BUSINESS AND LEGAL ENVIRONMENT UNIT 4

NEED OF COMPETITION ACT IN INDIA To provide institutional support to healthy and fair competition, there is a requirement of better regulatory and adjudicatory mechanism. To this effect, India has enacted the new competition law which shall replace the earlier law. THE COMPETITION ACT, 2002 An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto. It extends to the whole of India except the State of Jammu and Kashmir. OBJECTIVES OF THE COMPETITION ACT Objects to be achieved & Salient Features of the New Competition Regime:

The Competition Act has been designed as an omnibus code to deal with matters relating to the existence and regulation of competition and monopolies. Its objects are lofty, and include the promotion and sustenance of competition in markets,

protection of consumer interests and ensuring freedom of trade of other participants in the market, all against the backdrop of the economic development of the country. However, the Competition Act is surprisingly, compact, composed of only 66 sections. The legislation is procedure-intensive, and is structured in an uncomplicated manner. The raison detre of the Competition Act is to create an environment conducive to competition. The various Objectives of the Act are as follows I. To check anti-competitive practices II. To prohibit abuse of dominance

III. Regulation of combinations. IV. To provide for the establishment of Competition Commission of India (CCI), a quasi-judicial body to perform below mentioned duties:

Prevent practices having adverse impact on competition Promote and sustain competition in the market Protect consumer interests at large Ensure freedom of trade carried on by other participants in the market Look into matters connected therewith or incidental thereto.

I] ANTI-COMPETITIVE AGREEMENTS : A scan of the competition laws in the world will show that they make a distinction between horizontal and vertical agreements between firms. The former, namely the horizontal agreements are those among competitors and the latter, namely the vertical agreements are those relating to an actual or potential relationship of purchasing or selling to each other. . Most competition laws view vertical agreements generally more leniently than horizontal agreements as horizontal agreements are more likely to reduce competition than agreements between firms in a purchaser seller relationship. For example an agreement made between enterprises dealing in the same product or products. Such horizontal agreements, lead to unreasonable restrictions of competition and are therefore presumed to have an appreciable adverse effect on competition. Section 3 of the Act, states that: (1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India. (2) Any agreement entered into in contravention of the provisions shall be void.

(3) Any agreement entered into between enterprises or associations of enterprises or persons of associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in Identical or Similar Trade of goods or provision of services, which (a) directly or indirectly determines purchase or sale prices (b) limits or controls production, supply, markets, technical development, provision of services; (c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way; d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to an appreciable adverse effect on competition. Bid Rigging or Collusive Bidding: It is an illegal agreement between two or more competitors. It is a form of price fixing and market allocation and involves an agreement in which one party of a group of bidders will be designated to win the bid. E.g. Government construction contracts. 2] ABUSE OF DOMINANT POSITION: The concept of dominant undertaking prevailing in the MRTP Act has been discarded. Dominant Position has been appropriately defined in the Act in terms of the position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to : i) operate independently of competitive forces prevailing in the relevant market; or ii)affect its competitors or consumers or the relevant market, in its favour. have investment of

At this point it is worth mentioning that the Act does not prohibit or restrict enterprises from coming into dominance. There is no control whatsoever to prevent enterprises from coming into or acquiring position of dominance. All that the Act prohibits is the abuse of that dominant position. The Act therefore targets the abuse of dominance and not dominance per se. This is indeed a welcome step, a step towards a truly global and liberal economy.

Dominant position is abused when an enterprise imposes unfair or discriminatory conditions in purchase or sale of goods or services or in the price in purchase or sale of goods or services. According to section 4 of the act: (1) No enterprise shall abuse its dominant position. (2) There shall be an abuse of dominant position under sub-section (1), if an enterprise.(a) Directly or indirectly, imposes unfair or discriminatory condition in purchase or sale of goods or service; or price in purchase or sale (including predatory price) of goods or service,

For the purposes of this clause, the unfair or discriminatory condition in purchase or sale of goods or service referred to in sub-clause(i) and unfair or discriminatory price in purchase or sale of goods (including predatory price) or service referred to in sub-clause (ii) shall not include such discriminatory condition or price which may be adopted to meet the competition; or (b) Limits or restricts production of goods or provision of services or market therefore; or technical or scientific development relating to goods or services to the prejudice of consumers; or (c) Indulges in practice or practices resulting in denial of market access; or

(d) Makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or (e) Uses its dominant position in one relevant market to enter into, or protect, other relevant market. III] REGULATION OF COMBINATIONS: The Act is also designed to regulate the operation and activities of Combinations, a term which contemplates acquisition, mergers, take overs or amalgamations. Thus, the operation of the Competition Act is not confined to transactions strictly within the boundaries of India but also such transactions involving entities existing and/or established overseas. Herein again lies the key to understanding the Competition Act. The intent of the legislation is not to prevent the existence of a monopoly across the board. There is a realisation in policy-making circles that in certain industries, the nature of their operations and economies of scale indeed dictate the creation of a monopoly in order to be able to operate and remain viable and profitable. This is in significant contrast to the philosophy, which propelled the operation and application of the MRTP Act, the trigger for which was the existence or impending creation of a monopoly situation in a sector of industry Threshold limits that would invite the scrutiny are specified below: For acquisition: Combined assets of the firm more than Rs 3,000 crore (these limits are US $ 500 millions in case one of the firms is situated outside India). The limits are more than Rs 4,000 crore or 12,000 crore and US $ 2 billion and 6 billion in case acquirer is a group in India or outside India respectively. For mergers:

Assets of the merged/amalgamated entity more than Rs 1,000 crore or turnover more than Rs 3,000 crore (these limits are US $ 500 millions and 1,500 millions in case one of the firms is situated outside India).

These limits are more than Rs 4,000 crore or Rs 12,000 crore and US $ 2 billions and 6 billions in case merged/amalgamated entity belongs to a group in India or outside India respectively.

IV] COMPETITION COMMISSION OF INDIA: The apex body under the Competition Act which has been vested with the responsibility of eliminating practices having an adverse effect on competition, promoting and sustaining

competition, protecting the interest of the consumers, and ensuring freedom of trade carried on by other participants in India, is known as the Competition Commission of India (CCI) --- the successor to the MRTP Commission. CCI, entrusted with eliminating prohibited practices, is a body corporate and independent entity possessing a common seal with the power to enter into contracts and to sue in its name.The CCI is not merely a law enforcement agency, but would be actively involved in the formulation of the countrys economic policies, advise the government on competition policy, take suitable measures for the promotion of competition advocacy and create awareness and imparting training about competition issues. Composition of Commission The Commission shall consist of a Chairperson and not less than two and not more than ten other Members to be appointed by the Central Government: Provided that the Central Government shall appoint the Chairperson and a Member during the first year of the establishment of the Commission. The Chairperson and every other Member shall be a person of ability, integrity and standing and who, has been, or is qualified to be, a judge of a High Court; or, has special knowledge of, and professional experience of not less than fifteen years in international trade, economics, business, commerce, law, finance, accountancy, management, industry, public

affairs, administration or in any other matter which, in the opinion of the Central Government, may be useful to the Commission. The Chairperson and other Members shall be whole-time Members.

Powers of CCI: The CCI will have the following powers: To issue "Cease and Desist" Orders: To grant such interim relief as would be necessary in each case. To award compensation. To impose fines on the guilty. To order division of dominant undertaking. Power to order de-merger. Power to order costs for frivolous complaints

In addition to the adjudication function, the CCI will have the roles of advocacy, investigation, prosecution and merger control. The Statutory Regulatory Authorities can make reference to CCI for advice. The proposed Law provides for the post of Director Genral (and a host of his deputies in various places) to assist the Competition Commission in its inquiries. Unlike in MRTP Act, the Director General will not have powers to initiate investigations suo motu. Extension of the executive powers The Act contemplates the extension of the executive powers of CCI by the appointment of a Director General and as many other persons for the purpose of assisting it in conducting enquiries into contraventions of the provisions of the Act as well as conducting cases before the Commission. Penalties:

In case of failure to comply with the directions of CCI and Director General or false representation of facts by parties, penalties ranging from Rs 1lac to Rs 1 crore may be impSSosed as the case may be. Execution of the order So far the execution of the order is concerned, it is the responsibility CCI. However, in the event of its inability to execute it, CCI may send such order for execution to the High Court or the principal civil court, as the case may be. POST-DECISIONAL OPTIONS: The aggrieved person may apply to CCI for review of the order within thirty days from the date of the order, provided that the below mentioned conditions are fulfilled: An appeal is allowed by this Act No appeal has been preferred

Provision has been made for an appeal against any order or decision of CCI by any aggrieved persons. An application for this purpose has to be made to the Supreme Court within sixty days from the date of communication of the decision or order. Amendments in the Competition Act : In March this year the government put forward the Competition (Amendment) Bill 2006, which has been referred to the parliamentary standing committee on finance. Proposals of the amendment 1. A change proposed in Section 12 increases from one year to two years the coolingoff period for which the chairman and members of the CCI are debarred from accepting employment with any (private) enterprise that has been party to any proceedings before it. 2. Amendments to Sections 19 and 26 allow the CCI to act on information received, not just a formal complaint.

3. There is a statement added to Section 32, explicitly allowing the CCI to pass orders against acts of firms outside India that adversely affect competition in India. The original phrasing seemed to suggest that the CCI could only inquire into such acts. 4. The bill also proposes to delete the ill advised clause that allowed the CCI to issue temporary injunctions to restrain any party from importing goods. 5. The CCI has not been given powers of search and seizure, which are crucial in obtaining evidence in cartel cases in Europe and the US, and are even available in Section 12(5) of the outgoing MRTP Act. 6. Section 21 of the act is to be amended so that when the CCI is asked by a statutory authority to give its opinion on any decision that might infringe the Competition Act, the authority is now required to record its response to the CCI opinion. 7. Section 49, which allowed the central government to seek the CCIs opinion on formulating a policy on competition, is now to be extended to state governments. ADVANTAGES OF THE COMPETITION ACT: 1) The foremost objective of the act is to create an environment conducive to competition. The act does not condemn or oppose the existence of a monopoly in the relevant market. 2) The operation of the act is not confined to transactions strictly within the boundaries of India but also such transactions involving entities exixting or established overseas. 3) Explicit definitions and criteria have been specified in order to access whether a practice has an appreciable adverse effect on competition. 4) It is the intention of our legislators that provisions of the act in its extant form should not be considered to be immutable and unchangeable.The intention is promotion of competition advocacy,creating awareness and imparting training about competition issues

SHORTCOMINGS OF THE COMPETITION ACT: 1) It is a body to which the appeals lie and not an investigative agency that proactively goes and seeks out industrial monopolistic practice. As the executive body is contemplated at present, it is likely to be a haven for senior bureaucrats, businessmen and technocrats enjoying positions of sinecure. 2) There is a lack of mandatory provision compelling persons or entities whether public or private to approach the commission that is compounded by the corresponding logistical limitations of the commission to be able to take cognizance on its own motion of every malpractice in the economy. 3) The IPR laws have overriding powers over the Competition Act in matters related to competition abuses. 4) The act provides for exemptions to mergers and abuse of dominance on grounds like economic development and public interest and in the absence of any clear definition/criteria the relevant provisions would be open to varying interpretations. 5) The provisions in context of the autonomy of the CCI mainly aim at keeping a check on CCIs functioning by limiting its independence.

FERA v FEMA S.No. Point 1 Emphasis FERA FEMA

On regulation of foreign On management of foreign exchange exchange

Situation

Foreign exchange reserves With the improvement in positions was not foreign exchange reserves

satisfactory for that stringent such stringent controls are controls were required on the not required now. use of foreign exchange 3 Permission Need to take permission of No need for seeking the RBI in connection with permission of RBI in with involving trade except

remittances external trade

involving connection remittances external

section3 relates to dealing in foreign exchange 4 Restrictions These restrictions on drawals Section 5, it removes all of foreign exchange for the the restrictions on drawals purpose current account of foreign exchange for the papoose of current account transactions 5 Violations of Violations of FERA was Violations Rules of FEMA

transactions

treated as criminal offence treated as civil offence and burden of proof was on removes the guilty the threat of

imprisonment

compared

their illegal acts by paying a fine (not too high)

The similarities between FEMA and FERA are: 1. The RBI and central government would continue to be the regulatory bodies. 2. Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has been retained. 3. The Directorate of Enforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and seizure. The major differences are between the two are: 1. FERA consists of 81 complex sections, while FEMA has only 49 which are relatively simpler. 2. Some terms like Capital Account Transaction, current Account Transaction, person, service etc were not defined at all in FERA while they have been defined in detail in FEMA. 3. Definition of Authorized person as per FERA was limited while in FEMA it has been extended to include banks, money changes, off shore banking Units etc. 4. While defining Resident, FERA and Income Tax Act differed a lot. In FEMA, the term has been defined in accordance with the act. 5. Under FERA, any offence was a criminal one which included imprisonment as per code of criminal procedure, 1973. Under FEMA, offence is treated as civil offence. A penalty has to be paid in terms of money and imprisonment is only for those people who do not pay the penalty. 6. The amount of money paid as penalty was quite large in FERA. It was five times the amount involved. In FEMA, the amount has been considerably reduced to three times the amount involved. 7. Any appeal against the order of "Adjudicating office", before Foreign Exchange Regulation Appellate Board went before High Court. The appellate authority under FEMA is the special Director (Appeals). Appeal against the order of Adjudicating

Authorities and special Director (appeals) lies before "Appellate Tribunal for Foreign Exchange. An appeal from an order of Appellate Tribunal would lie to the High Court. 8. FERA does not have any provision for the complainant to take any legal help whereas FEMA clearly recognizes the right of the complainant to take help from a lawyer or a chartered accountant. 9. With FERA, police officers (Deputy Superintendent of Police and above rank officers) were granted extensive powers of search and seizure while FEMA has restricted the power to a great extent.

1. What is Foreign exchange?

When trade takes place between the residents of two countries, the two countries being a sovereign state have their own set of regulations and currency. Due to this problem arises in the conduct of international trade and settlement of the transactions .While the exporter would like to get the payment in the currency of his own country, the importer can pay only in the currency of the importers country. This creates a need for the conversion of the curr ency of importers into that of the exporters country. Foreign exchange is the mechanism by which the currency of one country is gets converted into the currency of another country. The conversion is done by banks who deal in foreign exchange.

3. What is FERA?
The Foreign Exchange Management Act, 1999, (FEMA) is an Act 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 the foreign exchange market in India. (1) This Act may be called the Foreign Exchange Regulation Act, 1973. (2) It extends to the whole of India. (3) It applies also to all citizens of India outside India and to branches and agencies outside India of companies or bodies corporate, registered or incorporated in India.

(4) It shall came into force on such date as the Central Government may, by notification in the Official Gazette, appoint in this behalf: Provided that different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision.

Why FERA?
a) FERA was introduced at a time when foreign exchange (Forex) reserves of the country were low, Forex being a scarce commodity. b) FERA therefore proceeded on the presumption that all foreign exchange earned by Indian residents rightfully belonged to the Government of India and had to be collected and surrendered to the Reserve bank of India (RBI). c) It regulated not only transactions in Forex, but also all financial transactions with nonresidents. FERA primarily prohibited all transactions, except to the extent permitted by general or specific permission by RBI.

Objective of FERA
The main objective of the FERA 1973 was to consolidate and amend the law regulating: certain payments; dealings in foreign exchange and securities; transactions, indirectly affecting foreign exchange; the import and export of currency, for the conservation of the foreign exchange resources of the country; the proper utilization of this foreign exchange so as to promote the economic development of the country The basic purpose of FERA was:

a) To help RBI in maintaining exchange rate stability. b) To conserve precious foreign exchange. c) To prevent/regulate foreign business in India

4. Progression/Transfer of FERA to FEMA

FERA in its existing form became ineffective, therefore, increasingly incompatible with the change in economic policy in the early 1990s. While the need for sustained husbandry of foreign exchange was recognized, there was an outcry for a less aggressive and mellower enactment, couched in milder language. Thus, the Foreign Exchange Management Act, 1999 (FEMA) came into being. FEMA has brought about a sea change in this regard and except for section 3, which relates to dealing in foreign exchange, etc. no other provisions of FEMA stipulate obtaining RBI permission. It appears that this is a transition from the era of permissions to regulations. The emphasis of FEMA is on RBI laying down the regulations rather than granting permissions on case to case basis. This transition has also taken away the concept of exchange control and brought in the era of exchange management. In view of this change, the title of the legislation has rightly been changed to FEMA.

FERA contained 81 sections (some were deleted in the 1993 amendment of the Act) of which 32 sections related to operational part and the rest covered penal provisions, authority and powers of Enforcement Directorate, etc. FEMA contains 49 sections of which 12 sections cover operational part and the rest contravention, penalties, adjudication, appeals, enforcement directorate, etc. What was a full section under FERA seems to have been reduced to a sub-clause under FEMA in some cases. For example, (i) Section 13 of FERA provided for restrictions on import of foreign currency & foreign securities. Now this restriction is provided through a sub-clause 6(3)(g). (ii) Section 25 of FERA provided for restrictions on Indian residents holding immovable properties outside India. Now the restriction is under sub-clause 6(4).

Reduction in the number of sections means nothing. Real quality of liberalization will be known when all notifications & circulars are finalized & published. Need for FEMA The demand for new legislation was basically on two main counts. The FERA was introduced in 1974when Indias foreign exchange reserves position was not satisfactory. It required stringent controls to conserve foreign exchange and to utilize in the best interest of the country. Very strict restrictions have outlived their utility in the current changed scenario. Secondly there was a need to remove the draconian provisions of FERA and have a forward-looking legislation covering foreign exchange matters.

a) Objectives and Extent of FEMA

The objective of the Act is 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 market in India. FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India owned or controlled by a person who is a resident of India and also to any contravention there under committed outside India by any person to whom this Act applies. Except with the general or special permission of the Reserve Bank of India, no person can : deal in or transfer any foreign exchange or foreign security to any person not being an authorized person; make any payment to or for the credit of any person resident outside India in any manner; receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner; reasonable restrictions for current account transactions as may be prescribed.

Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. The Reserve Bank may, in consultation with the Central Government, specify : any class or classes of capital account transactions which are permissible;

the limit up to which foreign exchange shall be admissible for such transactions

However, the Reserve Bank cannot impose any restriction on the drawing 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 Reserve Bank can, by regulations, prohibit, restrict or regulate the following : 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 foreign exchange in whatever form or by whatever name called; Any borrowing or tending 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 incurred (i) by a person resident in India and owed to a person resident outside India or (ii) by a person resident outside India. A person, resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was

resident in India. The Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. Every exporter of goods and services must : Furnish to the Reserve Bank or to 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 or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India; Furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter. The Reserve Bank may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines, having regard to the prevailing market-conditions, is received without any delay, direct any exporter to comply with such requirements as it deems fit. Where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.

FEMA Rules & Policies

The Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000. With the introduction of the new Act in place of FERA, certain structural changes were brought in. The Act consolidates and amends the law relating to foreign exchange to facilitate external trade and payments, and to promote the orderly development and maintenance of foreign exchange in India.

From the NRI perspective, FEMA broadly covers all matters related to foreign exchange, investment avenues for NRIs such as immovable property, bank deposits, government bonds, investment in shares, units and other securities, and foreign direct investment in India. FEMA vests with the Reserve Bank of India, the sole authority to grant general or special permission for all foreign exchange related activities mentioned above. Section 2 - The Act here provides clarity on several definitions and terms used in the context of foreign exchange. Starting with the identification of the Non-resident Indian and Persons of Indian origin, it defines "foreign exchange" and "foreign security" in sections 2(n) and 2(o) respectively of the Act. It describes at length the foreign exchange facilities and where one can buy foreign exchange in India. FEMA defines an authorised dealer, and addresses the permissible exchange allowed for a business trip, for studies and medical treatment abroad, forex for foreign travel, the use of an international credit card, and remittance facility Section 3 prohibits dealings in foreign exchange except through an authorised person. Similarly, without the prior approval of the RBI, no person can make any payment to any person resident outside India in any manner other than that prescribed by it. The Act restricts non-authorised persons from entering into any 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. Section 4 restrains any person resident in India from acquiring, holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act. Section 6 deals with capital account transactions. This section allows a person to draw or sell foreign exchange from or to an authorised person for a capital account transaction. RBI in consultation with the Central Government has issued various regulations on capital account transactions in terms of sub-sect ion (2) and (3) of section 6. Section 7 covers the export of goods and services. All exporters are required to furnish to the RBI or any other authority, a declaration regarding full export value. Section 8 puts the responsibility of repatriation on the persons resident in India who have any amount of foreign exchange due or accrued in their favour to get the same realised and repatriated to India within the specific period and in the manner specified by the RBI.

The duties and liabilities of the Authorised Dealers have been dealt with in Sections 10, 11 and 12, while Sections 13 to 15 cover penalties and enforcement of the orders of the Adjudicating Authority as well as the power to compound contraventions under the Act.

Sr. No

DIFFERENCES FERA

FEMA

PROVISIONS

FERA consisted of 81 sections, and was FEMA is much simple, and consist more complex of only 49 sections. of negative intention These presumptions of Mens Rea

FEATURES 2

Presumption

(Mens Rea ) and joining hands in and abatement have been excluded offence (abatement) existed in FEMA in FEMA

NEW TERMS IN Terms FEMA 3

like

Capital current

Account Terms

like

Capital current

Account account

Transaction,

Account Transaction,

Transaction, person, service etc. were Transaction person, service etc., not defined in FERA. have been defined in detail in FEMA. DEFINITION OF Definition of "Authorized Person" in The definition of Authorized person

AUTHORIZED PERSON

FERA was a narrow one ( 2(b)

has been widened to include banks, money changes, off shore banking Units etc. (2 ( c )

PUNISHMENT

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

procedure, 1973

Imprisonment is prescribed only when one fails to pay the penalty.

QUANTUM OF The monetary penalty payable under Under FEMA the quantum of 7 PENALTY. FERA, was nearly the five times the penalty amount involved. has been considerably

decreased to three times the amount

involved.

RIGHT ASSISTANCE 9 DURING LEGAL

OF FERA did not contain any express FEMA expressly recognizes the provision on the right of on impleaded right of appellant to take assistance person to take legal assistance of legal practitioner or chartered accountant (32)

PROCEEDINGS. POWER 10 SEARCH SEIZE OF FERA conferred wide powers on a The scope and power of search and AND police officer not below the rank of a seizure has been curtailed to a great Deputy Superintendent of Police to extent make a search

a) Key Terms/Glossary with respect to FERA & FEMA

1. Authorised Person - "Authorised person" means an authorised dealer, moneychanger, offshore banking unit or any other person for the time being authorised under section 10(1) to deal in foreign exchange securities. 2. Capital Account Transaction - "Capital account transaction" means 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 person resident outside India, and includes transactions referred to in sub-section (3) of section 6 3. Current Account Transaction - "Current account transaction" means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes, Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business. Payments due as interest on loans and as net income from investments. Remittances for living expenses of parents, spouse and children residing abroad, and

 Expenses in connection with foreign travel, education and medical care of parents, spouse and children;

2. Foreign exchange reserves - A country's reserves of foreign currencies. Commonly known as "quick cash", they can be used immediately to finance imports and other foreign payables.

3. Foreign portfolio investment - Investment into financial instruments such as stocks and bonds in which the objective is not to engage in business but to merely generate dividend income and capital gains. The larger portion of international investment flows in the world today is FPIs.

4. Forward contract - An arrangement between two parties to trade specified amounts of two Currencies at some designated future due date at an agreed price. More than a formal hedge against unforeseen changes in currency prices, it guarantees certainty in the foreign exchange rate at the contract's delivery date. 5. Forward swap - The most common type of forward transaction, forward swaps comprise 60 per cent of all foreign exchange transactions. In a swap transaction, two companies immediately exchange currency for an agreed-upon length of time at an agreed exchange rate. At the end of the time period, each company returns the currency to the former owner at the original exchange rate with an adjustment for interest rate differences.

6. Authorised dealer - "authorised dealer" means a person for the time being authorised under section 6 to deal in foreign exchange; 7. Franchising - Franchising is similar to licensing, although it tends to involve much longer term commitments than licensing. Whereas licensing is pursued primarily by manufacturing firms, franchising is employed primarily by service firms. A franchising agreement invol c!es a franchise or selling limited rights for the use of its brand name to a franchisee in return for a lump sum payment and a share of the franchise's profits.

8. Free float - A process in international monetary markets in which foreign currency prices change relative to one another, free of central bank intervention and subject only to the global supply of and demand for specific currencies. Not many countries have their currencies on a free float. The currencies of most industrial countries are on a "managed float".

9. Drawal - "Drawal' means drawal of foreign exchange from an authorized person and includes opening of Letter of Credit or use of International Debit Card or A TM card or any other thing by whatever name called which has the effect of creating foreign exchange liability.

10.

Authorized person - Readers to note that the term 'authorized person' has been defined

in clause (c) of Section 2 of FEMA. It provides that an 'authorized person' means an authorized dealer, money changer, off shore banking unit or any other person for the time being authorized under the provisions of Sub-section (1) of Section 10 to deal in foreign exchange or foreign securities.

11. Transferable Development Rights - 'Transferable Development Rights' means certificates issued in respect of category of land acquired for public purpose either by Central or State Government in consideration of surrender of land by the owner without monetary compensation, which is transferable in part or whole.

12. Currency [including relevant notification] "Currency" includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank;

POWERS AND FUNCTIONS OF SEBI: (1) ISSUE GUIDELINES TO COMPANIES:SEBI issues guidelines to the companies for disclosing information and to protect the interest of investor. The guidelines relates to issue of new shares, issue of convertible debentures, issue by new companies, etc. After abolition of capital issues control act,

SEBI was given powers to control and regulate new issue market as well as stock exchanges.

(2)

REGULATION OF PORTFOLIO MANAGEMENT SERVICES:Portfolio Management services were brought under SEBI regulations in January 1993. SEBI framed regulations for portfolio management keeping securities scams in mind. SEBI has been entrusted with a job to regulate the working of portfolio managers in order to give protections to investors.

(3)

REGULATION OF MUTUAL FUNDS:The mutual funds were placed under the control of SEBI on January 1993. Mutual funds have been restricted from short selling or carrying forward transactions in securities. Permission has been granted to invest only in transferable securities in money market and capital market.

(4)

CONTROL ON MERCHANT BANKING:Merchant bankers are to be authorized by SEBI, they have to follow code of conduct which makes them responsible towards the investors in respect of pricing, disclosure of/ in the prospectus and issue of securities, merchant bankers have high degree of accountability in relation to offer documents and issue of shares.

(5)

ACTION FOR DELAY IN TRANSFER AND REFUNDS:SEBI has prosecuted many companies for delay in transfer of shares and refund of money to the applicants to whom the shares are not allotted. These also gives protection to investors and ensures timely payment in case of refunds.

(6)

ISSUE GUIDELINES TO INTERMEDIARIES:SEBI controls unfair practices of intermediaries operating in capital market, such control helps in winning investors confidence and also gives protection to investors.

(7)

GUIDELINES FOR TAKEOVERS AND MERGERS:SEBI makes guidelines for takeover and merger to ensure transparency in acquisitions of shares, fair disclosure through public announcement and also to avoid unfair practices in takeover and mergers.

(8)

REGULATION OF STOCK EXCHANGES FUNCTIONING:SEBI is working for expanding the membership of stock exchanges to improve transparency, to shorten settlement period and to promote professionalism among brokers. All these steps are for the healthy growth of stock exchanges and to improve their functioning.

(9) REGULATION OF FOREIGN INSTITUTIONAL INVESTMENT (FIIS):SEBI has started registration of foreign institutional investment. It is for effective control on such investors who invest on a large scale in securities.

Foreign Exchange Management Act, 1999

With the liberalization and globalization, it was felt that the Foreign Exchange Regulation Act 1973 (FERA) should be replaced by a more business friendly enactment. With this view in mind, the Foreign Exchange Management Act, 1999 (42 of 1999) (FEMA) was passed.

Objective: The object of Foreign Exchange Regulation Act, 1973 (FERA) was to conserve the foreign

resources, whereas the objects of the Foreign Exchange Management Act, 1999 (FEMA) were to consolidate and amend the law relating to Foreign Exchange with the objective of facilitating external trade and payments for promoting the orderly development and maintenance of foreign exchange market by India.

Scope of the Act: (Means where all this Act applies and How it applies) 1. This Act may be called the Foreign Exchange Management Act, 1999.

2. It extends to the whole of India.

3. It shall also apply to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention thereunder committed outside India by any person to whom this Act applies.

4. The Foreign Exchange Management Act, 1999 (FEMA) as also the Rules, Notifications and Orders issued by the Government of India and Reserve Bank of India (RBI) under the Act, form the statutory basis of Foreign Exchange Management in India.

5. The Act has received the assent of President of India on 29-12-1999 and has come into force with effect from 01-06-2000.

Salient Features of the Act: The Foreign Exchange Management Act, 1999 (FEMA) is more transparent in its application. It has laid down the areas where specific permission of the Reserve Bank / Government of India is required. In rest of the cases no such permission would be needed and a person can remit funds and acquire assets, incur liability in accordance with the specific provisions laid down in the Act or Notifications issued by the Reserve Bank / Government of India under the Act, without seeking approval of the Reserve Bank / Government of India.

The salient features of FEMA are given below: 1. Application of FEMA may be seen broadly from two angles viz., capital account transaction

and current account transactions. (a) Capital Account Transactions: Capital Account Transactions release to movement of capital, e.g., transactions in property and investments and lending and borrowing money.

(b)

Current Account Transactions: All other transactions, which do not fall in capital account category, are current account transactions. They are freely permitted subject to few restrictions. Like certain transaction needs permission from RBI and Central Govenrament.

(In the above two points a clear understanding is required between the two typs of transactions)

2. Some other Features of the FEMA are: (a) The Foreign Exchange Management Act and Rules give full freedom to a person resident in India, who was earlier resident outside India to hold or own or transfer any foreign security or immovable property situated outside India and acquired when he/she was resident there. ---- Rights of persons who is a resident Indian with regards to FEMA

(b)

Similar freedom is also given to a resident who inherits such security or immovable property from a person resident outside India.

(c)

A person resident outside India is permitted to hold shares, securities and properties acquired by him while he/she was resident in India.

The above three points discusses the rights or degree of freedom given to resident Indian and non residant To give effect to the provisions of the Act the Government of India have, among others, made Foreign Exchange Management (Current Account Transactions) Rules, 2000 under section 5 read with Section 46 of the Act. The Reserve Bank of India has also made the following Rules/Regulations/ issued Notifications under various provisions of the Act, which are:

(i)

Rules relating to Current Account Transactions.

(ii)

Regulations relating to Capital Account Transactions.

(iii) Regulations relating to Export of Goods Services.

(iv) Other Regulations / Notifications issued by Reserve Bank of India.

2. Regulation and Management of Foreign Exchange: Provisions of FEMA

Dealing in Foreign Exchange, Etc., - [Section 3]: ---- who can deal in Foreign Exchange

Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of Reserve Bank, no person shall:

(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;

(b) make any payment to or for the credit of any person resident outside India in any manner;

(c) receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner; In nutshell only an authorized person shall deal in foreign exchange.

Holding Of Foreign Exchange, Etc., - (Section 4): ------ Handling similar to handling of baggage in airports. means when a foreign exnache is transacted who can handle or involve in the transaction Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

Current Account Transactions - (Section 5): Any person may sell or draw foreign exchange to or from an authorized person if such sale or

drawn is a current account transaction:

Provided 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. However certain transactions are not restricted------(no restrictions examples) 1. payment for imports under open general license 2. payment of dividend on approved foreign investment 3. payment of interest on approved borrowed funds 4. salary to foreign directors 5. payment to airline bookings, shipping companies and for transfer of cargo

Capital Account Transactions-(Section 6): (1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction.

(2) 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 up to which foreign exchange shall be admissible for such transactions:

(3) (a) (b) (c)

Restrictions of capital account transactions ------(Restrictions examples) transfer or issue of any foreign security by a person resident outside India; transfer or issue of any security by a person resident outside India; any borrowing or lending in foreign exchange or in Indian rupees in whatever form or by whatever name called;

(d) (e) (f)

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;

(g)

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

(h) (i) (ii)

giving of a guarantee or surety in respect of any debt, obligation or other liability incurred: by a person resident in India and owed to a person resident outside India; and by a person resident outside India.

Export of Goods and Services - (Section 7): --------rules while exporting (1) Every exporter of goods shall:

(a)

furnish to the Reserve Bank or to 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.

(b)

furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter.

(2)

Every exporter of services 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.

Realization And Repatriation Of Foreign Exchange - (Section 8): Save as otherwise provided in this Act, where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.

Exemption from Realization and Repatriation in Certain Cases-(Section 9):

(a)

possession of foreign currency or foreign coins by any person up to such limit as the Reserve Bank may specify;

(b)

foreign currency account held or operated by such person or class of persons and the limit up to which the Reserve Bank may specify;

(c)

foreign exchange acquired from employment, business, trade, vocation, services,

honorarium, gifts, inheritance or any other legitimate means up to such limit as the Reserve Bank may specify; and (d) such other receipts in foreign exchange as the Reserve Bank may specify.

3. Authorized Persons To Deal In Foreign Exchange: Chapter - III of the Act, relates to the Authorization of a person by the Reserve Bank to deal in Foreign Exchange:

Authorized Person - (Section 10): (1) The Reserve Bank may authorize any person to be known as authorized person to deal in foreign exchange or in foreign securities, as an authorized dealer, money changer or offshore banking unit or in any other manner as it deems fit. Reserve Bank's Powers To Issue Directions To Authorized Person - (Section 11): The Reserve Bank may, for the purpose of securing compliance with the provisions of this Act and of any rules, regulations, notifications or directions made thereunder, give to the authorized persons any direction in regard to making of payment or the doing or desist from doing any act relating to foreign exchange or foreign security. Power Of Reserve Bank To Inspect Authorized Person (Section 12): The Reserve Bank may, at any time, cause an inspection to be made by any officer of the Reserve Bank specially authorized in writing by the Reserve Bank in this behalf, of the business of any authorized person as may appear to be necessary.

4. Contravention and Penalties: Penalties-(Section 13): (1) If any person contravenes any provision of this Act, or contravenes any rules, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand

rupees for every day after the first day during which the contravention continues.

(2)

Any Adjudicating Authority adjudging any contravention under sub-section (1), may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf.

Appeal to Appellate Tribunal - (Section 19): Save as provided in sub-section (2), the Central Government or any person aggrieved by an order made by an Adjudicating Authority, other than those referred to in sub-section (1) of Section 17, or the Special Director (Appeals), may prefer all appeal to the Appellate Tribunal;