B.Com Ist Year Foreign Investment And Its Regulation Question Answer Notes
(1) Origin of Investment in India:
(i) Anon-resident entity other than a citizen of Pakistan or an
entity incorporated in Pakistan can invest in India, subject to FDI policy.
(ii) Overseas Corporate Bodies (OCBs) can make investment with prior approval of Government of India if investment is through government route, and with prior approval of RBI ifinvestment is through automatic route. (iii) An FII may invest in the capital of Indian company subject to 10% individual limit and 24% aggregate limit. (iv) Foreign Venture Capital Investors (FVCIs) may invest in Indian Venture Capital Undertakings subject to SEBI and RBI regulations.
(2) Types of Investment Instruments:
(i) Indian companies can issue equity shares, fully convertible debentures, fully convertible preference shares to foreign investors. These capital instruments must be issued within 180 days of receipt of funds.
(ii) Indian companies can also issue Foreign Currency
Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) in global capital markets.
(3) Eligibility of FDI in Resident Entities : Foreign direct investment can be made in following three resident entities only:
(i) FDI in an Indian company.
(ii) FDI by way of contribution to the capital of partnership firm or proprietary concern provided the partnership firm/proprietary concern is not engaged in agriculture, plantation, real estate or print media.
(iii) FDI in Trusts.
(4) Calculation of Direct and Indirect Foreign Investment in Indian Companies : Foreign Direct investment means investment made by non-residents in Indian companies. On the other hand, if any Indian company, which has foreign investment in its capital, invests in another Indian company, then it is said to be indirect foreign investment.
On 12th February 2009, government issued new guidelines for computing foreign equity holdings of Indian companies. The new guidelines open up the scope for additional foreign equity inflow into Indian companies. The new norms will benefit all such companies in which foreign investments have touched their FDI ceilings. As per new norms, if the investing company is majority Indian owned/controlled (either 51% ownership or right to appoint majority directors), the foreign holding in that company will not reflect in the investment it makes in other companies. All such investments made by Indian owned/controlled companies would count as purely Indian. For instance, if company A in which foreign investment is less than 50%, invests in company B then amount of FDI will be taken as nil, If company A has foreign investment more than 50% and it invests say 26% in company B then entire 26% will be counted as indirect FDI. Prior to new norms, proportionate holding was counted as indirect FDI.
(5) Entry Route for Foreign Invest: There ment are two routes for foreign investment in India : (i) Automatic Route, (ü) Government Route. Under automatic route, foreign investor does not require any approval from government or RBI for investment. Under govrnment route, foreign investor must obtain prior approval of government’s Foreign Investment Promotion Board (FIPB).
(6) Prohibition of FDI in India : FDI is prohibited in following activities/sectors:
(i) Retail Trading (except single brand retailing)
(ii) Atomic Energy
(iii) Lottery Business
(iv) Gambling, Betting, Casinos
(v) Chit Funds and Nidhi Companies
(vi) Real Estate Business
(vii) Activities/Sectors not opened to private sector investment.
Q.34. Discuss the main features of Foreign Exchange Management Act (FEMA). – What is its main objectives? Also distinguish between FERA and FEMA. (Rohilkhand, 2006)
Ans. Foreign exchange transactions were regulated in India by the Foreign Exchange Regulations Act (FERA), 1973. The main objective of FERA, framed against the background of severe foreign exchange problem and the controlled economic regime, was conservation and proper utilisation of the foreign exchange resources of the country.
There was a lot demand for a substantial modification of FERA in the light of the ongoing economic liberalization and improving foreign exchange reserves position. Accordingly, a new Act, the Foreign Exchange Management Act (FEMA), 2000, replaced the FERA.
The FEMA, which came into force with effect from 1st June, 2000, extends to the whole of India and also applies to all branches, offices and agencies outside India, owned or controlled by a person resident in India.
MAIN FEATURES OF FEMA NOTES
- This Act has replaced FEMA.
- It extends to the whole of India.
- It shall apply to all branches, offices and agencies outside India also which are owned or controlled by residents of India. Thus, this Act enjoys extra-territorial jurisdiction.
(iv) Reserve Bank of India (RBI) is the overall controlling authority in respect of FEMA because RBI is the guardian and custodian of foreign exchange reserves in our country.
OBJECTIVES OF THE FEMA STUDY NOTES
The main objectives of Foreign Exchange Management Act, 2000 are as follows:
(1)Toregulate the foreign capital in India.
2. To regulate the employment of foreigners in India.
3. To control and regulate the purchase and sale of foreign exchange in India.
4. To bring stability in foreign exchange rates.
(5) To regulate from and to foreign payments.
(6) To promote, stabilise and develop foreign exam
markets in India.
(7) To assist in removingimbalance in foreign trade of the (8) To check the outgoing capital from India.
(9) To assist in maintaining the supply of foreign current
economic programmes organised in India.
(10) To regulate employment, business, investment
profession of non-resident Indians in India.
(11). To control and check mal-practices in foreign bills.
(12) To maintain foreign exchange resources of India. (13) To encourage foreign trade.
(14) To give necessary suggestions as to simplifvine consolidating and amending the law relating to foreign exchange according to the needs of the country.
(15) To establish more liberal and orderly regulatory framework conducive to economic growth in India.
DIFFERENCE BETWEEN FERA AND FEMA NOTES
| Basis of Difference | Foreign Exchange Regulation Act (FeRA) | Foreign Exchange Management Act (FeMA) |
| 1.Generation | RERA was a first generation control law. | FEMA is the second generation reform law. |
| 2.Object | The obect of FERA was to keep foreign exchange in reserve and use it properly. | The object of FEMA is foreign trade, payment of money and facilitate develop and organize the foreign exchange market. |
| 3. Position of Residence | In FERA, the meaning of Indian citizen is Indian person | In FEMA, the meaning of Indian citizen is the person residing in India. |
| 4. Sections | FERA contained 81 sections. | FEMA contains only 49 sections. |
| 5. Offence And Contravention | FERA contained many sections using the word’offence’. | FEMA uses the word contravention in place of offence. |
| 6. Nature of Default | An offence under FERA was of a criminal nature. | A contravention under FEMA is of civil Nature. |
| 7.Arrest | FERA provided for arrest of the person, guilty of an offence. | FEMA provides for the arrest and detention in civil prison only. |
| 8.Penalty | FERA provided for a penalty not exceeding five times the amount of value involved or Rs. 5,000,whichever is more. | FEMA provides for a penalty upto thrice the sum involved where such amount is quantifiable, or upto Rs. 2 lakh where the amount is not quantifiable. |
| 9. Power to Compound travention | Under FERA, there was no provision for power to compound contravention. | Under FEMA, Sec. 15 Providesfor power to compound contravention. |
| 10. New definition | FERA did not define capital account transaction, current account transactions export, services etc. | FEMA defines these terms clearly. |
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