Background, purview and penal provisions

It is a matter of surprise and concern that a bill of such far- reaching implications should have had such scant attention and scrutiny from the professions, the press and Parliament. In contrast, the run-up to the passing of the IRDA Bill was exciting, says S. Balakrishnan

THE troika of important economic legislation, namely, the Insurance Regulatory and Development Authority (IRDA) Bill, 1999, the Foreign Exchange Management Bill (FEMA), 1999, and the Prevention of Money Laundering Bill, 1999, were on the anvil for a considerably long time and could not be enacted due to various well publicised compulsions. The three have now been passed by the Lok Sabha - the first two, namely, IRDA and FEMA bills, have received the nod of the elders, and with no delay envisaged in getting the assent of the President, should be in the statute book in the current year itself. The Money Laundering Bill has surprisingly been referred to a ten member select committee of the Rajya Sabha.

The FEMA which aims ``to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange markets in India", has had a chequered career. It will be interesting to find out whether the omission of the word `receipts' after `external trade' was deliberate, or a victim of casual drafting. FEMA is to take the place of the `dreaded' Foreign Exchange Regulation Act, 1973 (FERA).

It is a matter of surprise and concern that a bill of such far- reaching implications should have had such scant attention and scrutiny from the professions, the press and Parliament. In contrast, the run-up to the passing of the IRDA Bill was exciting - there were fruitful and sometimes intemperate discussions at all the fora concerned. Probably the IRDA received the attention it got because the insurance industry employs thousands with powerful unions with political connections.

In the case of FEMA, there is no such `attraction' for political parties to take advantage of. Is it not amazing and also alarming that the FEMA Bill introduced in the Lok Sabha on November 29, was passed just two days later, that too at the fag end of the day with barely 30 members present in the House?

Background

The FERA reflected the compulsions of a highly regulatory system, when anything `foreign', especially MNCs, were looked upon with suspicion. It was amended in 1993 as a sequel ``to the liberalisation in trade/industrial policies and for creating a more conducive climate for attracting foreign direct investment with a view to increasing production and promoting exports". Several amendments were enacted as ``part of the ongoing process of economic liberalisation relating to foreign investments and foreign trade for closer interaction with the world economy".

Additionally, in the earlier two years, through a series of notifications by the Central Government/ Reserve Bank, steps had been taken to reduce the rigours and irrationalities of FERA and to bring it in line with the then economic realities.

In 1993, amendments, inter alia, sought to give assurance of permanence to the changes in the parent Act made by the issue of notifications. Various facilities were extended to foreign/FERA companies on matters such as appointment of technical and management advisers, opening of branches, acquisition of immovable property, borrowing of money, acceptance of deposits and the like. Facilities were also extended to non-resident Indians, Indian companies and residents for the opening of foreign currency accounts in India following the introduction of partial convertibility. NRIs returning to the country were exempted from making declarations on their arrival in India regarding their assets abroad and from the requirements of prior approval for the acquisition of immovable property in India. FERA companies were also allowed to acquire whole or part of any undertaking in India, of any person or company carrying on trade, commerce or industry excepting agriculture and plantation activity.

According to the Statement of Objects and Reasons appended to the FEMA, ``significant developments have taken place since 1993 such as substantial increase in the country's foreign exchange reserves, growth in foreign trade, rationalisation of tariffs, current account convertibility, liberalisation of Indian investments abroad, increased access to external commercial borrowing by Indian corporates and participation of foreign institutional investors in the Indian stock markets". Keeping in view these developments the Government decided to repeal the FERA and enact the FEMA in its place.

Purview

It was reported that the only point raised by the Opposition in the Lok Sabha on the short discussion on FEMA was on ``capital account liberalisation". The Finance Minister allayed this apprehension with ease, saying, ``while the Bill paves the way for current account liberalisation, it does not propel us to capital account liberalisation. We will move very cautiously........ We will never take risks that expose the country to unnecessary hardships".

What does `current account transaction' mean? The Bill itself provides the answer. `Current account transaction means transaction other than a capital account transaction........ and includes (a) payments due in connection with foreign trade, other current business, services and short-term banking and credit facilities in the ordinary course of business; (b) payment due as interest on loans and as net income from investments; (c) remittances for living expenses of parents, spouse and children residing abroad, and (d) expenses in connection with foreign travel, education and medical care of parents, spouse and children.

On the other hand, `capital account transaction' has been defined as a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India. And `person' includes, in addition to an individual, a company, any agency, office or branch owned or controlled by such person. The Reserve Bank can also, by regulation, prohibit, restrict or regulate transactions relating to securities including foreign securities, borrowing or lending in rupees or foreign exchange, deposits, export, import or holding of currency, and immovable properties, as applicable to persons resident both in India and abroad. The Reserve Bank, in consultation with the Central Government, will specify the types of capital account transactions which are permissible and the limit to which foreign exchange is admissible for such transactions.

It is well known that the country is under constant and sustained pressure from developed nations, the World Bank and the International Monetary Fund, to allow convertibility on capital account also. Successive governments have so far wisely resisted this demand, taking cover under the genuine plea that the country is still not ready for a measure of this importance and magnitude. From hindsight this seems to have been the right decision in the light of what happened to the economies of Thailand, Korea and Malaysia in the recent past because of this.

In addition to current and capital account transactions, there are provisions in the Bill on dealings in foreign exchange, holding of foreign exchange, export of goods and services, realisation and repatriation of foreign exchange and exemption from realisation and repatriation in certain cases. There is nothing out of the way in these provisions.

Further, the Bill combines in one chapter called `Authorised Persons' the powers and liabilities of people empowered to deal in foreign exchange, including money-changers. The earlier FERA had mentioned two distinct agencies `Authorized Dealers' and Money-changers' for this purpose.

Penal provisions

The scanty press reports on the discussion in the Lok Sabha on FEMA referred to `stringent penalties for violation of foreign exchange norms'. This aspect will now be examined. It has to be mentioned at this point and as stressed by the Secretary, Central Vigilance Commission, that ``FERA was necessary at the time when there was financial emergency and there was a need to uplift the economy and to make available foreign exchange for the country. FEMA has now been introduced when there is sufficient foreign exchange but proper financial management is required. The regulatory powers of FERA have new been shifted to the new Prevention of Money Laundering Bill" (Chartered Secretary - November 1998). This important aspect has to be borne in mind when discussing the penal provisions of FEMA and also comparing them with those in FERA.

(1) FEMA classifies violation of its provisions into two categories, `quantifiable' and `not quantifiable'. For any quantifiable violation, the infringer is liable to a penalty up to twice the sum involved. In cases where amounts or values are not quantifiable, the penalty can be up to a lakh of rupees. In both cases, the same quantum of additional penalty is leviable when the contravention is a continuing one.

On the other hand, FERA makes no such distinction and in both types of contravention, the penalty can be up to five times the amount or value involved or Rs. 5,000 whichever is more.

(2) If the penalty is not paid within 90 days, FEMA stipulates that the contravener is liable to civil imprisonment. He can be detained up to three years when the penalty exceeds Rs. 1 crore and up to six months in other cases. The detainee is to be released even during the period of detention if the liability is cleared. He cannot be arrested a second time after his release for the same violation even if the penalty remains unpaid.

Under FERA also, a person who defaults in payment of any penalty, can be imprisoned for a term up to two years or with fine or with both.

(3) FEMA bars the jurisdiction of the civil court in respect of matters to be dealt with by the Adjudicating Authority or by the Appellate Tribunal.

In contrast, FERA provides that in addition to any award of penalty, the infringer can also be detained under orders of a court for a term which shall not be less than six months but not more than seven years and a fine if the amount or value of the contravention exceeds Rs. 1 lakh and up to three years or with fine or with both in other cases.

(4) Surprisingly, FEMA does not seem to have any provision for recovery of dues. This in essence means that an infringer can enjoy his ill-gotten wealth without fear of further prosecution or with recovery proceedings, once he is released from detention. This is disturbing.

On the other hand, FERA provides that arrears of penalty can be recovered by collectors as if they are arrears of land revenue.

It is interesting to note that FEMA's sister Bill on Prevention of Money Laundering empowers the authorities concerned to take recourse to recovery proceedings as laid down in the Income-tax Act, that is, arrears of penalty can be recovered in the same way as a Tax Recovery Officer recovers tax arrears.

(5) FERA had a healthy provision that a court while convicting an infringer could also impose the condition that the person shall not carry on business which was likely to facilitate the commission of such offence for a period not exceeding three years. FEMA is silent on this point.

(6) FE MA also does not provide for more stringent punishment for a second or every subsequent offence. Under FERA, in such cases, the court could sentence the person convicted to imprisonment for a term not loss than six months and not more than seven years and with fine.

(7) FERA had a salutary inbuilt protection against any person giving false report leading to search, and investigation and against an enforcement officer misusing his powers, as follows:

(a) Any person, wilfully or maliciously giving false information leading to vexatious starch and arrest, is punishable with maximum imprisonment of two years or with fine (a paltry Rs. 2,000!) or with both;

(b) Any Enforcement Officer is liable to a maximum fine of Rs. 2,000 (he has been let off rather easily!) if he causes search to be made without ground of suspicion or `vexatiously' detains or searches or arrests any person;

(c) Any Enforcement Officer is liable to be imprisoned for a term which may extend to six months or with fine which may extend to Rs. 1,000 or both if he discloses any document or information obtained by him except `in the discharge of his duty in good faith'.

It is a pity that FEMA does not have these `very necessary' provisions.

Repeal of FERA

Although FEMA provides for the repeal of FERA it also provides that offences committed under the repealed Act shall continue to be governed by the provisions of the repealed Act as if it had not been repealed. In the words of Mr. R. A. Shah, a leading solicitor of Mumbai, ``In terms of Clause 49 of FEMA, the provisions of FERA will remain perpetually in the statute books despite FERA being repealed" (Chartered Secretary - December 1998).

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