FEMA - control or management?

A LITTLE bird told me that exchange control in India had just vanished. The Foreign Exchange Management Act (FEMA), said the bird, had replaced the Foreign Exchange Control Act (FERA). Not that I don't trust the bird, but if we were really saying goodbye to exchange control, what did we need a new act for? All we had to do was to throw the old one away and forget all about it. Don't be a cynic said the bird; look at the name of the new act; the word `regulation' has gone and we have the word `management' instead. It was true but I was still a bit confused. To my mind, Foreign Exchange Management was what the smart guys in bank and corporate treasuries did and this topic probably does not deserve a whole Act. The bird then added, "people say we are now convertible on the current account".

This whole thing deserved a closer look and since the word `management' had replaced the word `regulation' in the title of the act, I thought that I should begin by checking out the meanings of these two words. I am not sure if Webster's New World dictionary is the last word on what words mean, but it's the only dictionary I have. I looked up the words `regulation' and `regulate' and found myself being led to the word 'control' to describe which the dictionary freely used terms like `to exercise authority', `to direct or command', `direct or regulate' and `to curb or to restrain'. This fitted FERA to a T.

I had now to set aside the dictionary and start reading the new Act and the notifications that the Government and the RBI had issued. The objective of the new Act, I read, is "to facilitate the external trade and payments and promote the orderly development and maintenance of the foreign exchange market in India". This is dramatically different from the objectives of the old Act, which made it clear that exchange control was the one thing it had in mind.

Reading further I found that I could enter into foreign exchange transactions only with persons authorised by the RBI. I cannot ask my friend in the U.S. to buy me that special bird feed for the little bird and settle his dues by giving my hard-earned rupees to his parents here. The Act also told me that, `save as otherwise provided in this Act' I could not ``acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property out side India.'' After reading just four out of the 49 sections that comprise FEMA I realised that exchange control was still lurking around. If the Act insists on telling us what we can do and what we cannot do, then we're not talking foreign exchange management; we are talking exchange control.

The bird was trying to swallow his disappointment when his eyes suddenly lit up. `look, look,' he said, ``Sec. 5 says clearly that current account transactions are freely allowed. We are now convertible on the current account.'' For a moment it looked like the bird was right; then I saw the second part of the section. It said that `in the public interest', the Union Government, in consultation with the RBI, may, impose `reasonable' restrictions on current account transactions.

Foreign exchange can be drawn for all current account transactions, except those that are prohibited, while on the capital account, forex outflow is allowed only for transactions that are permitted. The Government and the RBI have issued a number of notifications under FEMA and these tell us what is permitted and what is not. It seemed while reading the bare Act that exchange control under FEMA could be almost as bad as under FERA, however, it was when the bird and I read the notifications that the full impact of the new regulatory regime hit us. Words like `considerable', `substantial' and `significant' can be used to truthfully describe the liberalisation that has been brought about.

One of the notifications issued by the Government, called the Foreign Exchange Management (current account transactions) Rules, 2000, tell us, through three schedules, what the restrictions on current account transactions are. The first schedule tells us the transactions that are prohibited, the second lists the transactions that need the Government's permission and the third schedule contains the transactions that need the prior approval of the RBI.

The bird read out some of the prohibited transactions. We are not allowed to remit money earned from lottery winnings, racing/riding or any other hobby. We cannot send money out for buying lottery tickets or banned/proscribed magazines (The bird, whose mind is not the cleanest in town, told me that "banned and proscribed' related only to magazines and not websites, till I pointed out the `etc'). Football pools, sweepstakes and payment related to telephone `call back' services are also on the banned list. I had to agree with the bird that these restrictions are indeed reasonable and probably in the national interest (except the last one, which is in the interest of the local telephone service providers).

The second schedule lists transactions that need the Government's approval such as cultural tours and health insurance from a company abroad, to mention just two. Most items on this list, like charges for hiring transponders or container detention charges exceeding the rate prescribed by the Director General of Shipping, do not really interest, the general public or me.

The third schedule tells us what we need to get RBI's permission for and many these are of interest to the general public. The bird read out a few transactions that need RBI's permission only if a prescribed ceiling, given in brackets, is exceeded. These include private visits to any country, except Nepal and Bhutan ($5,000 per calendar year), gift remittances, donations, maintenance expenses for close relatives abroad ($5,000 per year per recipient), travel abroad for employment or emigration ($5,000 or amount prescribed by country of emigration). A person going abroad on business, for attending a conference or specialised training needs RBI permission only if he wants to draw more than $25,000. Any one going abroad for higher studies, needs to go to the RBI only if he wants more than what is estimated by the institution abroad or $30,000, whichever is higher.

There you have it, if a current account transaction is not found in any of these schedules, we can safely conclude that it is permitted and we don't have to get permission from the RBI or the Government. The bird and I agreed that most people, for their everyday needs of foreign exchange, do not have to go to the RBI for permission. Barring a few things like some ceilings on expenditure and compulsory repatriation of export proceeds, this is about as convertible on the current account as any one anywhere can hope to get. The problem now is not how to get the dollars, but how to raise the Rupees to buy the dollars.

Now it was time to look at capital account transactions. The central bank has come out with twenty-five notifications, some of which cover these transactions as well as areas such as exports and insurance. The rules relating to non-resident investment in India, resident investment abroad, borrowing and lending in foreign currencies and in rupees and foreign currency accounts are made clear. The changes carry forward the deregulation that has been going on in the recent past. It is quite amazing how much can be done without going to the authorities for prior approval in these areas.

So far so good. Now I had to find out how external trade and payments will be `facilitated' by FEMA. I started with exports and found that the situation is very similar to what prevailed under FERA. There is no major change in the case of import transactions either. FEMA does lay down some rules but not even the bird in his most optimistic mood could see how external trade will be `facilitated'.

However, the really important changes brought about by FEMA relate to prosecution, proof and penalties. The bird does not want me to get into those details in this article as he feels that readers of this newspaper are law-abiding citizens, who will never have to think about these things. So we will save that for another audience.

There is no doubt that the regulators have introduced a substantial element of liberalisation on foreign exchange transactions, though one could argue that a lot of what has been done could have been done without a new Act. The bird is now convinced that exchange control is alive and kicking, though not so vigorously, and we are reasonably but not really convertible on the current account. We unanimously agreed that life was much easier than before.

To celebrate, the bird and I, decided to take holiday abroad with our wives. We are, between us, entitled to a generous $20,000 and need nearly Rs. 9 lakhs to buy the dollars. If there are any venture capitalists reading this, would they like to help out?

P. Yesuthasen

(Former Deputy Controller, Reserve Bank of India)

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