The Scheme and Noteworthy Features of FEMA

In one line

FEMA's noteworthy features are that it manages rather than regulates, treats breach as civil, frees the current account, manages the capital account, defines residence by stay rather than citizenship, delegates the detail, splits functions between the Government and the Reserve Bank, channels dealings through authorised persons, permits compounding, and applies extra-territorially. Each of those has a provision, and the provision is what turns a description into an answer.

The ten features, each with its section

1. Management, not regulation: the long title and section 1

The long title declares the object to be "facilitating external trade and payments" and "promoting the orderly development and maintenance of foreign exchange market in India". The change of the middle word of the statute's name from Regulation to Management is not cosmetic: a regulating statute prohibits and permits, a managing statute permits and restricts.

Section 1(3) adds the extra-territorial reach, applying the Act to all branches, offices and agencies outside India owned or controlled by a person resident in India, and to any contravention committed outside India by a person to whom the Act applies.

2. Civil, not criminal: section 13 with section 14

Contravention attracts a penalty on adjudication under section 13(1), up to thrice the sum involved where quantifiable, up to two lakh rupees where it is not, and up to five thousand rupees a day for a continuing contravention. The only imprisonment is civil imprisonment under section 14 for failure to pay a penalty within ninety days of the notice of demand.

The authority is Director of Enforcement v. MCTM Corporation (P) Ltd, (1996) 2 SCC 471, holding that a penalty adjudication is for the breach of a civil obligation, that mens rea is not an essential ingredient, and that the delinquency itself is the blameworthy conduct.

3. The current account is free: section 5

Section 5 provides that any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction, with a proviso permitting the Central Government, in public interest and in consultation with the Reserve Bank, to impose such reasonable restrictions for current account transactions as may be prescribed.

The structure of section 5 is the feature. Freedom is the rule and restriction the exception, the restriction must be reasonable, it must be in the public interest, it requires consultation with the Reserve Bank, and it must be prescribed, that is made by rule. This is the provision by which India gives effect to her obligations under Article VIII of the Articles of Agreement of the International Monetary Fund, accepted in August 1994.