1.

FERA TO FEMA- 20 MARKS

FEMA

The Foreign Exchange Management Act (1999) or in short FEMA has been introduced as are
placement for earlier Foreign Exchange Regulation Act (FERA). FEMA became an act on the
1st day of June, 2000. FEMA was introduced because the FERA didn’t fit in with
post-liberalisation policies. A significant change that the FEMA brought with it, was that it made
all offenses regarding foreign exchange as “civil offenses”, as opposed to “criminal offenses” as
dictated by FERA. The main objective behind the Foreign Exchange Management Act (1999) is
to consolidate and amend the law relating to foreign exchange with the objective of facilitating
external trade and payments. It was also formulated to promote the orderly development and
maintenance of foreign exchange market in India. FEMA is applicable to all parts of India. It
enabled a new foreign exchange management regime consistent with the emerging framework of
the World Trade Organisation (WTO). It is another matter that the enactment of FEMA also
brought with it the Prevention of Money Laundering Act of 2002, which came into effect from 1
July 2005.

From Foreign Exchange Control to Management (FERA to FEMA)

In the 1990s, consistent with the general philosophy of economic reforms a sea change
relating to the broad approach to reform in the external sector took place. The Report of the
High Level Committee on Balance of Payments (Chairman: Dr. C. Rangarajan, 1993) set the
broad agenda in this regard. The Committee recommended the following:

· The introduction of a market-determined exchange rate regime within limits

· Liberalization of current account transactions leading to current account
convertibility;
· Compositional shift in capital flows away from debt to non debt creating flows;
· Strict regulation of external commercial borrowings, especially short-term debt;
· Discouraging volatile elements of flows from non-resident Indians; full freedom for
outflows associated with inflows (i.e., principal, interest, dividend, profit and sale
proceeds) and gradual liberalization of other outflows;
· Dissociation of Government in the intermediation of flow of external assistance, as in
the 1980s, receipts on capital account and external financing were confined to
external assistance through multilateral and bilateral sources.

The sequence of events in the subsequent years generally followed these recommendations.
In 1993, exchange rate of rupee was made market determined; close on the heels of this
important step, India accepted Article VIII of the Articles of Agreement of the International
Monetary Fund in August 1994 and adopted the current account convertibility. In June 2000
a legal framework, with implementation of FEMA, was put into effect to ensure
convertibility on the current account.

Objectives and Extent of FEMA

The objective of the Act is to consolidate and amend the law relating to foreign exchange
with the objective of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India. FEMA extends to the
whole of India. It applies to all branches, offices and agencies outside India owned or
controlled by a person who is a resident of India and also to any contravention there under
committed outside India by any person to whom this Act applies.
Except with the general or special permission of the Reserve Bank of India, no person can :-
· deal in or transfer any foreign exchange or foreign security to any person not being an
authorized person;
· make any payment to or for the credit of any person resident outside India in any
manner;
· receive otherwise through an authorized person, any payment by order or on behalf of
any person resident outside India in any manner;
· Reasonable restrictions for current account transactions as may be prescribed.
Any person may sell or draw foreign exchange to or from an authorized person for a capital
account transaction. The Reserve Bank may, in consultation with the Central Government,
specify:-
· any class or classes of capital account transactions which are permissible;
· the limit up to which foreign exchange shall be admissible for such transactions
However, the Reserve Bank cannot impose any restriction on the drawing of foreign
exchange for payments due on account of amortization of loans or for depreciation of direct
investments in the ordinary course of business.
The Reserve Bank can, by regulations, prohibit, restrict or regulate the following:-
· Transfer or issue of any foreign security by a person resident in India;
· Transfer or issue of any security by a person resident outside India;
· Transfer or issue of any security or foreign security by any branch, office or agency in
India of a person resident outside India;
· Any borrowing or lending in foreign exchange in whatever form or by whatever name
called;
· Any borrowing or tending in rupees in whatever form or by whatever name called
between a person resident in India and a person resident outside India;
· Deposits between persons resident in India and persons resident outside India;
· Export, import or holding of currency or currency notes;
· Transfer of immovable property outside India, other than a lease not exceeding five
years, by a person resident in India;
· Acquisition or transfer of immovable property in India, other than a lease not
exceeding five years, by a person resident outside India;
· Giving of a guarantee or surety in respect of any debt, obligation or other liability
incurred.

FEATURES OF FEMA

Main Features of the Act are as follows:

-The most important feature of the Act is that the definition of a resident and non-resident are
almost in line with income tax Law. Therefore there is uniformity in defining the residential
status of persons who are liable for income tax and who are entitled for foreign exchange related
exemptions, relaxations and amenities.

-A "Person" defined includes persons like Firm, Company, HUF etc., which are coherent with
income tax laws. Previously the RBI had powers to determine the residential status of artificial
Persons.

-Under FEMA residents who were earlier non-residents may hold, own, transfer or invest in
property abroad, provided such foreign exchange or property, and was acquired by them while
they were non-residents.

-The Citizens of Countries like Pakistan, Afghanistan, Bangladesh, Nepal, Bhutan and Sri Lanka
are not allowed by the RBI to freely hold and transfer property in India.

-FEMA has permitted all current Account transactions unless otherwise specifically prohibited
by the RBI. The following are some of the Current Account transactions. i. Any payment in
connection with foreign trade, other current business, services and short term Banking and credit
facilities in the ordinary course of business.
ii. Any payment due as interest on loans and as net income from investments.
iii. Any remittances for living expenses of parents, spouse and children residing abroad.
iv. Any expenditure incurred in connection with foreign travel, education and medical care of
parents, spouse and children.

FEMA Rules & Policies

The Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from
June 1, 2000. With the introduction of the new Act in place of FERA, certain structural
changes were brought in. The Act consolidates and amends the law relating to foreign
exchange to facilitate external trade and payments, and to promote the orderly development
and maintenance of foreign exchange in India.

From the NRI perspective, FEMA broadly covers all matters related to foreign exchange,
investment avenues for NRIs such as immovable property, bank deposits, government bonds,
investment in shares, units and other securities, and foreign direct investment in India.

FEMA vests with the Reserve Bank of India, the sole authority to grant general or special
permission for all foreign exchange related activities mentioned above.

2. UNCTAD DRAFT MODEL ON TNC-

The emergence of the transnational corporation (the "TNC") as a main engine of global
economic activity is a phenomenon characteristic of the post-Second World War period. These
corporations revolutionized international business patterns, leading to an unprecedented level of
transnationalization of the world economy. For the United States, about eighty percent of its
international trade takes place within TNCs, of which about forty percent is intra-company trade.
At the same time, cross-border corporate strategies and complex inter-corporate alliances are
making the identification of a single nationality for a TNC increasingly difficult.

Thus, International Business Machines and Hewlett-Packard (US) are locating key corporate
functions in Western Europe, while Honda and Nissan, the Japanese automobile
manufacturers, are becoming important exporters for the United States.' From the legal
perspective, a transnational corporation is only recognized as a group of separate national
companies established under the laws of different countries.

Indeed, while other international business transactions usually involve one-time operations at the
border, foreign direct investment and TNC operations penetrate deeply into the national
fiber of the host country and also presuppose a long-term relationship with that country.
Consequently, while it was a relatively easy task to adopt global instruments setting up
international regimes to deal with trade, finance, and monetary matters, the conclusion of a
similar instrument for foreign direct investment and TNC activity has proven to be more elusive.

THE EXISTING INTERNATIONAL FRAMEWORK OF FOREIGN DIRECT

INVESTMENT
The international framework of foreign direct investment ("FDI") as it exists today is mainly the
cumulative result of a number of instruments that have been adopted. Those instruments
present different characteristics, both in terms of their structure, scope, approach, and content,
and their legal nature and underlying philosophy. They reflect the changing moods, perceptions,
and expectations of governments with respect to transnational corporations in response to rapidly
evolving and dynamic international economic conditions and relations.

One of the main preoccupations of the developed countries with respect to foreign investment
over the years has been to secure international standards for the protection of their investments
abroad.

A number of major developed countries turned to the bilateral level in order to provide legal
protection under international law to their investments in developing countries.' The standards of
treatment prescribed in most bilateral treaties include fair and equitable treatment, national and
most-favoured-nation treatment, as well as a number of specific protection standards on
expropriation, transfer of payments, and settlement of disputes. This approach has been
maintained in most bilateral investment treaties.

Another important aspect of the framework for TNCs relates to the standards of behaviour
expected from those corporations in their operations outside their home countries. Developing
countries in particular viewed the growing expansion of TNCs from the old colonial powers as a
potential threat to their newly-attained political independence. Many of those concerns were also
shared by trade unionists, consumers, and other public opinion groups in developed countries.

Other efforts in the United Nations concentrated on the elaboration of international standards to
deal with specific aspects of the activities of transnational corporations. Thus, in the area of
employment and labor relations, the International Labour Organisation adopted the Tripartite
Declaration of Principles Concerning Multinational Enterprises and Social Policy.' The
declaration addresses governments, employers, and workers' organizations as well as
transnational corporations, and sets out a number of voluntary standards in the areas
of employment, training, conditions of work and life, and industrial relations.

Another important instrument adopted within the aegis of the U.N. Conference on Trade and
Development ("UNCTAD") was the Set of Multilaterally Agreed Equitable Principles and Rules
for the Control of Restrictive Business Practices,' which provides a number of principles and
guidelines for identifying and dealing with situations where there is abuse of a dominant position
of the market.
The most far-reaching attempt so far to establish international standards on issues relating to
transnational corporations, both in terms of its comprehensiveness and its universal scope, has
been the elaboration of a U.N. Code of Conduct on Transnational Corporations (the "Code").'

The Code includes both standards for the activities of transnational corporations as well as
standards for the treatment of those corporations by their host countries. The standards of
corporate behaviour cover a wide range of legal, economic, political, and social issues. These
standards are based on the recognition of the sovereign authority of the state over foreign
investment within its jurisdiction, but also on the need for international cooperation to deal with
the full implications of the operations of transnational corporations across national borders.

This approach was reflected mainly in provisions dealing with non-interference in internal affairs
of host countries, permanent sovereignty over natural resources, and adherence to development
objectives and policies of host countries. On the basis of those general principles, it has been also
possible to elaborate more specific provisions in the Code in a number of concrete areas, such as
parent-affiliate relations, disclosure of information, and consumer and environmental protection.

The provisions of the Code on the treatment of transnational corporations by their host countries
include several general standards, notably, fair and equitable treatment and national treatment, as
well as specific standards on issues such as nationalization and compensation, transparency of
national regulation, transfer of payments, settlement of disputes, conflicts of jurisdiction, and
conflicting requirements. Moreover, the Code includes an umbrella clause with a general
reference to international law or international obligations as the overall measure for the treatment
of transnational corporations.

CONCLUSION

The increasing transnationalization of economic activity and the recent changes in international
economic relations have emphasized the central role TNCs play in mobilizing resources across
national borders. Those developments have also enhanced the need for strengthening
intergovernmental cooperation in the area of foreign direct investment through, among other
things, the establishment of appropriate international instruments that match the global reach of
TNC operations.

The instrument should encompass existing arrangements and build upon principles already
accepted. It should address both governments and TNCs, and should set out in a balanced
manner the rights and responsibilities of all parties to an investment relationship.
The Code, now near completion, meets all these characteristics. Therefore, its completion would
give expression to major parts of the existing international framework on transnational
corporations and provide a broad basis for further elaboration of international standards in the
future.

​ 10 MARKS

1. DEPOSITORIES ACT, 1996 (NSDL/SDDL)

Background:

The Depositories Act initially came into force as an ordinance viz. The Depositories Ordinance,
1995 promulgated on 7th January 1996. It was designed to provide a legal framework for
establishment of depositories to record ownership details in book entry form. The Act also made
consequential amendments in the Companies Act, 1956; the Securities and Exchange Board of
India Act, 1992; the Indian Stamp Act, 1899; the Income tax Act, 1961; and the Benami
Transactions (Prohibition)Act, 1988. The Depositories Act, 1996 was enacted with the objective
of ensuring free transferability of securities with speed, accuracy, and security, by making
securities of public companies freely transferable subject to certain exceptions by restricting
company’s right to use discretion in effecting the transfer securities and dispensing with the
transfer deed and other procedural requirements under the Companies Act.

The Depositories Act, 1996 is an Act to provide for regulation of depositories in securities and
for matters connected therewith or incidental thereto. ​Certificate of Commencement of
Business:​ No depository shall act as a depository unless it obtains a certificate of
commencement of business from SEBI. The Act provides for establishment of one or more
depositories. Every depository is required to be registered with the Securities and Exchange
Board of India (SEBI) and will have to obtain a Certificate for commencement of business on
fulfillment of such conditions as may be prescribed.

The Board shall not grant it certificate under sub-section (1) unless it is satisfied that the
depository has adequate systems and safeguards to prevent manipulation of records and
transactions. Investors opting to join the system will be required to be registered with one or
more participants who will be the agents for the depository. Investors will have the choice of
continuing with the existing securities certificates or opt for the depository mode. Under Section
3 (1) of the Act the depository is required to obtain a certificate of commencement of business
from the Securities and Exchange Board of India. According to subsection 3 the Board shall not
grant a certificate under sub-section (1) unless it is satisfied that the depository has adequate
systems and safeguards to prevent manipulation of records and transactions.
The Depository Act provides for the establishment of depositories like the National Securities
Depository Limited (NSDL) and the Central Depository Services Limited providing depository
services in the electronic form for securities traded in equity and debt markets. Every depository
must have adequate mechanisms for reviewing, monitoring and evaluating the depository’s
controls, systems, procedures and safeguards. It should conduct an annual inspection of these
procedures and forward a copy of the inspection report to SEBI.

The depository is also required to ensure that the integrity of the automatic data processing
systems is maintained at all times and take all precautions necessary to ensure that the records
are not lost, destroyed or tampered with. In the event of loss or destruction, sufficient back up of
records should be available at a different place. Adequate measures should be taken, including
insurance, to protect the interests of the beneficial owners against any risks.

Every depository is required to extend all such co-operation to the beneficial owners, issuers,
issuers’ agents, custodians of securities, other depositories and clearing organisations, as is
necessary for the effective, prompt and accurate clearance and settlement of securities
transactions and conduct of business.

Parties to a Depository:
In a depository system, the following parties are involved
1. the depository,
2. the beneficial owner;
3. the participant;
4. the issuer.

Regulation 26 of the SEBI (Depositories and Participants) Regulations, 1996 states that
depositories, participants, issuers, and issuers agent, in addition to the rights and obligations laid
down in the Depositories Act and the bye laws shall have the rights and obligations arising from
the agreements entered into by them.

In Probir Kumar Misra v. Ramani Ramaswamy​ it was held that after the Depositories Act,
1996, such depositors who are holding equity share capital of the company and whose name is
entered as beneficial owner are also deemed to be members of the company, thus making them
members under the Act.

Conclusion​:
The Depository Act which provides for the establishment of depositories like NSDL and CDSL
to curb the irregularities in the capital market and protect the interests of the investors and paved
a way for an orderly conduct of the financial markets through the free transferability of securities
with speed, accuracy and transparency.

2. FOREIGN COLLABORATION AND JOINT VENTURES-

JOINT VENTURE

A foreign company, depending upon its nature of business activities in India, may operate
through an Indian company in any of the following manners:-
-As a joint venture with Indian partner
-As a wholly owned subsidiary ( a company where 100 percent shareholding is held by the
foreign company).
A joint venture company in India is like any other company for the purposes of Indian
Companies Act, Indian Income-tax Act and other applicable laws, rules and regulations. Where
the foreign party does not confine itself only to the transfer of technical know-how to the Indian
party but also agrees for financial participation with the Indian party, the parties conclude joint
venture agreement.

Collaboration Agreements:

The foreign entrepreneur would normally enter into an agreement with its Indian partner for
carrying on business operations in India. Such agreements are called collaboration agreements.
The rights and obligations of the foreign party will be primarily contained in the collaboration
agreement. It is therefore, recommended that the collaboration agreement should be made to
form a part of the Articles and Memorandum of Association of the joint venture company.
Furthermore, the collaboration agreement should be specifically approved in the meeting of the
Board of Directors of the joint venture company.

FOREIGN COLLABORATION
There are two types of foreign collaboration:
a. financial collaboration (foreign equity participation) where foreign equity alone is involved ;
b. technical collaboration (technology transfer) involving licensing of technology by the foreign
collaborator for appropriate compensation.

There are three relevant approving authorities:

1. the Reserve Bank of India (RBI); and
2. the Department of Industrial Development in the Ministry of Industry, Government of India.
3. Foreign Investment Promotion Board (FIPB): The FIPB is the nodal, single window agency
for all matters relating to foreign direct investment (FDI) as well as promoting investment into
the country. Secretary, Industry (Department of Industrial Policy and Promotion) chairs it.

Its objective is to promote Foreign Direct Investment into India: -

[i] by undertaking investment promotion activities in India and abroad,
[ii] facilitating investment in the country by international companies, non-resident Indians, and
other foreign investors,
[iii] through purposeful negotiation/discussion with potential investors,
[iv] early clearance of proposals submitted to it, and
[v] review policy and put in place appropriate institutional arrangements, transparent rules and
procedures and guidelines for investment promotion and approvals.

Validity of foreign collaboration approval:

Government approval for foreign collaboration is valid for an initial period of two years, which
may be extended for one more year. In case any further extension is needed, beyond the period
of three years, it will be considered by the Foreign Investment Promotion Board on the
recommendation of the administrative ministry.

A representation on the foreign collaboration approval of the Government, if any required to be

made, may be sent to the concerned department with reference to the item of manufacture along
with a copy of the same to the Secretariat for Industrial Assistance. The administrative ministry
will examine the request keeping in view the various steps taken by the applicant for
implementation of the foreign collaboration approval and make suitable recommendation for
consideration by the appropriate authority.

Execution of foreign collaboration agreement:

The Indian party and the collaborator should execute an agreement on foreign collaboration
within the validity, or extended validity, period strictly in conformity with the terms prescribed
by the Government. The letter of approval issued by the Secretariat for Industrial Assistance will
be made a part of the foreign collaboration agreement to be executed between the Indian
company and the foreign collaborator and any provision of the agreement which is not covered
by the said letter or is at variance with the provisions of that letter shall be void and be not
binding on the Government of India.

This agreement will be scrutinised by the concerned ministry/department. If it is found to be in

accordance with the terms specifically approved by the Government, a letter approving the terms
of the agreement will be issued to the party. A copy of the agreement will be sent to the Reserve
Bank of India (RBI) through the Department of Economic Affairs to enable the RBI to authorise
remittances to the foreign collaborator.

Government Policy
The Government of India’s policy on foreign private investment is based mainly on the approach
adopted in 1991. The Industrial Policy 1991 is based on the view that while freeing Indian
industry from official controls, opportunities for promoting foreign investments in India should
also be fully exploited. It is felt that foreign investment can bring attendant advantages of
technology transfer, marketing expertise, the introduction of modern managerial techniques and
new possibilities for the promotion of exports.

​6 MARKS

1. ROLE OF INFORMATION TECHNOLOGY IN THE INVESTMENT MARKET-

Technology is key in turning trading strategy into trading profit. Technology enables new pricing
models and products to be delivered to the market. The IB industry thrives on the flow, analysis,
and interpretation of information and technology is often the edge that gives a bank competitive
advantage.

The Information Technology (IT) is the most important one, which is being widely used in
different fields of industries. This is also the fastest changing and growing technology of the day.
The IT which is latest and most relevant to-day, will become altogether obsolete and irrelevant
tomorrow, as soon as a more advanced version of the same comes to the market.

Investing in IT
As we have seen that IT is a fast changing technology, it becomes a very difficult task for the
policy makers of an organization to decide about the investment in IT. There can be two
possibilities:

(i) Before investing in IT, wait for the new advance version to be launched in the market, that too
at much cheaper price than the present one. By the time a decision is reached regarding
investment in IT a further advanced version of IT starts knocking at the door. Thus another
postponement is taken regarding the investment. This process goes on and on and ultimately
investment in IT never materializes.

(ii) In the second scenario, the policy makers having decided to implement IT in the organization
instantly invest on whatever version of IT available in the market at the huge prevailing cost. But
soon they realize that whatever they have bought has become obsolete and has become a
liability.
Thus we see that while investing in IT a very balanced and judicious decision is required to be
taken by the competent policy makers, who are also essentially required to be IT enabled
persons.

2. INVESTMENT THROUGH INTERNET & VIRTUAL BANKING-

Technology gives banks the opportunity to be closer to customers, to a broader range of

services at lower costs, streamline the March belang systems so that all information in
one place where it can be used for the trends that can quickly lead into new products.
Electronic banking data can be gathered and analyzed. Interactivity allows the consumer
to save the settings, directing the development of truly new products.

Internet banking (or E-banking) means any user with a personal computer and a browser
can get connected to his bank -s website to perform any of the virtual banking functions.
In internet banking system the bank has a centralized database that is web-enabled. All
the services that the bank has permitted on the internet are displayed in menu. Any
service can be selected and further interaction is dictated by the nature of service. Once
the branch offices of bank are interconnected through terrestrial or satellite links, there
would be no physical identity for any branch. It would a borderless entity permitting
anytime, anywhere and anyhow banking.

3. TNC VS MNC-

Both MNC and TNC are enterprises that manage production or delivers services in more than
one country. .
They are characterized as business entities that have their management headquarters in one
country, known as the home country, and operate in several other countries, known as host
countries. Industries like manufacturing, oil mining, agriculture, consulting, accounting,
construction, legal, advertising, entertainment, banking, telecommunications and lodging are
often run through TNC’s and MNC’s.
The said corporations maintain various bases all over the world.
As MNC, also TNC operate in a number of countries. But while MNC have a clearly
identifiable home country and head office, there isn’t a centralized management system
and structure present in TNC.

4. AMIT BHARDWAJ CASE/SCAM-