Try to find out the important provisions of the FEMA Act applicable to Banks. Critically analyse these provisions.

 The Foreign Exchange Management Act (FEMA) of 1999 is an Act of the Indian Parliament that came into effect from 2000. This Act replaced the Foreign Exchange Regulation Act (FERA) of 1973. The primary objective of FEMA is to consolidate and amend the laws relating to foreign exchange with the objective of facilitating external trade and payments and promoting the orderly development and maintenance of foreign exchange market in India.

The FEMA Act has certain provisions that are applicable to banks in India. The important provisions of the FEMA Act applicable to banks are as follows:

1. Authorised Persons: FEMA specifies that only authorised persons can deal in foreign exchange. In the case of banks, the Reserve Bank of India (RBI) authorises banks to deal in foreign exchange. Banks can open, maintain, and operate foreign currency accounts, and undertake foreign exchange transactions with the approval of the RBI. Hence, FEMA provisions make it mandatory for banks to obtain authorisation from the RBI to deal in foreign exchange.

2. Capital Account Transactions: The FEMA Act prohibits capital account transactions without prior approval or general permission of RBI. Banks can undertake capital account transactions on behalf of their clients only after obtaining necessary approvals from RBI. Capital account transactions include transfer of funds outside India for investments such as foreign direct investment (FDI), portfolio investment, loans, etc. The provisions ensure that banks comply with the rules and regulations governing capital account transactions.

3. Reporting of Transactions: FEMA mandates banks to report all foreign exchange transactions to the RBI. Banks are required to furnish daily reports of their foreign exchange transactions to the RBI. In addition, banks are also required to report any suspicious transaction to the Financial Intelligence Unit (FIU). The provisions help maintain the integrity of the foreign exchange market in India by enabling the RBI to monitor foreign exchange transactions.

4. Export Credits: FEMA provides guidelines on export credits. Banks can extend credit to exporters for their exports in foreign currency. The Act also permits the receipt of advance payments against exports. Banks can provide finance to exporters based on the quality of the export orders and the creditworthiness of the importer. The provisions encourage exports from the country and facilitate access to finance for exporters.

5. External Commercial Borrowings (ECBs): FEMA regulates external commercial borrowings by Indian entities. Banks are the designated entity to facilitate ECBs. FEMA ensures that ECBs are consistent with the country’s economic policies and regulations. Banks can act as a mediator between the borrower and the overseas lender. RBI permits banks to accept the proceeds of the ECBs on behalf of their clients. The provisions promote foreign investment in India while safeguarding India’s external debt position.

6. Prohibition of Contravention of FEMA: FEMA prohibits the contravention of any provision of the Act. Banks are required to abide by the provisions of the Act. The RBI has the power to impose penalties on banks for violating the provisions of FEMA. The provisions deter banks from engaging in any transaction that could be against the provisions of the Act.

On a critical analysis of the provisions mentioned above, it can be concluded that FEMA provisions are aimed at achieving the following objectives:

1. Maintaining Orderly Development of the Foreign Exchange Market: FEMA provisions maintain the integrity of the foreign exchange market in India. The regulations provide clarity on foreign exchange transactions and prevent any fraudulent transactions. The daily reporting of transactions ensures transparency in operations and facilitates the RBI’s monitoring of the market. The authorised persons and capital account transactions provisions ensure that only legitimate transactions are conducted.

2. Facilitating External Trade and Payments: FEMA facilitates external trade by allowing export credits, advance payments against exports, and ECBs. These provisions provide access to finance for exporters and attract foreign investment into India. The RBI’s control over capital account transactions balances the inflow and outflow of foreign exchange, ensuring the stability of the economy.

3. Ensuring Compliance with the Rules and Regulations Governing Foreign Exchange: FEMA provisions make it mandatory for banks to comply with the rules and regulations governing foreign exchange. The vast powers given to the RBI to monitor and regulate foreign exchange transactions ensure that the banking sector follows the regulations. Prohibition of contravening FEMA provisions deters banks from conducting any illegal transactions.

In conclusion, the FEMA Act provisions applicable to banks ensure the proper functioning of the foreign exchange market in India. Banks can only deal in foreign exchange after obtaining authorisation from the RBI. The Act regulates capital account transactions, reporting of transactions, provides guidelines on export credits, permits ECBs and prohibits any contravention of the Act. The FEMA provisions maintain the orderly development of the foreign exchange market, facilitate external trade and payments, and ensure compliance with the rules and regulations governing foreign exchange. Hence, banks must abide by the provisions of FEMA to operate within the legal framework and contribute to the development of India’s foreign exchange market.

Subcribe on Youtube - IGNOU SERVICE

For PDF copy of Solved Assignment

WhatsApp Us - 9113311883(Paid)