Foreign Exchange Regulation Act (FERA)

Foreign Exchange Regulation Act (FERA)

In the present day Indian politico-economic environment, FERA has emerged as a very important piece of legislative control over

(a) the activities of multinational businesses;

(b) the flow of foreign capital, technology and managerial enterprise; and

(c)foreign collaboration and joint ventures.

In short, FERA regulates the stock and flow of foreign investment in India.

Foreign exchange control in India was introduced for the first time in the Defence of India Rules, 1939. Then came the Foreign Exchange Regulation Act, 1947, as the basic law of exchange control and as the main legal instrument regulating the operation of foreign controlled companies in India. This Act was amended in 1957 and 1965. A major change was effected through the Foreign Exchange Regulation (Amendment) Act 1973. The new Act came into force with effect from January 1, 1974. The main features of 1973. The new Act came into force with effect from January 1, 1974. The main features of this Act suggesting a host of guidelines for foreign business in India are as follows :

1. All branches of foreign companies (except airlines and shipping companies) seeking approval under FERA have to convert themselves into Indian companies.
2. A minimum permissible foreign shareholding limit of 74 per cent will be allowed to companies which are either engaged in manufacturing of curtail  listed items under the 1973 Industrial Policy, or predominantly, or engaged in trading not exceeding 25 per cent of the ex-factory value of the production of having a turnover of less than Rs. 5 crores.
3. A permissible foreign shareholding of 40 per cent will be allowed for companies engaged in “other manufacturing items”, construction and consultancy trading companies, plantation companies (other than tea), and other miscellaneous activities not mentioned in the guidelines.
4. The explanation to the guidelines also constrains a provision that if a company is 10 per cent export-oriented, a foreign shareholding exceeding 74 per cent may be allowed depending on the merits of each case.

5. Airlines and shipping companies, which are excluded from the provisions of Section 29 of the Act, will be treated on a reciprocal basis.
6. Banking companies, which are also excluded, will be governed by guidelines issued by the Reserve Bank of India and the Banking Department.

The guidelines listed above were further revised in August 1976 to assist the reserve Bank of India in administering Section 29 of FERA (1973). The main features of the revised FERA Guidelines 1976 were as follows :

1. If the activities of a company under Appendix I, together with activities requiring sophisticated technology and exerts, account toe not less than 75% of its total annual turnover, such a company will be allowed to continue its activities subject to the condition that it will increase India participating, within a specified period, to not less than 26 per cent of the equity capital of the company.

2. If the activities of a company under Appendix I together with activities requiring sophisticated technology and exports account for not less than 60 per cent of the total annual turner, such a company will be allowed to continue its activities, subject to the condition that it will increase, within a specified period, Indian participation to not less than 49 per cent of the equity of the company. In such cases a condition will be stipulated that the company concerned should undertake to export a minimum of 10 per cent of its total annual turnover within a period of two years commencing form the date of approval by the Recovered bank of India.

3. if the export of a company account for more than 40 per cent of the total annual turnover, such a company will be allowed to continue its activities subject to the condition that it will increase, within a specified period, Indian participation to not less than 49 per cent of the equity of the company.

4. Cases of companies coming with proposals fro substantial exports could be considered on merits for higher level of equity participation provided such participation is in the overall interest of the economy of the country.

5. The limit of Rs. 5 crores for permissible trading activity by multi-activity companies will be applicable only in the case of tiding activities.

6. The ceiling of 25 per cent of the ex-factory value of the annual production for permissible trading activity by multi-activity companies will be raised to 40 per cent and 60 per cent respectively in the types of cases mentioned in (2) and (3) above.

Foreign investments and enterprises which are branches or subsidiaries of foreign companies as well as joint ventures involving foreign collaboration are subject all the laws governing Indian enterprises 0 the MRTP Act, the Companies Act, the Income-tax Act, the Industries (Regulation and Development) Act, etc., as well as FERA. TO a casual observe, it appears that control is stricter over foreign companies than on Indian companies. This observation is not quite correct. Every independent nation State has the right to design its business and industrial policies primarily in view of the national interest.

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