The regulatory trajectory of foreign exchange in India is deeply intertwined with its evolving economic philosophy, signifying a profound paradigm shift from stringent sovereign control to market-driven facilitation. The legislative transition from the restrictive Foreign Exchange Regulation Act, 1973 (FERA) to the liberalising Foreign Exchange Management Act, 1999 (FEMA), constitutes one of the most critical milestones following the initiation of India’s comprehensive economic liberalisation.
FERA vs. FEMA: Key Differences
|
Characteristics |
FERA |
FEMA |
|
Nature |
Criminal Law: Contraventions were characterised as criminal offences, attracting severe punitive sanctions, including custodial sentences. The term “offence” was used repeatedly. |
Civil Law: Contraventions are classified as civil defaults and are subject to calculated monetary penalties. Jail time is removed as a penalty. |
|
Philosophy |
Presumption of Guilt: The onus was on the accused to prove innocence, making legal defence extremely challenging. |
Presumption of Innocence: Transactions are deemed permissible unless expressly prohibited or regulated by the statute. |
|
Objective |
Conservation and Control: Treating foreign currency as a scarce national resource that needed hoarding. |
Facilitation and Promotion – The primary goal is “facilitating external trade and payments.” |
Core Regulatory Framework
- India’s foreign exchange transactions are governed by FEMA and the Foreign Trade (Development and Regulation) Act (FT(D&R) Act), which together manage financial flows and the physical movement of goods.
- FEMA: Governs all external financial transactions, categorizing them into Current Account Transactions (CAT) and Capital Account Transactions (CAT). CATs are generally unrestricted, while CATs require specific authorization from the Reserve Bank of India (RBI).
- FT(D&R) Act: Provides the legal framework for India’s foreign trade policy, regulating imports and exports based on national security and international obligations. It classifies imports into Open General License, Restricted, and Prohibited categories.
Also Read: Foreign Liabilities and Assets (FLA) Return under FEMA
Role of Regulatory Authorities
- The RBI oversees the implementation of FEMA, ensuring compliance and managing capital account transactions.
- The Directorate General of Foreign Trade (DGFT) administers the FT(D&R) Act, issuing licenses and translating trade policy into actionable regulations.
- The interplay between FEMA and the FT(D&R) Act mandates timely realization and repatriation of sale proceeds from exports, creating compliance obligations for exporters.
Authorized Dealer Banks and Compliance
- Authorized Dealer Category-I Banks (AD Banks) act as the first line of defense in foreign exchange regulation, responsible for due diligence, reporting transactions, and certifying compliance with FEMA.
- Common failures by AD Banks, such as delays in reporting or misinterpretation of regulations, can lead to contraventions that impact their clients.
FEMA Compliance and Compounding Mechanism
- Non-compliance under FEMA is treated as a civil contravention, with liability often falling on company executives.
- The compounding mechanism allows entities to acknowledge violations and seek regularization through monetary penalties, avoiding lengthy litigation. Recent amendments have introduced caps on penalties for minor defaults and a ‘Fresh Start’ policy for repeat applicants.
Strategic Trade Controls and SCOMET Compliance
- The SCOMET list regulates dual-use technologies to prevent their misuse in military applications, reflecting India’s commitment to international non-proliferation treaties.
- Exporters must conduct due diligence to ensure compliance with licensing requirements, including obtaining End-Use and End-User Certificates (EUCs) to verify the intended use of exported items.
Enforcement Mechanism
- The Directorate of Enforcement (ED) enforces FEMA and the Prevention of Money Laundering Act (PMLA), with powers to investigate and prosecute violations.
- The ED’s dual mandate allows it to escalate civil contraventions into criminal investigations if they involve proceeds of crime, significantly increasing the stakes for non-compliance.
Conclusion
India’s foreign exchange and trade compliance landscape demands careful navigation of FEMA and the FT(D&R) Act, as regulatory overlap is both constant and unforgiving. The greatest risk arises from the FEMA–PMLA nexus, where technical non-compliance can escalate into criminal proceedings with severe consequences for businesses and key managerial personnel.
To improve ease of doing business, regulators are increasingly relying on digital platforms such as PRAVAAH to streamline approvals and compounding processes. Looking ahead, enforcement agencies are adopting artificial intelligence and data analytics to detect complex financial irregularities. In this evolving environment, compliance is no longer reactive—it is a strategic imperative that underpins sustainable participation in India’s globally integrated economy.
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.
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