Watchdog To Doorman

For, the draft Act will not only give them a respite from thedraconian provisions of FERA, it will also signal India's transition from aregulated foreign exchange-starved economy to a vibrant forex-surplus one. FEMA,which is based on the 1993 Sodhani Committee report on the outdated FERAprovisions, seeks to present a transparent setup for forex transactions so thatRBI sanction is not sought on every case. It also seeks to remove thedysfunctional aspects of capital account and current account restrictions.

FERA is considered obsolete in today's liberalised economicenvironment. The law was formulated in a situation of scarcity during the oilshocks of the '70s, and sought to deal with all forex-related atrocities withan iron hand. A thrust which policy liberalisations since 1991 and a dramaticoverhaul of the Act in 1993 failed to remove.

The need for FEMA stems from two crucial factors. Primaryamong them are the obligations under Article VIII of the IMF, under which Indiamust move fast to make the rupee fully convertible on the capital account. Thatautomatically makes FERA redundant. Secondly, FERA was relevant when there wasan enormous flight of capital from forex-scarce India. Current forex reservesare a comfortable $19 billion plus. Says Lester Pereira, director-treasury &forex, Barclay's Bank: "As the domestic money markets become moreintegrated with the global market, the possibility of flight of capital getsmore remote. When the rupee tumbled in end-1995, no significant amount of FIImoney went out of India." Agrees Bibek Debroy of Project LARGE which islooking into obsolete and outdated Indian laws: "After the reforms, FERAhas become totally dysfunctional. The continued hawala transactions cries forfurther economic reforms, not retention of FERA. Also, capital inflows areperking up sufficiently to neutralise the current account deficit. The rupee'shardening shows that there's a clear case for going for capital accountconvertibility soon."

The government is aware of this. Says a finance ministryofficial: "Our aim is to formulate a law consistent with full rupeeconvertibility and progressive liberalisation of capital accounttransactions." But even before it can be tabled in the monsoon session ofParliament, the draft provisions of FEMA are embroiled in charges of being abonanza for forex dealers and operators. The short 20-section FEMA takes awaymost of the draconian provisions of the 70-section FERA which gave sweepingpowers to the Enforcement Directorate (ED). And eases most of the curbs placedon forex movement in and out of the country.

Says Debroy: "While FERA was an enabling legislationauthorising the RBI to issue a barrage of notifications, the bulk of FEMA doesnot take into account the criminal part of these offences." This, he feels,is one of its major shortcomings. The high-profile ED will now cease to have itspowers of summons for arrest on suspicion of forex violation which would now bedone only with RBI permission. Similarly, the RBI will reign supreme in theconduct of investigations too. Statements recorded before the ED will no longerbe permissible in courts.

All this will, however, not render the ED jobless. EDofficials feel that unless FEMA is automatically substituted for cases bookedunder FERA too, there would be enough cases for the ED to pursue for the next 10years. As of now, there's a grey area on whether FEMA stands to repeal, alongwith FERA, the scores of violation cases pending against big Indian corporatehouses. On the other hand, once the bill on money laundering becomes an Act, theED would be born in a new avatar. "Economic and financial crimes would bedealt with in the new law on money laundering which is expected to be launchedalong with the FEMA," says an official.

But then, how much of the FERA violations would amount to a crime in today'sliberalised environment? Those responsible for framing the money-laundering billfeel that inclusion of forex-related crimes in the new bill would amount torepetitive legislation. Says forex consultant Jamal Mecklai: "There'salready a fair amount of capital convertibility. NRIs and FIIs have fullconvertibility in that they are free to bring in dollars, invest them in certaininstruments and reconvert the rupee proceeds into dollars which can then beremitted after settling all tax dues. Exporters too have a degree ofconvertibility in the use of their EEFC (Exchange Earners Foreign Currency)accounts." Adds Ravi Vasantraj, vice president, Mecklai Financial &Commercial: "Exporters should, subject to liquidation of outstandingadvances, be permitted to retain 100 per cent of their forex earnings in India,considering the current level of reserves and the expectations of higherinflows."

However, issues related to current accounttransactions, including sending money abroad, payment of royalty, dividend andpayment for children's education, as well as capital account transactions likeissuing global depository receipts or borrowings abroad, have been kept out ofFEMA. While it continues with the system of authorised forex dealers, it laysdown clear rules enabling dealers to purchase or sell dollars against the rupee.A crucial difference is that while FERA had strict rules against repatriation,the draft Act authorises the RBI to frame rules to ensure that exportersrepatriate their earnings.

While FEMA cuts down the RBI workload, it lets the apex bankprohibit or regulate a number of transactions: the sale or issue of security orforeign security in India by nonresidents and residents abroad; transactionbetween an Indian resident and a non-resident; borrowing and lending betweenresidents and non-residents, acceptance of deposits by non-residents andplacement of deposits by residents with non-residents; export or import ofcurrency, cheques, travellers cheques and other financial instruments;acquisition, holding and disposal of immovable property in India bynon-residents; and acquisition, holding and disposal of immovable propertyoutside India by resident Indian nationals.

But the smooth passage of the bill seems to be a far cry. The government is yet to decide whether to introduce FEMA with retrospective effect. A far-reaching decision which would affect several other statutes. It would also mean that the bulk of the huge backlog of the cases under FERA would become redundant, thereby giving an unexpected amnesty to alleged offenders. And going by the ED's prowess in booking—about 2,500 cases were booked in 1996 and 1,000 till March 1997—the extent of this amnesty would probably create a world record.

Industry, too, has reservations. "While the treatment toforex transactions is a good sign, the government seems to be hurrying over thelegislation rather than engaging in research and taking a long-term view,"says T.K. Bhaumik, senior policy adviser, CII. In speeding up the draft bill, hefeels, the government and the RBI have taken a soft option instead of a harder,foolproof system of forex management.

But the job may yet be done by the RBI committee under former deputy governor S.S. Tarapore to set up a road map to capital convertibility. Says Pereira: "This committee has laid down lucrative penalties for violators. Mainly in fines ranging from Rs 500 to Rs 5 lakh a day. The common practice of over- and under-invoicing exports and imports may not vanish overnight, but will hardly remain attractive." There are many more such grey areas to sort out before FEMA heralds a freer dawn.