Sheathing the sword that struck fear
The much-dreaded Foreign Exchange Regulation Act,1973 (FERA) is being finally laid to rest by the new enactment, ie, the Foreign Exchange Management Act,1999 (FEMA). The FEMA Bill was recently passed by both houses of parliament and is now awaiting the president's assent. Since India attained independence, the foreign exchange regulations have been the bane of Indian citizens and every resident Indian, whether an Indian citizen or not.
One vividly recalls the time when even a basic hospitality like offering a cup of tea or providing local conveyance to a non-resident guest on a visit to India could have landed an Indian resident directly into the net of the enforcement directorate. A mere dollar in the pocket was enough to invite the attention of the enforcement authorities. In fact, businessmen used to shudder at the very thought of the authority as they were well aware that once caught in the authority's net, rightly or wrongly, it would be extremely difficult to come out unscathed. It was not uncommon to find enforcement authorities using third degree methods to extract a confession from a suspect. Even highly respected persons like the late S L Kirloskar were humiliated by the authorities. FERA has been not just a bugbear for businessmen, it has also been a big slur on the country's polity. Fortunately, the powers that we have, at last realised the damage it has been causing to the country and have given it a not-so-quite burial.
FERA was so draconian in its approach that trade and industry were forced to unite and voice a serious concern about the government's intentions. Anybody could be arrested under FERA and put behind bars on mere suspicion. Such a legislation has no place in any civilised society. After much dilly-dallying the government finally managed to have the FEMA Bill passed in both houses. At the same time, to ensure that there are no hawala operations and money laundering, a separate enactment is on the anvil. At present, the Prevention of Money Laundering Bill is before the standing committee for its report.
At the outset, it should be remembered that though FERA will be replaced by FEMA, the authorities will still have power to invoke the provisions of FERA for another two years from the date of commencement of FEMA. In other words, according to Sec. 49(3) of FEMA, the courts and the adjudicating authorities have been given the power to take cognizance of contraventions under FERA for another two years. Hence, if any proceedings are initiated under FERA during the next two years, they shall be valid under the law. In such cases, to be really free from the clutches of FERA, it would take further two-three years after the commencement of the proceedings.
To ascertain the thrust of the enactment and the intention of the government it would be useful to compare the preamble of both the Acts. Under FERA, the thrust was on regulating payments and dealings in foreign exchange and also to conserve the foreign exchange resources of the country. In addition, the preamble also provided for the proper utilisation of the resources in the interest of the country's economic development. In other words, FERA's thrust was on regulation and control.
FEMA's preamble clearly mentions that the objective of the Act is to facilitate external trade and payments. In addition, the Act also seeks to promote the orderly development and maintenance of the Indian foreign exchange market.
As is apparent from the two preambles, the new law is positive in its approach and liberal in its content. There is no doubt on the government's intention if that the foreign exchange law should not act as an impediment for growth of exports nor should it be made a tool in the hands of government officials to browbeat innocent citizens.
One of the main reasons to fear FERA was, the unbridled power the enforcement authorities had, to arrest any person almost at their whim and fancy. Under Sec. 35 of FERA, any officer authorised by the Central government can arrest any person on mere suspicion of his having committed an offence under the Act. This is one of the most obnoxious and most misused provisions of FERA.
However, now Indians can breathe a sense of relief, as under FEMA, no enforcement officer or any other authorised person can arrest any person for suspected contravention of the provisions of the Act.. The only situation under which a person can be arrested is when he fails to pay the penalty levied on him under the Act. In this regard also, the law stipulates that even if the said person is arrested for non-payment of penalty, he shall be released forthwith on payment of the prescribed penalty. Consequently, the maximum that a guilty person shall have to face is payment of penalty and not imprisonment. Hence, for all practical purposes, it will be more like a civil offence resulting in payment of a fine.
Sec. 13 of FEMA provides that for any contravention of the Act, a maximum penalty upto three times the sum involved can be levied. However, where it is not possible to quantify the amount, a penalty of upto Rs 2,00,000 can be imposed by the adjudicating authority.
An important change has been effected in the definition of the term 'a person resident in India'. Earlier, under FERA, the definition of a 'person resident in India' depended on the intention of the concerned person, ie, whether the person had gone overseas for business or education or for an indefinite period, etc. However, now the definition is in consonance with the Income-Tax Act, 1961, by prescribing the criteria of resident ship in India for at least a period of 182 days during the course of the preceding financial year. Besides, the scope of the definition has been enlarged by specifying that the following categories shall also be deemed to be a person resident in India: (a) any person or body corporate registered or incorporated in India; (b) an office, branch or agency in India owned or controlled by a person resident outside India; (c) an office, branch or agency outside India and owned or controlled by a person resident in India.
So far as categories (a) and (b) are concerned, they only reiterate the existing position of law, but it is category (c) which needs to be understood carefully. The Indian corporate sector has been spreading its wings by setting up offices, branches and agencies outside India so as to enlarge markets and, in this task, support has been forthcoming from the Central government as well. In fact, during the recent years, the government has liberalised the rules relating to investment in wholly-owned subsidiaries and joint ventures abroad. In addition, exporters have also been encouraged to make forays into foreign markets, resulting in the opening up of offices abroad by several Indian exporters. By treating such an overseas office, branch or agency, owned or controlled by a person resident in India as an Indian resident under FEMA , it would be subject to all the limitations as are applicable to other residents in India. Indian companies, which are already having their establishments in foreign countries in the nature of an office, branch or an agency, will now have to reckon with the various constraints as a result of the new law. This is certainly not what the corporate sector would be happy to have and that too, at a time when the government is talking of opening up the economy further.
Another important change that has been effected in the new enactment is the widening of the scope of the Act. Under FERA, the thrust of the law so far as exports were concerned, related to goods but now under FEMA, even services have been included. Clause (2b) of Sec. 2 of FEMA provides the meaning of the term 'service' which is very wide in its ambit and virtually includes every kind of service relating to different activities. The term includes the provision of facilities in connection with banking, financing, insurance, medical assistance, legal assistance, chit fund, real estate, transport, processing, boarding/lodging, entertainment, amusement as well as supply of news/information.
As is apparent from the definition of the term 'service', all important activities have been included and any type of service or facility provided in relation to such an activity will attract the provisions of FEMA. However, there are two exemptions provided in the definition itself. The first relates to the rendering of free service without charging anything — either in cash or kind. The other exemption covers contracts for personal service.
The implication of this provision is that there will be additional responsibility on all professionals and others providing such services, as now they will have to comply with the requirements of FEMA and RBI, as may be applicable from time to time. Particularly, care will have to be taken to ensure timely payments from abroad for services rendered to foreign clients. Sec.7(3) of FEMA requires that every exporter of service will have to furnish a declaration in the prescribed form to RBI giving particulars relating to payment for such services.
With the new enactment in place, shortly, it should be possible for Indians to breathe more freely without having to worry too much about big brother watching from a distance. However, we have to wait for the law relating to prevention of money laundering which will take some time before it is passed by parliament.
-- by S D Israni
The writer is a member of the central council, Institute of Company Secretaries of India. The views expressed by the author are his own and not those of the ICSI. e-mail: firstname.lastname@example.org