Foreign Exchange Regulation Act

The Foreign Exchange Regulation Act of 1973 (FERA)in India was repealed on
1st June, 2000. It was replaced by the Foreign Exchange Management Act
(FEMA), which was passed in the winter session of Parliament in 1999.
Enacted in 1973, in the backdrop of acute shortage of Foreign Exchange in the
country, FERA had a controversial 27 year stint during which many bosses of
the Indian Corporate world found themselves at the mercy of the Enforcement
Directorate (E.D.). Any offense under FERA was a criminal offense liable to
imprisonment, whereas FEMA seeks to make offenses relating to foreign
exchange civil offenses.

FEMA, which has replaced FERA, had become the need of the hour since
FERA had become incompatible with the pro-liberalisation policies of the
Government of India. FEMA has brought a new management regime of Foreign
Exchange consistent with the emerging frame work of the World Trade
Organisation (WTO). It is another matter that enactment of FEMA also brought
with it Prevention of Money Laundering Act, 2002 which came into effect
recently from 1st July, 2005 and the heat of which is yet to be felt as
“Enforcement Directorate” would be investigating the cases under PMLA too.

Unlike other laws where everything is permitted unless specifically prohibited,

under FERA nothing was permitted unless specifically permitted. Hence the
tenor and tone of the Act was very drastic. It provided for imprisonment of even
a very minor offence. Under FERA, a person was presumed guilty unless he
proved himself innocent whereas under other laws, a person is presumed
innocent unless he is proven guilty.

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
 o (i) by a person resident in India and owed to a person resident
outside India or
o (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.

CONTRAVENTIONS AND PENALTIES

If any person contravenes any provision of this Act, or contravenes any rule,
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.

Any Adjudicating Authority adjudging any contravention 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.

"Property" in respect of which contravention has taken place, shall include

deposits in a bank, where the said property is converted into such deposits,
Indian currency, where the said property is converted into that currency; and
any other property which has resulted out of the conversion of that property.

If any person fails to make full payment of the penalty imposed on him within a
period of ninety days from the date on which the notice for payment of such
penalty is served on him, he shall be liable to civil imprisonment.

INVESTIGATION

The Directorate of Enforcement investigate to prevent leakage of foreign

exchange which generally occurs through the following malpractices :

• Remittances of Indians abroad otherwise than through normal banking

channels, i.e. through compensatory payments.
• Acquisition of foreign currency illegally by person in India.
• Non-repatriation of the proceeds of the exported goods.
• Unauthorised maintenance of accounts in foreign countries.
• Under-invoicing of exports and over-invoicing of imports and any other
type of invoice manipulation.
• Siphoning off of foreign exchange against fictitious and bogus imports.
• Illegal acquisition of foreign exchange through Hawala.
• Secreting of commission abroad.
ORGANISATIONAL SET UP AND FUNCTIONS OF ENFORCEMENT
DIRECTORATE

Directorate of Enforcement has to detect cases of violation and also perform

substantially adjudicatory functions to curb above malpractices.

The Enforcement Directorate, with its Headquarters at New Delhi has seven
zonal offices at Bombay, Calcutta, Delhi, Jalandhar, Madras, Ahmedabad and
Bangalore. The zonal offices are headed by the Deputy Directors. The
Directorate has nine sub-zonal offices at Agra, Srinagar, Jaipur, Varanasi,
Trivandrum, Calicut, Hyderabad, Guwahati and Goa, which are headed by the
Assistant Directors. The Directorate has also a Unit at Madurai, which is
headed by a Chief Enforcement Officer. Besides, there are three Special
Directors of Enforcement and one Additional Director of Enforcement.

The main functions of the Directorate are as under:

• To collect and develop intelligence relating to violation of the provisions

of Foreign Exchange Regulation Act and while working out the same,
depending upon the circumstances of the case:
• To conduct searches of suspected persons, conveyances and premises for
seizing incriminating materials (including Indian and foreign currencies
involved) and/or.
• To enquire into and investigate suspected violations of provisions of the
Foreign Exchange Management Act.
• To adjudicate cases of violations of Foreign Exchange Management Act
for levying penalties departmentally and also for confiscating the
amounts involved in contravent ions;
• To realise the penalties imposed in departmental adjudication.

PROCEDURAL PROVISIONS

For enforcing the provisions of various sections of FEMA, 1999, the officers of
Enforcement Directorate of the level of Assistant Director and above will have
to undertake the following functions

• Collection and development of intelligence/information.

• Keeping surveillance over suspects.
• Searches of persons/vehicles by provisions of Income-tax Act, 1961.
• Searches of premises as per provisions of Income-tax Act, 1961.
• Summoning of persons for giving evidence and producing of documents
as per provisions of Income-tax Act, 1961.
• Power to examine persons as per provisions of Income-tax Act,1961.
• Power to call for any information/document as per provisions of Income-
tax Act, 1961.
• Power to seize documents etc. as per provisions of Income-tax Act, 1961.
• Custody of documents as per Income-tax Act, 1961.
• Adjudication and appeals - Officers of and above the rank of Dy Director
of Enforcement, are cases of contravention of the provisions of the Act;
these proceedings which are quasi-judicial in nature, start with the
issuance of show cause notice; in the event of cause shown by the Notice-
not being found satisfactory, further proceedings are held, vis. personal
hearing, in which the noticee has a further right to present his defence,
either in person or through any authorised representative; on conclusion
of these proceedings, the adjudicating authority has to examine and
consider the evidence on record, in its entirety and in case the charges not
being found proved, the noticee is acquitted, and in the event of charges
being found substantiated, such penalty, as is considered appropriate as
per provisions of section 13 of the Act can be imposed, besides
confiscation of amounts involved in these
Pre- Shipment Inspection and Quality Control
Act, 1963
ESTABLISHMENT & ROLE
The Export Inspection Council of India (EIC) was set up by the Government of
India under Section 3 of the Export (Quality Control & Inspection) Act, 1963 as
an apex body to provide for sound development of export trade through quality
control and pre-shipment inspection. The Act empowers the Central
Government to notify commodities and their minimum standards for exports,
generally international standards or standards of the importing countries and to
set up a suitable machinery for inspection and quality control. EIC is assisted in
its functions by the Export Inspection Agencies (EIAs) located at Chennai,
Kochi, Kolkata, Delhi and Mumbai having a network of 42 sub-offices and
laboratories to back up the pre-shipment inspection and certification activity.
The main functions of EIC are to advise the Central Government regarding
measures to be taken for enforcement of quality control and inspection in
relation to commodities intended for export and to draw up programmes for
quality control and inspection of commodities for exports. EIC, either directly
or through Export Inspection Agencies, its field organisations, renders services
in the areas of Certification of quality of export commodities through
installation of quality assurance systems (In-process Quality Control and Self-
Certification) in the exporting units as well as consignment-wise inspection and
Food Safety Management Systems in the food processing units as per
international standards, Issue of Certificates of Health and Certificates of
Authenticity to exporters, Issue of Certificate of Origin to exporters under
various preferential tariff schemes, Laboratory testing and Training and
technical assistance to the industry in installation of Quality and Safety
Management Systems based on principles of HACCP, ISO-9001: 2000,
ISO:17025 and other related areas.
In the WTO regime, as India's trading partners are installing regulatory import
controls, EIC has refashioned its role to introduce voluntary certification
programmes besides regulatory export control, especially in food sector, and is
seeking recognition for EIC's certification by official import control agencies of
its trading partners, as per provisions of WTO agreements, to facilitate easier
access to their markets for Indian exporters.
EIC has a Chairman and 17 members nominated by the Central Government
with Director (Inspection & Quality Control), EIC as Member Secretary, who is
also the Chief Executive of the organisation. EIC is located at YMCA Cultural
Centre Building at New Delhi while the EIAs and sub-offices are located all
over the country. During the year, a ready built space was procured for the EIA-
Chennai office and plots of land at Delhi and Kochi for construction of the
offices of respective EIAs.
NOTIFICATION OF COMMODITIES
Final Notification on export of Bivalve Molluscs was published as also
amendments to Notifications on fish and fishery products, egg products and
honey to incorporate provisions for maximum residue limits. A Notification
amending the standard on basmati rice was also published.
EXPORT CERTIFICATION SYSTEMS
The main systems of export inspection and certification being followed by EIC
include Consignment wise inspection (CWI), In-process quality control (IPQC),
Self-certification (SC), and Food Safety Management Systems based
Certification (FSMSC).
Food Safety Management Systems based Certification has been aligned with
international standards on Hazard Analysis Critical Control Point (HACCP) /
Good Management Practices (GMP) / General Health Practices (GHP) in the
areas of fish & fishery products, egg products, milk products, poultry products
and honey. Under CWI samples, based on a laid down sampling plan are drawn
from the consignment, offered for inspection and tested against the specified
standards. The other three schemes follow a systems approach, which involves
approval of the units followed by periodic surveillance by EIAs.
The value of exports certified under each of the above systems is given below:
IMPLEMENTATION OF CERTIFICATION IN THE FOOD SECTOR
Fish & Fishery Products
In this area, 393 Fish and fishery products processing units (145 for EU and 217
for Non-EU and 31 live fish processing units for Non EU) were on the
approved list. All consignments of shrimps meant for export to EU were issued
health certificate only after testing and clearance for banned antibiotics.
Egg Products & Honey
Under the system, four units of egg were approved by EIC/EIAs. Amendment
to the Export of Egg Product (Quality Control, Inspection and Monitoring)
Rules, 1997 was published on 19 Dec 2003 by Govt of India banning usage of
certain unauthorised substances, veterinary drugs & pharmacologically active
substances at all stages of production and export of egg products. The
amendments also give powers to the Council to take assistance of APEDA or
any other organisation approved by it for residue monitoring. Govt. of India
issued a similar final notification to include MRLs for veterinary drugs, other
substances, environmental & other contaminants in honey also on 19 December
2003.
Milk Products
During 2003-2004, 42 units were on the approved list. Further, a Residue
Monitoring Plan (RMP), prepared to monitor the residue status of milk products
was implemented by EIC through the Export Inspection Agencies (EIAs). The
RMP as forwarded to EC is being implemented on yearly basis for the Milk
units approved under the notification. The testing data under the RMP is under
compilation.
RAW (chilled/frozen) Meat, Processed Meat and Animal Casings
EIC/EIAs are proposing to initiate certification in the area of Raw (chilled/
frozen) Meat, Processed Meat and Animal Casings and have developed a
scheme based on a system of approval of Units. In the area of Poultry Meat and
Meat Products, two units applied for approval of which one unit was approved.
Other Schemes
Work has been initiated to develop voluntary schemes in the areas of Quality
Control and Inspection for Fresh Fruits and Vegetables for Exports, HACCP
and Organic Certification Schemes.
CERTIFICATES OF ORIGIN
Certificates of Origin are non-contractual instruments through which tariff
concessions are extended to goods originating in specific countries. There are
six Schemes under which goods originating in India are accorded preferential
duty treatment by importing countries namely Generalised System of
Preferences (GSP), Generalised System of Trade Preferences (GSTP), Bangkok
Agreement, SAARC Preferential Trading Agreement (SAPTA), Indo-Sri Lanka
Free Trade Agreement (ISFTA) and Indo Afghanistan Free Trade Agreement
(IAFTA).
EIC, through EIAs, continued to issue a major share of Certificates of Origin
under various preferential tariff schemes in India. Around 8 lakhs Certificates
of Origin were issued, during the current financial year which is around 1 lakh
more than in the previous year.
In this area the officials of European Court of Auditors visited India from 18 to
22 Dec 2003 to examine the norms laid down and procedures being followed in
issuance of GSP certificates for European Union. The team expressed
satisfaction with regard to implementation of the system in India.
LAB TESTING ACTIVITIES
In order to ensure acceptability of test results of EIA laboratories
internationally, it is essential that the international standard for quality system
for laboratories i.e. ISO:17025 is implemented. EIAs have prepared the basic
document i.e. Quality Manual, Standard Operating Procedures (SOP's) etc. and
are in a phase of stabilising these. In the next financial year, all documentation
work as required under this standard would be completed and EIA laboratories
could go for accreditation under National Accreditation Board for Testing and
Calibration Laboratories (NABL).
The statistics in respect of number of samples tested are as given below:
2002-03 2003-04
58042 52201
To supplement the test facilities of EIAs, 5 labs have been approved by EIC
namely SGS-Chennai, SIIR-Bangalore and Delhi, Geochem-Mumbai and
CIPET Chennai for various products /parameters. During the year, Tea Board
has enlisted Thoppumpady Laboratory, EIA-Kochi for Quality Assurance of
Tea on voluntary basis. Ministry of Health & Family Welfare, has initiated a
project on Networking of Food Laboratories to cope with the work load of
testing of imported food items. Based on an on-site assessment, EIA's labs at
Chennai, Kochi and Kolkata as well as PTH were identified for such testing.
The supervisory officers as well as analysts from these labs were given training
in Central Food Laboratories in Kolkata, Mysore and Pune during the year
2002-03 and 2003-04. Pilot Test House continued its recognition by the Bureau
of Indian Standards under its Laboratory Recognition Scheme for testing of five
electrical products as per relevant Indian Standards.
EIC Inspection Agency Recognition Scheme
EIC continues to recognize Inspection Agencies under the provisions of Section
7(1) of Export (Quality Control and Inspection) Act, 1963. The Scheme has
been aligned with the international standard on acceptance of inspection bodies,
ISO/IEC 17020:1998, to make the same internationally acceptable w.e.f. 1
February 2002. 51 inspection agencies have applied for recognition as per fresh
norms out of which 18 Agencies have been audited and 7 recognised and for the
others, the exercise is in progress.
HUMAN RESOURCE DEVELOPMENT
Training is an important component of building up human resources, both of the
industry as well as within the organisation. This aspect is being taken care of by
the Human Resources and Quality Development Centre (HR&QDC), which
was set up in the organisation in May 2000. EIC has organised training
programmes and seminars for its own personnel as well as industry. For its own
personnel training was organised in the areas of Certificate of Origin. Refresher
Training Programmes for Fish & Fishery certifying officers, Quality
Management Systems, besides rice certification, milk quality control and
testing, computerisation, administration, accounts and vigilance. More than 500
officials were given training in above areas.
14 Programmes were organised during the year for exporters on Quality
Certification and Certificates of Origin to make them aware about the
provisions of various Preferential Tariff Schemes, the Rules of Origin and the
procedure for issue of such certificates by EIC/EIAs, as also certification
activities. Two programmes were also organised in educational institutions
namely Haryana Agriculture University, Hissar and Fortune Institute of
International Business, New Delhi.
Officials were trained in Basmati Rice, HACCP & Milk Products for
Certifying/ Monitoring and Testing activities including, Quality Management
Systems, Administrative, Vigilance and Accounts functions and Computer.
INTERNATIONAL ACTIVITIES
Participation in International Events
EIC/EIAs officials participated in "Second International Workshop on
Microbiological risk Assessment and Mitigation" from 19-23 May 2003 at
Paris, France, "5th World Fish Inspection & Quality Control Congress" from
19-23 October 2003 at The Hague, Netherlands and Codex meetings including
26th Session of Codex Committee on Fish & Fishery Products held from 11-17
October 2003, Aluesund, Norway; Drafting Group Meeting of Principals for
Microbiological Risk Management, from 3-6 June 2003 at Brussels, Drafting
Group meeting for revision of document relating to exchange of information in
food safety emergency situations held in Brussels in August 2003, 12th session
of the Codex Committee on food Import and Export Inspection & Certification
Systems held in Brisbane from 1 to 5 December 2003, HPLC MSMS training in
USA from 1-4 December, 2003 & Sanitation Control Procedure and HACCP
training in Thailand, Bangkok from 27-30 January, 2004
Assessment by EC & USFDA teams
A team comprising 4 inspectors from Food and Veterinary office of European
Commission visited India from 14 to 22 October 2003 to assess the adequacy of
implementation of the Residue-Monitoring Plan (RMP) in aquaculture farms,
egg and Honey processing areas. The team visited fish processing plants, egg
processing plants, layer hen farms, aquaculture farms, feed mixing plants, a
honey collection centre and veterinary drugs outlets and also interacted with
private veterinary practitioners . The team also visited various laboratories of
CIFT-Kochi, EIA-Chennai and MPEDA-Kochi besides two privately owned
laboratories at Bangalore and Delhi.
Assessment report of the team with recommendation had been received and the
same has been circulated for compliance by all concerned including EIAs and
processing units and is being monitored by the Competent Authority regularly.
A team comprising 3 delegates from USFDA visited India from 5 to 28
September, 2003 to assess the approved Fish & Fishery Products (F&FP)
establishments with a view to ensure that HACCP is being properly
implemented. The team visited 10 approved plants located at Mumbai, Chennai
and Kochi have given their observations/suggestions which are being
implemented by the units.
Corporate Audit
A system of corporate audit of all activities EIAs by EIC is in existence with the
twin objectives of checking compliance to and effectiveness of our systems as
well as building accountability. During the year, Corporate Audits were carried
out at EIA-Kochi for Fish & Fish Products scheme and of Sub office Banglore
for issue of Certificates of Origin, EIA Chennai for Fish & Fish Products, Milk
and Egg Products scheme, EIA Mumbai for issue of Certificate of Origin and a
comprehensive audit of EIA-Delhi for Milk and Rice Schemes including
laboratory activities and for issue of Certificates of Origin.

COMPUTERIZATION ACTIVITIES
Under the Integrated Computerisation Project (ICP), System Requirements
Specifications and Design documents for 19 modules have been studied and
finalised. Software development work for web based centralised solution is in
progress and is expected to be put in place very shortly.
 International Commercial Practices
In addition to Indian legal environment, there are
certain international commercial practices which have
to be taken care of in export transactions. The two
important documents like Uniform Customs Practice for
Documentary Credit(UCP) 1993 and INCO Terms, 1990,
prepared by the International Chamber of Commerce,
Paris are widely used in international business. The
Uniform Customs Practices is the documents used by
banks in the negotiation of export-import documents.
INCO Terms represents the various trade terms like
FOB, CF, CIF etc and codify the respective rights and
obligation for the two parties under the terms of the
contracts.
The basic legal issues are different in the international
business. These are as follows:

1. Import-export contract: The legal issues in

international business relating to import-export
contracts are almost universal in their applications
such as parties, description of product quality,
price, currencies, packaging, delivery schedule,
insurance, inspection, documentation, passing of
risk and settlement of disputes.
2. Export- Agent: The contract of Agency is a
legal document establishing commercial
relationship between the principal and the agent in
the international business. The contract of Agency
incorporates the condition mutually agreed upon.
While negotiating an agency contract the exporter
 should be careful about parties, products, territory,
customers, orders, commission, renewal and
termination of contract which will be useful for the
settlement of disputes.
3. Products: The issues relating to products are
trademarks, patents, product liability, packaging
and promotional requirements. Trademarks are
used to differentiate a products and symbolise the
quality of the product and stimulate the desire to
buy. Product liability is the result of increased
consumption. It provides the responsibility borne
by the manufacturer, distributer and retailer for
any consequential damages in case of product
sold. Many countries in the world have laid down
the rules regarding the packaging items. If any
special precaution is to be taken while using the
product that must be indicated on the package.
Similarly, laws regarding advertising of product are
also framed by the countries. The advertising
industry has prescribed cod e of conduct for the
industry members. An exporter who wants to
promote such products should see the codes.
4. Letter of Credit: A letter of credit is an
authorization issued by the importer`s bank to the
negotiating bank stating that if the exporter
presents the relevant set of documents, bank will
make the payment. If the exporter wants that he
should be paid for the good exported before the
title to goods passes on the importer, he will insist
upon a letter of credit. A letter of credit creates a
contractual relationship between the opening bank
and the exporter. The bank would make the
payment of the sum indicated in the letter of credit
subject to the condition that all the requisite
documents are submitted to the bank and are
found in order. The opening and negotiation of the
latter of credit are governed by the International
Chamber of Commerce, Brochure No. 500 entitled,
Uniform Customs and Practice for Documentary
Credits.