January 25, 2020
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Strict Spoiler

The draconian FERA almost invites citizens to violate it

Strict Spoiler

Now suddenly in the limelight due to the ITC scandal, the Foreign Exchange Regulations Act of 1973 (FERA) may be the classic case of a law that is so draconian that it in fact leaves citizens and corporates with no choice but to violate it.

And it doesn’t matter if you had no knowledge, motive or intention of committing the offence, since Section 59 of FERA presumes you were in possession of these three. That is, unlike most laws which assume you are innocent till proved guilty, FERA assumes you are guilty till proved innocent. Officers of the Enforcement Directorate, whose sole job is to probe FERA violations, have wide powers to arrest, search premises, seize documents, and interrogate anyone they want to. And Section 78 protects these officers from any legal proceedings or prosecution for discharging duties, even if proved wrong.

Bibek Debroy says the outdated preamble of the Act—which still emphasises that foreign exchange is a scarce resource and therefore must be allocated to best secure the national interest—results in wrong interpretations, mindless controls, and often ridiculous situations. No one can have a foreign coin collection worth over $500. Even a visiting foreigner can’t mail a cheque abroad because the law doesn’t allow "sending currency instruments out of the country". Or, an exporter can’t sell a consignment at a discount after it has reached the buyer. He must bring it back and declare it to the RBI afresh, an impossibility in the case of consignments of perishables or goods with low shelf life. Naturally, if you are an agro exporter, you take a big loss and shut up, or you break the law. Some of the FERA violations ITC is accused of fall under this. Nine sections of FERA were deleted in 1993, following liberalisation, but no corresponding change was carried out in the penal provisions dealing with adjudication and investigation of offences. The control of many areas has now moved from the RBI to the Foreign Investment Promotion Board (FIPB) and the Secretariat of Industrial Approvals (SIA), but the lack of a complete overhaul of the Act has left major room for confusion.

For instance, Sections 9, 28 and 29 still empower the RBI to give "automatic or general permission" to foreign nationals to carry out commercial and trading activities in India. So foreign investments approved by the SIA or FIPB have to still get RBI approval under these sections (and forget the fact that ‘automatic permission’ is a contradiction in terms). Section 11 restricts NRI investors from freely dealing in India. Provisions like these have made the entire revamp futile. Even today, 99 per cent of a foreign company’s activity requires RBI clearance, including for opening a liaison office in India. And the simplest approval takes 45-90 days.

The entire ITC scam started because in the mid-’80s, when Chairman J.N. Sapru wanted to go global (something the Government wants industry to do desperately today) FERA didn’t allow ITC to make the puny overseas investment required to set up two restaurants in the US. Even today, FERA is out of touch with times and unreasonably harsh. Hence, its widespread violation and its abuse as an instrument for political vendetta.

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