MCom I Business Environment Regulation Foreign Investment Study Material Notes

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MCom I Business Environment Regulation Foreign Investment Study Material Notes

Table of Contents

MCom I Business Environment Regulation Foreign Investment Study Material Notes: Foreign Exchange Regulations ACT 1973 Objectives of FERA Guidelines of FERA Main Provisions of Act 1973 AMENDMENTS in FERA 1993 Enforcement of FERA Characteristics of FEMA Long Answer Questions Short Answer Questions Objective Questions :

Regulation Foreign Investment
Regulation Foreign Investment

BCom 3rd Year Nature Importance Financial Money Study Material notes

Regulation of Foreign Investment

With the advent of freedom, the pressure for economic development in India necessitated a realistic approach toward foreign capital. Indian government recognized foreign capital as an important supplement to domestic savings for the development of the country and for securing scientific, technical and industrial know-how. As a result MNCs after their entry are rapidly increasing their shareholding in Indian companies. MNCs have decided to expand their business in India by adopting the wholly-owned subsidiary root at the cost of their established and listed subsidiaries. MNCs promised that they would bring fresh capital, introduce latest technologies and marketing skills and help Indian’ affiliates become more competitive internationally and accelerate their growth.

FOREIGN EXCHANGE REGULATION ACT, 1973

Soon after India’s independence, the government of India enacted the Foreign Exchange Regulation Act, 1947 to regulate the operation of foreign-controlled companies in India. The Act was amended comprehensively in 1973 and the New Foreign Exchange Regulation Act, 1973 (FERA) came into force from January 1974.

OBJECTIVES OF FERA

The main objectives of FERA 1973, were:

1 Transfer, protection and export of securities.

2. Regulation of transactions with non-residents.

3. Regulation of foreign exchange.

4. Conservation of India’s precious foreign exchange resources.

5. Regulation of fixed assets of NRIs owned in India.

6. Underwriting of foreign scripts and issue of to foreign securities.

7. Regulation of receipts and payments of foreigners.

8. Regulation of export and import of currency and gold.

Section 29 of FERA referred directly to the operations of MNCs in India. According to this section, all non-banking foreign branches and subsidiaries with foreign equity exceeding 40 percent had to obtain permission to establish new undertakings, to purchase shares in existing companies, or to acquire wholly or partly any other company.

GUIDELINES OF FERA

Guidelines for administering Section 29 of FERA were announced in 1973 and later amended in 1976. Guidelines of FERA are as follows:

1 The principal rule was that all branches of foreign companies operating in India should convert themselves into Indian companies with at least 60 percent equity participation.

2. All subsidiaries of foreign companies should bring down the foreign equity share to 40 percent or less.

3. Exempted from these rules were the companies :

(i) exporting a substantial part of their production.

(ii) engaged in core sectors and priority sector industries.

(iii) engaged in tea-plantation activities.

According to Martinuseen, “these exceptions to the general rule reflected the government’s endeavours to induce TNCs to use their access to global distribution and marketing system, with a further view to improving India’s balance of payment position. Besides, they reflected a desire on the part of the Indian government to channel TNCs away from certain industries and into core sectors and high priority industries. They later included primarily basic intermediate and capital goods whereas the former group comprised mainly consumer goods. As a rule, the manufacture of priority items required sophisticated technology not available from indigenous source.

MAIN PROVISIONS OF THE ACT, 1973

The main provisions of FERA, 1973 are as follows:

1 Restrictions on dealing in foreign exchange: Under FERA all transactions in foreign exchange and transactions with non-residents whether in foreign exchange or in rupees were absolutely prohibited.

2. Restrictions on consumption in foreign exchange : Consumption of foreign exchange was prohibited except where specific relations were made.

3. Restrictions on import and exports of certain currencies and gold-silver : According to the Provision of Sec. 13, no one, except with the permission of RBI, shall import and export gold, silver, foreign exchange or Indian currency.

4. Restriction regarding assets held by non-residents : According to Section 11 of FERA, no non-resident shall hold, transfer, or mortgage assets without prior permission of RBI.

5. Regulation of foreign companies : According to Sec. 29, all nonbanking foreign branches and subsidiaries with foreign equity exceeding 40% had to obtain permission to establish new undertakings, to purchase shares in existing companies, or to acquire wholly or partly any other company.

6. Power to arrest : According to Section 35 of FERA, if the enforcement officer, authorised by the Central Government has confidence that the person residing in India or within Indian boundaries is responsible for any offence, he may arrest such person.

7. Penalities : Sections 50 to 56 of FERA provide provisions for penalties for various offences.

AMENDMENTS IN FERA, 1993

Some sections of FERA have been amended. The amendments are as follows:

1 Section 17 which conferred powers on government to regulate uses of ported gold and silver was deleted. Import and export in gold and silver was exempted from FERA implying that these commodities were now to be governed by EXIM policy.

2. Section 27, which restricted Indian companies from setting up joint ven. bure abroad and resident Indian’s associating themselves with or taking part in overseas concerns was scrapped.

3. U/s830, foreign nationals were exempted from obtaining prior permission under FERA before taking up employment in India.

4. Restrictions regarding assets held in India by non-residents were removed.

5. A FERA provision which provided that the government could direct certain payments to be made by FERA companies in a special account, was deleted.

6. Restrictions regarding assets held in India by non-residents, were removed.

7. Restrictions on transfers of shares by a non-resident to another nonresident were removed.

8. Section 31 was revoked. This allowed FERA companies to deal in immovable property in India.

9. Section 26, sub-section, which required the FERA companies to get Reserve Bank’s permission before raising working capital or accepting deposits was revoked.

10. Sections 28 and 29 were revoked.

ENFORCEMENT OF FERA

The Central Government appoints FERA officers. According to Section 3 of FERA, organisational structure of FERA comprises of Enforcement Director, Additional Director, Deputy Director, Assistant Director and other officers. Subject to such conditions as the Central Government may impose, officers of enforcement may exercise the powers and discharge the duties imposed on them under FERA.

FOREIGN EXCHANGE MANAGEMENT ACT (FEMA), 2000

The Union Budget, 1998-99 advocated repealing FERA and replacing it with FEMA (Foreign Exchange Management Act) as according to the government, FERA was out of tune with the changing times. According to the Finance Minister, since the country has moved to full current account convertibility and hence there is opening up of foreign exchange markets and transactions. With the liberalised economic environment and increased flow of foreign exchange to India the draconian provisions of FERA were needed to be reviewed. Therefore FERA was replaced and Foreign Exchange Management Act, 1999 (FEMA) was passed. FEMA has been brought into force from 1st June, 2000.

OBJECTIVES OF FOREIGN EXCHANGE MANAGEMENT ACT\ (FEMA), 2000

The objectives of FEMA are as follows:

1 Conservation of exchange resources.

2. Regulation of employment for foreigners in India.

3. To make exchange rate stable.

4. Regulation of entry of foreign capital in India.

5. To control sale and purchase of foreign exchange.

6. To correct deficit in balance of payments.

7. To encourage foreign trade.

8. To impose restrictions on the manipulation in foreign invoices.

10. To modify the supply of foreign exchange according to domestic needs.

11. To maintain the supply of foreign currencies for economic programmers.

12. Regulation of payments from foreign countries.

13. For promoting the orderly development and maintenance of foreign exchange market in India.

14. Regulation of employment, business, investment, services etc, of NRIS in India.

Regulation Foreign Investment

CHARACTERISTICS OF FEMA

Characteristics of FEMA are as follows

1 Execution System : The government has right to restrict the execution of any provision of the Act.

2. Right to government and RBI : 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.

3. Liberalised RBI approval : RBI’s approval for release of foreign exchange up to US $ 25,000 to a person for business travel or attending a conference, is not required.

4. Securities holding : A person or resident outside India may hold security of such currency, security or property was acquired, hold or owned by a such person when he was resident in India.

5. Increase in limit of foreign currency drawing: FEMA has increased the limit of foreign currency drawing for various purposes.

6. Provisions of Penalty : If any person contravenes any provisions of this Act, he shall be liable to a penalty up to thrice the sum involved while in FERA, it was five times the sum involved plus imprisonment in most of the cases.

REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE

The various provisions related to regulation and management of foreign exchange are as follows:

1 Restrictions on dealing in foreign exchange : Section 3 provides for following restrictions on transactions :

(i) No person shall deal in or transfer any foreign exchange or foreign security to any person not being an authorized person.

(ii) No person shall make any payment to or for the order of any person resident outside India in any manner.

(iii) No person shall receive, otherwise through an authorized person, any pay mint by order or on behalf of any person resident outside India in any manner.

(iv) No person shall enter into ‘financial transaction’ in India as consideration

for or in association with acquisition or creation or transfer of a right to acquire any asset outside India by any person.

2. Restriction on holding of foreign exchange : Under Section 4 of FEMA, no person resident in India shall acquire own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

3. Current account and capital account transactions (Section 5): Any person may sell or draw foreign exchange to or from an authorised person if such sale or draw is a current account transaction. However, the Central Government may in public interest and in consultation with the Reserve Bank of India, impose such reasonable restrictions for current account transactions as may be prescribed.

4. Capital account transactions : (1) According to provisions of Sec. 6, any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction. (ii) The Reserve Bank may, in consultation with the Central Government specify:

(a) any class or classes of capital account transactions, which are permissible.

(b) the limit upto which foreign exchange shall be admissible for such transactions.

5. Export of goods and services: (i) Under Section 7 (1) every exporter of goods shall :

(a) Furnish to the Reserve Bank or such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value. However, if the full export value is not ascertainable at the time of export, the exporter shall specify the amount which he expects to receive by way of sale of such goods in the overseas market. While determining the expected export value, the exporter shall pay due regard to the prevailing market conditions.

(b) Furnish to the Reserve Bank such other informations as may be required by the Reserve Bank for the purpose of ensuring the realisation of the export proceeds by such exporter.

(ii) Every exporter of service shall furnish to the Reserve Bank or to such other authorities a declaration in such form and in such manner as may be specified, containing the true and correct material particulars in relation to payment for such services.

6. Realisation and repatriation of foreign exchange : U/s 8, where any amount of foreign exchange is due or accrued to any person resident in India, such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.

7. Exemption from realisation an repatriation in certain cases : The provisions of Sections 4 and 8 shall not apply to following, namely: (i) Possession of foreign currency or foreign coins by any person upto such limit as the Reserve Bank may specify. 6) Foreign currency account held or operated by such person, class of persons and the limit upto which the Reserve Bank may specify. Gin) If such foreign exchange was acquired by way of gift or inheritance from a person.

(iv) Foreign exchange acquired from employment, business, trade, vocation,

service, honorarium, gifts, inheritance, or any other legitimate means uptor such limit as the Reserve Bank may specify.

(v) such other receipts in foreign exchange as the Reserve Bank may specify.

Regulation Foreign Investment

FOREIGN EXCHANGE MANAGEMENT (ADJUDICATION PROCEED INGS AND APPEALS) RULES, 2000

Under Section 46 of FEMA, the Central Government has formed following rules for inquiry, penalty and appeal.

Rule 1. Short title and commencement: These rules are known as, Foreign Exchange Management Rules. These rules are enforced with effect from June 1, 2000.

Rule 2. Definitions

(i) Applicant : Applicant means that aggrieved person who makes appeal to special director or adjudicating authority.

(ii) Section : Here section refers to the sections of FEMA.

Rule 3. Appointment of adjudicating authority : For the purpose of adjudication and imposing penalties, the Central Government may appoint certain officers as the adudicating authorities for holding inquiries in respect of any contravention under the Act. Such appointments shall be made by the Central Government by issuing a notification in the official gazettee.

Rule 4. Holding of Enquiry : The procedure for holding the enquiry is explained as under:

(i) Notice : Adjudicating authority shall issue a notice to the accused person requiring him to show cause as to why an inquiry should not be held against him. The adjudicating authority shall give the accused person atleast 10 days time for giving a reply of such show cause notice.

(ii) Nature of contravention : The nature of contravention committed by the accused person shall also be indicated in the notice.

(iii) Date of hearing: The adjudicating authority shall consider the reply made by the accused person. Thereafter, if the adjudicating authority is of the opinion that an inquiry should be held, the adjudicating authority shall issue a notice fixing a date for the hearing.

(iv) To explain the contravention : On the date fixed, the adjudicating authority shall explain to the accused person the contravention alleged to have been committed by him.

(v) Evidence opportunity : The adjudicating authority shall give an opportunity to such person to produce such documents or evidence as he may consider relevant to the inquiry. If necessary, the hearing may be adjourned to a future date.

(vi) Right to summon other persons : While holding an inquiry, the adjudicating authority shall have the power to summon and enforce attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which in the opinion of the adjudicating authority may be useful for the purpose of the inquiry.

(vii) Proceedings in absence : If any person fails or neglects or refuses to appear for the hearing, the adjudicating authority may proceed with the adjudicating proceedings in the absence of such person after recording the reasons for doing so.

(viii) Penalty : If upon considering of the evidence produced before the adjudicating authority, the adjudicating authority is satisfied that person has committed the contravention, the penalty as he thinks fit. The penalty shall be provisions of Section 13.

APPEAL TO SPECIAL DIRECTOR

Provision to appeal to special director are as follows:

1 The Central Government shall, by notification, appoint one or more Special Sector (Appeal) to hear appeals against the orders of the adjudicating authority under Section 17.

2. Any person aggrieved by an order by the adjudicating authority, being an Assistant Director of Enforcement or a Deputy Director of Enforcement may prefer an appeal of the Special Director (Appeal).

3. Every appeal shall be filed within forty-five days from the date on which the copy of the order made by the adjudicating authority is received by the aggrieved person and it shall be in triplicate copies and accompained by 5,000 as fees.

PROCEDURE OF APPEAL TO SPECIAL DIRECTOR

Procedure of appeal to Special Director is as follows:

1 On receipt of appeal, copy of appeal and a copy of order shall be sent to Enforcement Director.

2. Special Director shall give an opportunity of being heard to the parties before passing an order.

3. If parties fail or neglect to appear for the hearing, the Special Director may proceed with the proceeding in the absence of such parties.

4. The order of the Special Director shall specify the provisions of the Act.

5. He shall send a copy of every order made by him to the parties to the appeal and the concerned adjudicating authority.

6. The appellant may either appear in person or take the assistance of a legal practioner or a Chartered Accountant for presenting his case before the Special Director.

Regulation Foreign Investment

EXERCISE QUESTIONS

Long Answer Questions

1 Why regulation of foreign investment is required? Explain the main provisions of Foreign Exchange Regulation Act, 1973 of India.

2. Explain the role of the Reserve Bank in the foreign exchange system in India.

3. Explain amendments in the FERA Act of India in 1993.

4. Explain the objectives and characteristics of the Foreign Exchange Management Act. (FEMA), 2000 of India.

5. Explain main provisions of Foreign Exchange Regulation Act (FERA), 1973.

Short Answer Questions

1 Write the main objectives of FERA.

2. Why regulation of foreign investment is required?

3. Write the main characteristics of FEMA, 2000.

4 Write the objectives of Foreign Exchange Management Act (FEMA), 2000 of India.

Objective Questions

(I) Select the Correct Alternatives :

1 The prescribed fee of appeal to Special Director is :

(a) 75,000

(b) * 6,000

(c) < 7,000

(d) 8,000

2. The provisions of the Foreign Exchange Regulation Act (FERA), 1973 are amended in the year:

(a) 1974

(b) 1995

(c) 1993

(d) 1998

3. Under which section of FERA, 1973 imprisonment is allowed:

(a) Sec. 36

(b) Sec. 35

(c) Sec. 34

(d) Sec. 33

4. Foreign companies setting up joint ventures in India should participate in local equity up to :

(a) 60%

(b) 50%

(c) 40%

(d) 30%

[Ans: 1. (a), 2. (c), 3. (b), 4. (a)]

Regulation Foreign Investment

(II) Write True or False :

1 Foreign capital entered in India through imperialism.

2. Foreign companies, by investing less capital in India, has not earned huge profits.

3. FERA has not been enforced to regulate and to control foreign exchange in India.

4. The main objective of FERA is to regulate import and export of currencies and gold.

(Ans: 1. True, 2. False, 3. False, 4. True)

(III) Fill in the blanks :

1 The government restricted the subsidiaries of foreign companies to dilute its equity to ..

2. FERA regulates ………… held in India by non-residents.

3. Sections 50 to 60 of FERA deals with penalties for various

4. Restrictions on payments only in foreign currencies by ………… during travel is removed.

[Ans: 1. 40%, 2. fixed assets, 3. offences, 4. non-residents.)

Regulation Foreign Investment

 

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