA
(-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s
(b) Treasury bills and other monetary instruments of one year maturity having minimum rating
as indicated above
(c) Deposits with overseas branches / subsidiaries of Indian banks abroad
...

Any contravention of the ECB guidelines will invite penal action under the Foreign Exchange
Management Act (FEMA), 1999
...

xi) Refinancing of an existing ECB
The existing ECB may be refinanced by raising a fresh ECB subject to the condition that the
fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is
maintained
...


26

II
...

FCCBs are also subject to all the regulations which are applicable to ECBs in addition to the
requirements of
(i) having the maturity of the FCCB not less than 5 years
(ii) the call & put option, if any, shall not be exercisable prior to 5 years
(iii) issuance of FCCBs only without any warrants attached
(iv) the issue related expenses not exceeding 4% of issue size and in case of private placement,
shall not exceed 2% of the issue size
...

III
...
The
FCEB may be denominated in any freely convertible foreign currency
...

Offered Company: The Offered Company shall be a listed company, which is engaged in a
sector eligible to receive Foreign Direct Investment and eligible to issue
or avail of Foreign Currency Convertible Bond (FCCB) or External Commercial Borrowings
(ECB)
...

Eligible subscriber: Entities complying with the Foreign Direct Investment policy and adhering
to the sectoral caps at the time of issue of FCEB can subscribe to FCEB
...

27

Entities not eligible to subscribe to FCEB: Entities prohibited to buy, sell or deal in securities
by the SEBI will not be eligible to subscribe to FCEB
...

(ii) The proceeds of FCEB may be invested by the issuing company in the promoter group
companies
...

End-uses not permitted: The promoter group company receiving such investments will not be
permitted to utilise the proceeds for investments in the capital market or in real estate in India
...

Pricing of FCEB: At the time of issuance of FCEB the exchange price of the offered listed
equity shares shall not be less than the higher of the following two:
1
...
The average of the weekly high and low of the closing prices of the shares of the offered
company quoted on a stock exchange during the two week preceding the relevant date
...
The exchange option can
be exercised at any time before redemption
...
Cash settlement of FCEB shall not be
permissible
...
It shall be the responsibility of the issuing
company to ensure that the proceeds of FCEB are used by the promoter group company only
for the permitted end-uses prescribed under the ECB policy
...


28

Operational Procedure: Issuance of FCEB shall require prior approval of the Reserve Bank
under the Approval Route
...

IV
...
In cases where a Rupee loan is granted
against the guarantee provided by a non-resident, there is no transaction involving foreign
exchange until the guarantee is invoked and the non-resident guarantor is required to meet the
liability under the guarantee
...
In such cases, the nonresident guarantor may enforce his claim against the resident borrower to recover the amount
and on recovery he may seek repatriation of the amount if the liability is discharged either by
inward remittance or by debit to FCNR(B)/NRE account
...

V
...
Accordingly, take-out financing arrangement through ECB,
under the approval route, has been permitted for refinancing of Rupee loans availed of from
the domestic banks by eligible borrowers in the sea port and airport, roads including bridges
and power sectors for the development of new projects, subject to the following conditions:
i
...
The
scheduled date of occurrence of the take-out should be clearly mentioned in the agreement
...
The loan should have a minimum average maturity period of seven years
...
The domestic bank financing the infrastructure project should comply with the prudential
norms relating to take-out financing
...
The fee payable, if any, to the overseas lender until the take-out shall not exceed 100 bps
per annum
...
On take-out, the residual loan agreed to be taken out by the overseas lender would be
considered as ECB and the loan should be designated in a convertible foreign currency and all
the extant norms relating to ECB should be complied with
...
Domestic banks / Financial Institutions will not be permitted to guarantee the take-out
finance
...
The domestic bank will not be allowed to carry any obligation on its balance sheet after the
occurrence of the take-out event
...
Reporting arrangement as prescribed under the ECB policy should be adhered
...
Such ECB should not be raised from overseas branches / subsidiaries of Indian banks
...
CONVERSION OF ECB INTO EQUITY
(i) Conversion of ECB into equity is permitted subject to the following conditions:
a
...
The foreign equity holding after such conversion of debt into equity is within the sectoral
cap
c
...

d
...
is sought to be converted
by the company, it will be in order to apply the exchange rate prevailing on the date of the
agreement between the parties concerned for such conversion
...

VII
...
The designated AD bank is also required to ensure that raising / utilisation
of ECB is in compliance with ECB guidelines at the time of certification
...
GUIDELINES ON IMPORTS AND EXPORTS OF GOODS AND SERVICES
1
...
Foreign Currency Account
• Participants in international exhibition/trade fail have been permitted to open temporary foreign
currency account abroad for credit of foreign exchange obtained by sale of goods at the fair and
operate the account during their stay outside India
...
• An
Indian entity can also open, hold and maintain a foreign currency account with a bank outside India
for the normal business operations of its overseas office/ branch
...
• A person resident in India being a project / service exporter
may open, hold and maintain foreign currency account with a bank outside or in India, subject to
the standard terms and conditions
...
Diamond Dollar Account
• Firms/companies engaged in purchase and sale of rough or cut and polished diamonds/precious
metal jewellery, etc
...
3 crore or above during the
preceding three licensing years (April to March) are permitted to open/transact their business
through Diamond Dollar Account
...

04
...
EEFC is
allowed in the form of non-interest bearing current account
...

• Eligible credit in EEFC account include inward remittance through normal banking channel other
than received pursuant to any undertaking given to RBI or which represent foreign currency loan
raised or investment received from outside India or those received for meeting specific obligations

31

by the account holder and payments received in foreign exchange by a unit in Domestic Tariff
Area (DTA) for supplying goods to a unit in SEZ out of its foreign currency account
...

• Banks may permit exporters to repay packing credit advances whether availed in Rupee or in
foreign currency from balances in their EEFC account and / or Rupee resources to the extent
exports have actually taken place
...
Setting up of offices abroad and acquisition of immovable property for the purpose
• Banks may permit remittance towards initial expenses for setting up of the office to the extent of
fifteen per cent of the average annual sales/income or turnover during the last two financial years
or up to twenty-five per cent of the net worth, whichever is higher
...

• Remittances within the above limits for initial and recurring expenses can be permitted to acquire
immovable property outside India for its business and for residential purpose of its staff
...

06
...
The rate of interest, if any, payable
on the advance should not exceed LIBOR + 100 bps
...

• In case the export order provides for shipment of goods extending beyond one year from the date
of receipt of the advance payment, prior approval of the RBI is required to be obtained by the
exporter
...


07
...

08
...
, subject to the condition that the exporter shall produce relative Bill of
Entry within one month of re-import of the exported item from India
...

09
...

• The agents/consignees may deduct from sale proceeds of the goods expenses normally incurred
towards receipt, storage and sale of the goods, such as landing charges, warehouse rent, handling
charges, etc
...

10
...
10 Mn
...
The
permission may be granted initially for a period of one year and the same may be extended subject
to compliance of the conditions set there against
...
Direct dispatch of documents by the exporter
• Banks may dispatch shipping documents direct to the consignees or their agents resident in the
country of final destination of goods in cases where advance payment or an irrevocable letter of
credit has been received for full value of the export and the exporter being a regular customer
having satisfactory business dealing with the bank, etc
...

• Banks may regularize cases of dispatch of shipping documents by the exporter direct to the
consignee or his agent resident in the country of the final destination of goods, up to USD 1 Mn
...

• In case of doubt, bank may consider filing Suspicious Transaction Report (STR) with FIU_IND
(Financial Intelligence Unit in India)
...
Short shipment and shut out shipments
• Short-shipment in respect of shipment covered in GR form already filed with Customs, the
exporter is required to give notice to Customs about the same and
in case of any delay in obtaining the certified short-shipment from the Customs, an undertaking is
required to be furnished to the bank
...

13
...

b) No interest will be payable on balances standing to the credit of the Escrow Account but the
funds temporarily rendered surplus may be held in a short term deposit up to a total period of three
months in a year (i
...
, in a block of 12 months) and the banks may pay interest at the applicable
rate
...

d) Application for permission for opening an Escrow Account may be made by the overseas
exporter / organization through his / their bank to the Regional Office concerned of the Reserve
Bank
...
Export of Goods on Lease, Hire, etc

34


...
, on lease, hire basis
under agreement with the overseas lessee against collection of lease rentals/ hire charges and
ultimate re-import
...
Export of goods by Special Economic Zones (SEZs)
• Units in SEZs are permitted to undertake job work abroad and export goods from that country
itself subject to the conditions that processing / manufacturing charges are suitably loaded in the
export price and are borne by the ultimate buyer and the exporter has made satisfactory
arrangements for realization of full export proceeds subject to the usual GR procedure
...
Project Exports and Service Exports
• Export of engineering goods on deferred payment terms and execution of turnkey projects and
civil construction contracts abroad are collectively referred to as
‘Project Exports’
...
Project/Service exporters have also been extended
the facility of deployment of temporary cash balance as set out here under;
a) Inter-Project Transfer of Machinery
• Exporters are permitted to use the machinery / equipment for performing any other contract
secured by them in any country subject to the satisfaction of the sponsoring bank(s) / EXIM Bank
/ Working Group
...

c) Deployment of Temporary Cash Surpluses
• Project/Service exporters may deploy their temporary cash surpluses, generated outside India, in
the permissible/approved instruments/products, subject to monitoring by the bank(s)/EXIM
Bank/Working Group
...

17
...
7,500/-, except to the extent permitted under
any general permission granted under the Regulations, will require prior permission of RBI
...
Forfeiting
• EXIM Bank and banks have been permitted to undertake forfeiting for financing of export
receivables
...
Exports to neighboring countries by Road, Rail or River
• The procedure for export to neighboring countries by Road, Rail or River involves production of
the form of export presented by the exporter to the Customs at the border through which the vessel
or vehicle has to pass before crossing over to the foreign territory
...

20
...

21
...
GR Forms, SDF, PP Forms, &
SOFTEX forms along with check list for scrutiny of the forms are given in the RBI Master
Circular
...
Other guidelines
• Banks need not return the duplicate copies of GR/SDF/PP forms and shipping documents once
submitted for negotiation, collection, etc
...

• Banks may deliver one negotiable copy of the Bill of Lading to the Master of the carrying vessel
or trade representative for exports to certain landlocked countries if the shipment is covered by an
irrevocable letter of credit and the documents conform strictly to the terms of the Letter of Credit
which, inter alia, provides for such delivery
...

• Banks are supposed to closely monitor the realization of bills and in cases where bills remain
outstanding, beyond the due date for payment or 12 months from the date of export, the matter
should be promptly taken up with the concerned exporter
...

• Banks are required to follow up export outstanding with exporters systematically and vigorously
so that action against defaulting exporters does not get delayed
...

• RBI prior approval is not required if, after goods have been shipped, they are to be transferred to
a buyer other than the original buyer in the event of default by the latter provided the reduction in
value, if any, involved does not exceed 25% of the invoice value and the realization of export
proceeds is not delayed beyond the period of 12 months from the date of export
...

• RBI has permitted the banks to extend the period of realization of export proceeds beyond 12
months from the date of export up to six months, at a time irrespective of the invoice value of the
export subject to compliance of certain conditions
...
In cases where the claim is payable abroad, the banks are
required to arrange to collect the full amount of claim due on the lost shipment, through the
medium of their overseas branch/correspondent and release the duplicate copy of GR/SDF/PP
form only after the amount has been collected
...

• Banks, through whom the export proceeds were originally realized may consider requests for
refund of export proceeds of goods exported from India and being re-imported into India on
account of poor quality upon exercising due diligence regarding the track record of the exporter
and upon satisfying the bona fide of the transaction, etc
...


37

• Banks are required to obtain prior approval of RBI for issuing guarantees for caution-listed
exporters
...


Nostro A/C: [Ours Account with You]
38

Nostro Account is a Current account maintained by a domestic bank/dealer with a foreign bank
in foreign currency
...


Vostro A/C: [Yours Account with us]
Vostro A/C is a Current account maintained by a foreign bank with domestic bank in Rupee
currency
...
In other word Loro Account is a Nostro
Account for one bank who opened the bank and Loro Account for other bank who refers first one
account
...
If PNB refers that account of SBI
for its correspondence,then it is called Loro Account for PNB and it is Nostro Account for SBI
...
All receipt in Swiss franc (CHF) and all payment
/remittances in CHF will be made through Nostro account maintained with Switzer land bank]
Cash Position (Nostro A/C): (As bank Reconciliation statement: think it as Pass book which is
maintained by bank)
Nostro A/C of an Indian bank/dealer maintained with Switzerland bank will affect by:
- Spot Purchase/Sale of foreign currency (CHF) (Forward Purchase/Sale of CHF do not affect
Nostro A/C because there is no delivery of currency as on today)
- Receipt/payment in CHF
...
However, forward purchase/sale affects only the exchange position
...
CAPITAL ACCOUNT
Capital account transaction is defined as a transaction which:

Alters the assets or liabilities, including contingent liabilities, outside India of persons
resident in India
...
For example:- (i) a resident of India acquire an immovable
property outside India or acquires shares of a foreign company
...
This way he/she has created a liability outside India
...
In other words,
it includes those transactions which are undertaken by a non-resident such that his/her
assets or liabilities in India are altered (either increased or decreased)
...
This
way his/her assets in India are increased; or (ii) a non-resident borrows from Indian housing
finance institute for acquiring a house in India
...




The Act also contains a list of some of the most common capital account transactions:

Transfer or issue of any foreign security by a person resident in India;



Transfer or issue of any security by a person resident outside India;



Transfer or issue of any security or foreign security by any branch, office or agency
in India of a person resident outside India;



Any borrowing or lending in rupees in whatever form or by whatever name called;

42



Any borrowing or lending in rupees in whatever form or by whatever name called
between a person resident in India and a person resident outside India;



Deposits between persons resident in India and persons resident outside India;



Export, import or holding of currency or currency notes;



Transfer of immovable property outside India, other than a lease not exceeding five
years, by a person resident in India;



Acquisition or transfer of immovable property in India, other than a lease not
exceeding five years, by a person resident outside India;



Giving of a guarantee or surety in respect of any debt, obligation or other liability
incurredBy a person resident in India and owed to a person resident outside India; or
By a person resident outside India
...
But it shall not impose any restriction on the
drawal of foreign exchange for payments due on account of amortization of loans or for
depreciation of direct investments in the ordinary course of business
...
The FEMA
Notification No
...


The permitted capital account transactions have been classified into two categories: Capital account transactions by persons resident in India includes,


Investment in foreign securities;



Foreign currency loans raised in India and abroad;
43



Acquisition and transfer of immovable property outside India;



Guarantees issued in favour of a person resident outside India;



Export, import and holding of currency or currency notes;



Loans and overdrafts (borrowings) from a person resident outside India;



Maintenance of foreign currency accounts in India and outside India;



Taking out the insurance policy from an insurance company outside India;



Remittance outside India of capital assets of a person resident in India;



Sale and purchase of foreign exchange derivatives in India and abroad and
commodity derivatives abroad
...


There are generally two types of prohibitions on capital account transactions :

General Prohibition:- A person shall not undertake or sell or draw foreign exchange to or
from an authorized person for any capital account transaction
...
For example,
Reserve Bank of India has issued an AP (DIR) Circular, wherein a resident individual can
draw from an authorized person foreign exchange up to US$ 25,000 per calendar year for
a capital account transaction
...


Following are the pre-requisites for Capital Account Convertibility in India:
The Tarapore Committee appointed by the Reserve Bank of India (RBI) was meant for
recommending methods of converting the Indian Rupee completely
...
However, according to the Committee, this was possible only when the following few
conditions are satisfied:


The average rate of inflation should vary between 3% to 5% during the debt-servicing time



Decreasing the gross fiscal deficit to the GDP ratio by 3
...
VII, the article of agreement
...
This would exert less pressure on the Indian financial
market
...


Reasons for the introduction of CAC in India:
The logic for the introduction of complete capital account convertibility in India, according to the
recommendations of the Tarapore Committee, is to ensure total financial mobility in the country
...
Such
allocation of foreign funds in the country helps in equalizing the capital return rates not only across
different borders, but also escalates the production levels
...


The forecasts made by the Tarapore Committee regarding Indian CAC are as follows:


A prescribed average inflation rate of 3% to 5% will exist for a three-year time period,
from1997-98 and 1999-2000
...

46



By the years 1997-98, there will be a complete deregulation of the structure of interest rate
...
5% in 1997-98 to 4
...
5 % in 1999-2000, with respect to the GDP
...
It also represents the formation and liquidation of financial claims on or by the
remaining world
...
Along with the financial capitalists, the reputed commercial
firms in India jointly derive and enjoy the benefits of the CAC policy, which speculate the stock
markets through investments
...
However, CAC does not serve the
purposes of the real sectors of Indian economy, like eradication of poverty, escalation of the
employment rates and other inequalities
...

Despite several benefits, CAC has proved to be insufficient in solving the Indian financial crises,
the complete solution of which lies in having a regulated inflow of capital into the economy
...
SOUTH EAST ASIAN COUNTRIES CRISIS
Overview:The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in
July 1997, and raised fears of a worldwide economic meltdown due to financial contagion
...

The crisis started in Thailand with the financial collapse of the Thai baht after the Thai government
was forced to float the baht (due to lack of foreign currency to support its fixed exchange rate),
cutting its peg to the U
...
dollar, after exhaustive efforts to support it in the face of a severe
financial overextension that was in part real estate driven
...
As the crisis spread, most of Southeast Asia and Japan saw slumping currencies,
devalued stock markets and other asset prices, and a precipitous rise in private debt
...
Hong Kong,
Malaysia, Laos and the Philippines were also hurt by the slump
...

Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast
Asian Nations (ASEAN) economies in 1993-96, and then shot up beyond 180% during the worst
of the crisis
...
Only in Thailand and South Korea
did debt service-to-exports ratios rise
...
The efforts to
stem a global economic crisis did little to stabilize the domestic situation in Indonesia, however
...
The effects of the crisis lingered through 1998
...
Only Singapore and Taiwan proved relatively insulated from the shock, but both
suffered serious hits in passing, the former more so due to its size and geographical location
between Malaysia and Indonesia
...
After the 1997 Asian Financial Crisis, economies in the region are
working toward financial stability on financial supervision
...
As a result the region's economies received a large
inflow of money and experienced a dramatic run-up in asset prices
...

At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private current
account deficits and the maintenance of fixed exchange rates encouraged external borrowing and
led to excessive exposure to foreign exchange risk in both the financial and corporate sectors
...
S
...
S
...
As the U
...
economy recovered from a recession in the early 1990s, the U
...
Federal
Reserve Bank under Alan Greenspan began to raise U
...
interest rates to head off inflation
...
S
...
S
...
For the Southeast Asian nations which had currencies pegged to the U
...
dollar, the higher
U
...
dollar caused their own exports to become more expensive and less competitive in the global
49

markets
...
Some economists have advanced the growing
exports of China as a contributing factor to ASEAN nations' export growth slowdown, though
these economists maintain the main cause of the crises was excessive real estate speculation
...
Other economists dispute China's impact,
noting that both ASEAN and China experienced simultaneous rapid export growth in the early
1990s
...
The nominal U
...

dollar GDP of ASEAN fell by US$9
...
2 billion (31
...
In South
Korea, the $170
...
1% of the 1997 GDP
...

Indonesia, South Korea and Thailand were the countries most affected by the crisis
...
The nominal U
...

dollar GDP of ASEAN fell by US$9
...
2 billion (31
...
In South
Korea, the $170
...
1% of the 1997 GDP
...

Indonesia, South Korea and Thailand were the countries most affected by the crisis
...
5

41

Thailand 170

102

40
...
4%

75

47

37
...
9%

283

34
...
3

Malaysian

July 1998

2
...
1

1,290

Philippines

South Korea 430

The above tabulation shows that despite the prompt raising of interest rates to 32% in the
Philippines upon the onset of crisis in mid-July 1997, and to 65% in Indonesia upon the
intensification of crisis in 1998, their local currencies depreciated just the same and did not perform
better than those of South Korea, Thailand, and Malaysia, which countries had their high interest
rates set at generally lower than 20% during the Asian crisis
...
More
long-term consequences included reversal of the relative gains made in the boom years just
preceding the crisis

...

Many economists believe that the Asian crisis was created not by market psychology or
51

technology, but by policies that distorted incentives within the lender-borrower relationship
...
These asset prices eventually began
to collapse, causing individuals and companies to default on debt obligations
...
In addition, as foreign investors attempted to
withdraw their money, the exchange market was flooded with the currencies of the crisis countries,
putting depreciative pressure on their exchange rates
...

Neither of these policy responses could be sustained for long
...
When it became clear that the tide of capital
fleeing these countries was not to be stopped, the authorities ceased defending their fixed exchange
rates and allowed their currencies to float
...


The foreign ministers of the 10 ASEAN countries believed that the well co-ordinated manipulation
of their currencies was a deliberate attempt to destabilize the ASEAN economies
...


52

After Effects of Crisis:After the Asian crisis, international investors were reluctant to lend to developing countries,
leading to economic slowdowns in developing countries in many parts of the world
...
In
response to a severe fall in oil prices, the super majors that emerged in the late-1990s, undertook
some major mergers and acquisitions between 1998 and 2002 - often in an effort to improve
economies of scale, hedge against oil price volatility, and reduce large cash reserves through
reinvestment
...
6 billion
in 4 months
...

Many nations learned from this, and quickly built up foreign exchange reserves as a hedge against
attacks, including Japan, China, and South Korea
...
India is less dependent on global flows of
trade and capital and has a large internal market and a conservative financial system
...
Among the drivers of growth, domestic
capital formation retained much of its momentum from preceding years
...
IMPACT OF FERA ON FOREX
Until 1992 all foreign investments in India and the repatriation of foreign capital required previous
approval of the government
...
However, a new foreign investment policy announced in
July 1991, declared automatic approval for foreign exchange in India for thirty-four industries
...
The foreign
exchange market in India is regulated by the Reserve Bank of India
through the Exchange Control Department
...
In
1994 foreign and non resident Indian investors were permitted to repatriate not only their profits
but also their capital for foreign exchange in India
...
However, transfer of capital abroad by Indian
nationals is only allowed in particular circumstances, such as emigration
...

Indian authorities are able to manage the exchange rate easily, only because foreign exchange
transactions in India are so securely controlled
...
In February 1992, the Indian government started to make the
rupee convertible, and in March 1993 a single floating exchange rate in the market of foreign
exchange in India was implemented
...
81 was worth US$1, as
compared to Rs 7
...
37 in 1985 and Rs 17
...
Since the onset of
liberalization, foreign exchange markets in India have witnessed explosive growth in trading
capacity
...
While the Indian government has clearly adopted a
flexible exchange rate regime, in practice the rupee is one of most resourceful tracker of the US
dollar
...


The Gold (10gms
...
00
202
...
50
506
...
00
432
...
00
685
...
00
1330
...
00
1645
...
00
1970
...
00
2140
...
00
3130
...
00
3200
...
00
4334
...
00
4598
...
00
5160
...
00
4045
...
00
4400
...
00
4990
...
00
5850
...
00
8400
...
00
12500
...
00
18500
...
00
30113
...
00
28237
...
00
31799
...

Traditionally gold has been deeply entrenched in the Indian social psyche
...

Gold price is a function of the variables like expected inflation, the expected interest rate, the
exchange rate between the UD dollar and the Indian Rupee
...


57

The Rupee-Dollar parity of 1947
When India achieved independence in 1947, there were no external borrowings on India’s
balance sheet! The exchange rate as on 15 August 1947 was 1 US$ = 1 INR
...
The trend was exacerbated by the Indo-China war of 1962 and the
Indo-Pakistan war of 1965 which forced the government to further devalue the Rupee as the
country was in dire need of USD for importing weapons
...
Indira Gandhi, inflation was increasing at
an unprecedented rate
...
This led to the
Rupee being devalued to 1 USD=7 INR
...
Krishnamachari
& Mr
...
Gandhi did not relent, being mindful of
the country’s dependence on aid from the US
...
The exchange rate in 1970 was 1 USD= 7
...
4 INR in 1975, after the political uncertainty following the
assassination of Mrs
...
The next round of weakness in the Rupee came in the
wake of the Bofors scam which toppled Rajiv Gandhi’s government plunging the Rupee to new
lows of 1 USD= 12
...
In the year 1990 this rose to 1 USD =17
...

58

Devaluation after the economic liberalization of 1991
The economic liberalization in 1991 under the prime minister-ship of Narsimha Rao brought
with it a sharp devaluation of the Rupee
...
The Rupee hit new lows with 1 US$ =
24
...
16
...

The low Rupee policy came as a boom for exporters including the Information Technology
industry, which was in its infancy at the time
...
The
exchange rate today is far more market determined than ever before
...
The Real Effective
Exchange Rate index provides an excellent alternative for estimating the fair levels of a currency
relative to a basket of major currencies in the world
...
REER index is the 6
currency basket which uses 3 year moving averages for calculating weights of the index taking
2004 -05 as base year
...
REER relates to purchasing power parity
hypothesis
...

It is believed that RBI intervenes currency market to suppress Rupee if REER index approaches
105 and props Rupee up if REER gets close to 95
...
REER levels as on 25 Aug 2011 was at 117
...

There is also a 36-currency REER index, which is also used to measure competitiveness of
currency
...
On an average basis, the 6-currency real effective exchange rate (REER)
appreciated by 12
...
5 per cent and the 36currency REER by 7
...

REER Trends:
59

The 6-currency REER index rose to 112
...
During the crisis, REER weakened as rupee depreciated due to fall in capital flows
...
REER stood near
100 for almost two years in 2008 and 2009
...
From April 2010, REER has stayed around 115 for
17 months
...
However, recent slide in rupee has been triggered by the
euro-zone issues as also problems on the domestic front
...
CASE STUDIES
Rs 237 cr forex violations notice on Mumbai pharma firm
(Latest case – July 2014)
The Enforcement Directorate (ED) has slapped aRs 297 crore show cause notice on a Mumbaibased pharma company and few other financial institutions for alleged forex violations
...
The ED has issued a show cause notice under Foreign Exchange
Management Act (FEMA) to the firm and few other financial institutions
...

The total forex contravention is pegged at Rs 297
...
When contacted by PTI, the
firm said the alleged contraventions were done "inadvertently" by it and it will cooperate with the
probe agency
...
For raising
the funds, various solicitor's firm, financial advisors and Bank of Baroda (authorised dealer) was
appointed for the purpose of legal documentation and liasioning," general counsel for Plethico
Pharmaceuticals DevduttDhikle said
...

"However, the purpose for which money was raised through FCCB was utilised for the said
purpose," the reply said
...
The ED begun its probe in
this case two years ago
...
" Adding that a showcause notice will be issued
soon
...

FDI norms in India do not allow FDI in e-commerce especially in business to consumer models
...

Sources in ED say that, "We are aware of the change in their business model
...
" In fact, as per the FEMA norms, ED can slap a penalty upto three times of the
contravention or foreign investment received in this case
...

"The case has been made out by our investigating team and now the Adjudicating Officer is analyzing the
case to take a finally call on the penalty amount" explained a top source in the Directorate
...
The
Adjudicating Officer analyses the investigation report to ensure the case stands the test of law
...
In fact, the company could also compound the offences by appearing before the RBI and
pleading guilty of the contravention
...
"FEMA cases are civil cases to there is no question of criminal proceedings or
attachments" explains an official in the Directorate
...
But sources tell
ET Now that this probe is only in its initial stages
...


RBI slapped Rs
...
These actions, according to an
RBI order, violated various provisions of the Foreign Exchange Management Act (FEMA)
In its order, RBI said Reliance Energy raised a $360-million ECB on July 25, 2006, for investment
in infrastructure projects in India
...
On April 26, 2007, Reliance Energy repatriated
the ECB proceeds worth $300 million to India while the balance remained abroad in liquid assets
...
On the following day, i
...
, on April 27 2007, the entire
money was withdrawn and invested in Reliance Fixed Horizon Fund III Annual Plan series V
...

RBI said, under FEMA guidelines issued in 2000, a borrower is required to keep ECB funds parked
abroad till the actual requirement in India
...

“The conduct of the applicant was in contravention of the ECB guidelines and the same are sought
to be compounded,” the RBI order signed by its chief general manager Salim Gangadharan said
...
The company said due to unforeseen circumstances,
its Dadri power project was delayed
...

Rejecting Reliance Energy’s contention, RBI said it took the company 315 days to realise that the
ECB proceeds are not required for its intended purpose and to repatriate the same for alternate use
of investment in an overseas joint venture on March 5, 2008
...

“I do not find any merit in this contention also as the applicant has not approached RBI either for
utilizing the proceeds not provided for in the ECB guidelines, or its repatriation abroad for
investment in the capital of the JV,” the RBI official said in the order
...

But RBI does not think so
...

However, in a scenario where the proceeds of the ECB are parked overseas, the exchange rate
gains or losses are neutralized as the gains or losses restating of the liability side are offset with
corresponding exchange losses or gains in the asset
...

It said as the company has made additional income of Rs 124 crore, it is liable to pay a fine of Rs
124
...
On August this year, the company submitted another fresh application for
compounding and requested for withdrawal of the present application dated April 17, 2008, to
include contravention committed in respect of an another transaction of ECB worth $150 million
...


Andhra Pradesh minister gets two months jail for economic offence under FERA
1999 case – result in 2012

64

Andhra Pradesh secondary education minister K Parthasarathy was sentenced to two months'
simple imprisonment on Wednesday by a Hyderabad court in a 13-year-old case of Foreign
Exchange Regulation Act (FERA) violation
...
five lakh on a city-based firm
KPR Tele Products Ltd, of which Mr Parthasarathy was managing director, and also directed him
to pay a fine of Rs
...

The court, however, kept the sentence under suspension for a period of 30 days after the minister's
counsel moved a petition seeking time to challenge the order in a higher court
...
10,000 and a security of the same amount
...
The ED had imposed a penalty of Rs
...

Making it clear that he will challenge the verdict in a higher court, Mr Parthasarathy said the case
has nothing to do with his public life as he was neither an MLA nor a minister when it was filed
...
However, I will fight it out because the court has given me a chance to
appeal
...

Asserting that he will also legally fight the penalty order, he said, "I was doing some business at
that time and there was default, following which the case came up before the court
...

The court had on Monday last issued a non-bailable warrant against the minister, which was
subsequently recalled yesterday after he filed a petition informing that it was due to prior
commitment that he was unable to attend the court hearing and had assured of attending the court
proceedings today
...


Update :Granted Relief by the HC – Judge admits appeal :
In a huge relief to secondary education minister K Parthasarathi, Justice K G Shankar of the AP
high court on Tuesday condoned the 1394-day delay (nearly 4 years) and admitted an appeal filed
65

by the minister and his firm KPR Tele Products against an order passed by the appellate tribunal
for foreign exchange, New Delhi, that upheld the Rs-3 lakh penalty imposed on them
...
Though they claimed that the money
transaction was carried out for importing certain machinery for the company, the ED authorities
slapped a case against them because the import of machinery did not happen and the money
transfer was done in contravention to the provisions of Foreign Exchange Regulation Act (FERA)
...

Later, an appellate tribunal upheld the same in 2008
...

Following this, the minister and his firm preferred an appeal against the appellate tribunal order saying that
the order was never communicated to them
...
The judge admitted the appeal and stayed the penalty order
of the tribunal till disposal of the appeal
...
CONCLUSION
To conclude the rules regulations and procedures have been simplified & diluted after introduction
of FEMA 1999
...


FEMA which has replaced FERA had become the need of the hour since the FERA has become
incompatible with the pro- liberalization policies of the Government of India
...
It is another matter of enactment of FEMA also
brought it with prevention of Money Laundering Act, 2002 which came into recently from 1 st July
2005
...
It applies to all branches and offices and agencies outside
INDIA owned or controlled by a person who is resident of India and also to any contravention
there under committed outside India to any person to whom this act applies
...


Violation of FERA was a criminal offence, whereas violation of FEMA was a civil offence
...


Citizenship was the criteria to determine the residential status of a person under FERA whereas
182 days was the only requirement under FEMA
...
This transition has also taken away the concept of "exchange control" and
brought in the era of "exchange management"
...
The important aspect is that how and
through what channels of FDI inflows affect the performance of companies in developing
countries
...
If capital
inflows enable the recipient developing countries to increase the investment rate beyond what
they could sustain with their domestic saving they should achieve accelerated economic growth
with favorable consequences for employment, wages, and labor productivity
...


The importance of FDI extends beyond the financial capital that flows into the country
...
and
consequent integrations into global product chains which are the foundations of a successful export
strategy
...
For all these reasons FDI is regarded as an important vehicle for economic development
particularly for developing economies
...

However one should not forget South East Countries crisis, where excessive Foreign Capital
Inflow had created economic instability
...


69

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