MRTP, FERA, FEMA

GROUP 7

There are basically three economic units in a country:

Corporate Sector Government Household Sector

There are areas or people with surplus funds and there are those with a deficit.

A FINANCIAL SYSTEM functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit.
Flow of funds (savings)

Seekers of funds Suppliers of funds (Mainly business firms Flow of financial services (Mainly households) and government)
Incomes , and financial claims

Indian financial system consists of

Financial Markets

: Money Market,

Capital Market, Forex Market

Financial Instruments: Loans,

Deposits, Bonds, Equities

Financial Intermediation: Banks,

Mutual Funds, Insurance Companies

Organized Indian Financial System

Regulators

Financial Instruments

Financial Markets

Financial Intermediaries

Forex Market

Capital Market

Money Market

Credit Market

Primary Market Secondary Market

Money Market Instrument

Capital Market Instrument

A Financial Market can be defined as the market in which financial assets are created or transferred. Its mainly of five types:

Money Market Capital Market Forex Market

Credit Market
Commodity market

Market for short-term money and financial assets that are near substitutes for money. Place for Large Institutions and government to manage their short-term cash needs Generally period upto one year.

To finance the long-term investments

Period over a year

Facilitate the transfer of capital (i.e. financial) assets from one owner to another and they provide liquidity.

Deals with the multicurrency requirements, which are met by the exchange of currencies Depends on the exchange rate that is applicable One of the most developed and integrated market across the globe.

A place where banks, FIIs and NBFCs purvey short, medium and longterm loans to corporate and individuals.

Markets where raw or primary products are exchanged Traded on regulated commodities exchanges Bought and sold in standardized contracts

In India regulator body is the Forward Markets Commission (FMC).

Financial intermediation in the organized sector is conducted by a wide range of institutions functioning under the overall surveillance of the Reserve Bank of India

Initially, simple role of transfer of funds from the lender to the borrower. As the financial system widened, the scope of its operations also widened Example:
Investment bankers Underwriters Stock exchanges Registrars, Depositories, Custodians Portfolio managers, Mutual funds Financial advertisers, Financial consultants, Primary dealers, Satellite dealers, Self regulatory organizations, etc.

Intermediary Stock Exchange

Market Capital Market

Role Secondary Market to securities Corporate advisory services, Issue of securities

Investment Bankers Capital Market, Credit Market Underwriters

Capital Market, Money Subscribe to Market unsubscribed portion of securities

Registrars, Depositories, Custodians

Capital Market

Issue securities to the investors on behalf of the company and handle share transfer activity
Market making in government securities Ensure exchange ink currencies

Primary Dealers Satellite Dealers Forex Dealers

Money Market Forex Market

Those documents which represent financial claims on assets. Ex. Bills of Exchange, promissory note, treasury bill, government bond, deposit receipt, share, debenture, etc.

Money Market Instruments

Call/Notice Money
Treasury Bills Term Money Certificate of Deposit

Commercial Papers

Equity shares

Capital Market Instruments

Preference shares

Debentures
Zero coupon bonds Deep discount bonds Hybrid Instruments

Segment Government

Issuer
Central Government

Instruments
Zero Coupon Bonds, Coupon Bearing Bonds, Capital Index Bonds, Treasury Bills. Govt. Guaranteed Bonds, Debentures PSU Bonds, Debenture, Commercial Paper Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, InterCorporate Deposits Certificate of Deposits, Bonds Certificate of Deposits, Bonds

Public Sector

Government Agencies / Statutory Bodies Public Sector Units Corporate

Private

Banks Financial Institutions

The main functions of financial markets are:

To facilitate creation and allocation of credit and liquidity. To serve as intermediaries for mobilization of savings. To assist process of balanced economic growth. To provide financial convenience

Indian Financial System performs crucial role in economic development of India through saving investment process known as Capital Formation. The process of capital formation requires:
Increase in savings. Mobilization of savings (domestic savings collected by banks, financial institutions are placed at disposal of actual investors) Proper investment (which is production of capital goods)

The flow of money from savings to investments leads to formation of capital stock in the form of equipment, buildings, intermediate goods and inventories.

Gross Capital Formation (formerly gross domestic investment) consists of outlays in additions to the fixed assets of the economy plus net changes in the level of inventories.

Lack of co-ordination between different financial institutions.

Multiplicity of institutions in the Indian financial system

Monopolistic market structures:

Some financial institutions are so large that they have created a monopoly. Ex: LIC, UTI Mutual Funds

Dominance of development banks in industrial finance

Financial institutions created by the government fail to mobilize the savings of the public (like banks, LIC, pension and provident funds, unit trusts).

Inactive and Erratic capital market:

Lack of transparency, Variety of manipulative practices, Institutional deficiencies, Insider trading etc prevent Corporate customers from going to the capital markets.

Hindrance to development:
The financial system is not providing adequate services to the majority of Indian retail customers, small and medium-sized enterprises

NDTV (Jan 9, 2012) According to Finance Minister Pranab Mukherjee, The current state of heightened global uncertainty has implications for emerging market economies including India. RBI Governor D Subbarao in its fianancial report said that domestic financial system remains stable but the macro economic situation is a cause for concern.

Act came into existence on 27th December, 1969. Aimed at preventing economic concentration of power in the hands of a few, with the end result protecting consumer interest and the economic society at large.

Act extends to the whole of India except the state of Jammu and Kashmir.

Preventing the concentration of economic power to common detriment.

Probation of monopolistic, unfair and restrictive trade practices.

Control of the monopolies and protection of consumer interest.

Post independence, many new and big firms had entered the Indian market. They had little competition and they were trying to monopolize the market. Indian market was very weak and vulnerable. High concentration of economic power in over 85% of industries in India.

Need to enact a legislation to curb such practice safeguard the rights of consumers.

These are practices which indicate misuse of one's power to abuse the market in terms of production and sales of goods and services.

MTP were defined in Section 2(i) of the Act and investigations into such practices by MRTP commission were covered under section 31.

Maintaining high prices of goods or services.

Unreasonably preventing or lessening competition. Limiting technical development or capital investment to the common detriment.

Deteriorating the quality of any goods produced, supplied or distributed.

Increasing unreasonably the cost of production of any good.

The traders, to maximize their profit indulge in activities that tend to block the flow of capital into production. Manipulation of prices or conditions of delivery which affected the flow of supplies in the market of any goods or services, imposing on the consumers unjustified cost or restrictions.

RTP were defined in Section 2(O) of MRTP Act and may be investigated by Commission under Section 37 of the Act.

Any agreement which restricts persons to whom goods are sold or bought. Restricting the number or class of wholesalers, producers or suppliers from whom goods may be bought. Territorial restrictions and restricting terms of guarantee. Display of price-lists indicating maximum recommended rates and absence of indication that a lower price could be charged Imposing on the consumers unjustified cost or restrictions.

Trade practice for the purpose of promoting any sale, use or supply of any goods or services, adopts unfair method, or unfair or deceptive practice.

UTP were defined in Section 36A of MRTP Act and may be investigated by Commission under Section 36B of the Act.

Misleading representation regarding usefulness, need, quality, standard, style etc of goods and services. Falsely representing second-hand goods as new.

Giving false guarantee or warranty on goods and services

Hoarding or destruction of goods Advertising the sale or services at a bargain price which is not intended to be sold at such bargain price

Amendment of 1982

Redefinition of dominant undertaking. Goods exported out of India not included in calculation for market dominance. Unfair trade practices brought under the control of the act.

Amendment of 1984

Amendment of 1985

Raise asset threshold of undertakings from Rupees twenty Crores to Rupees hundred Crores. Scrapped the assets limit for MRTP companies. Prior approval not required from Central Government.

Amendment of 1991

MRTP believed to be ineffective in dealing with cartels. There was a shift of focus from curbing monopolies to promoting competition. To protect, promote and to sustain competition in India. Competition bill was introduced in parliament in 2001 and was passed in December, 2002.

To check interest of domestic market and consumer.

Check of Anticompetitive agreements (vertical and horizontal agreements.

Cartels prohibited.

Checking abuse of dominant position. Examples:

Aug, 2011: The Competition Commission of India (CCI) fined DLF Rs. 630 Crores fine on DLF. It was accused of unfair practices, abuse of market dominance and "brutal disregard of consumer right. June 2011: CCI asked NSE to pay a penalty of Rs 55.5 Crores within 30 days and also immediately stop subsidizing its services. The NSE accused of unfair pricing and unfairly using its dominant position.

According to Mr Dhanendra Kumar, Competition Commission of India Chairman in interview with Forbes India (Oct 26, 2009) The Competition Act is a promotional, not a restrictive act. It punishes abuse of dominant position not dominance per se. A firm is free to grow as large as it pleases, or achieve as big a market share as it can. For full interview: http://forbesindia.com/interview/closerange/cutting-em-to-size/6312/1

An Act to consolidate and amend the law regulating

certain payments dealings in foreign exchange and securities transactions indirectly affecting foreign exchange and the import and export of currency

for the conservation of the foreign exchange resources of the country and the proper utilization thereof in the interests of the economic development of the country.

MNCs controlled 53.7% of the assets of large sector in India till the end of decade of seventies 48 companies out of total 112 with assets of 10 crores or more were either foreign branches or Indian subsidiaries of foreign companies Foreign share capital and foreign loans contributed only 5.4%of the financial resources of these companies and 94.6 % was contributed by the domestic sources

This amount of capital issues consented with foreign participation declined from 61.5% in 1976 to 29.5% in 1980; These facts about the financing behavior of MNCs explode the myth that they bring in large amounts of foreign capital with them; The real position was that MNCs collected most of the capital from within the country itself but repatriated the large amounts of the profits to their home countries.

The country was also facing a trade deficit due to:

Devaluation of the currency Increase in the price of imported oil.

Therefore this 1973 law was created during the tenure of Prime Minister Indira Gandhi with the goal of conserving India's foreign exchange resources. Unfortunately, the act went to absurd lengths in its attempt to conserve foreign exchange.

To regulate dealings in foreign exchange and securities To regulate the transaction indirectly affecting foreign exchange To regulate import and export of currency and bullion To regulate employment of foreign nationals To regulate foreign companies To regulate acquisition, holding etc of immovable property in India by non-residents

All branches of foreign companies seeking approval under FERA will have to convert themselves into Indian companies.

A minimum of 74% foreign shareholding will be allowed to companies manufacturing certain items listed in Industrial policy

Authorized dealers are persons who can legally deal in foreign exchange. Most of the authorized dealers are banks. Any person wanting to deal in foreign exchange must deal through the authorized dealers Money changers are authorized to deal in foreign exchange but for very limited and specific purposes.
Hotels Foreign travel agents Foreign tour operators

No person shall;
deal in foreign exchange or foreign security with any person other than 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 in any manner; Finally if, otherwise provided in this act, no person resident in India shall acquire, hold, own posses or transfer any foreign exchange foreign security or any immovable property situated outside India.

Unlike other laws where everything is permitted unless specifically prohibited, under FERA nothing is permitted unless specifically permitted. The draconian regulations under FERA related to unbridled powers of Enforcement Directorate.

The contravention under FERA was treated as criminal offence and the burden of proof was on the guilty. The Act also routinely came into the way of many national business transactions, and combined with the extremely harsh penalties for offences under the Act.

FERA created flourishing black market in foreign exchange. It brought into the economic lexicon the word HAWALA. The objective of FERA was to conserve foreign exchange resources which badly affected the comfortable foreign exchange reserves.

Coca-Cola was India's leading soft drink until 1977 when it left India after a new government ordered the company to dilute its stake in its Indian unit as required by the Foreign Exchange Regulation Act (FERA).

Eighteen multi-national companies including Ericsson, Samsung, Sony, Nokia, Mitsubishi, Bank of Tokyo Mitsubishi and Deutsche Bank were slapped with show cause notices for alleged violation of Foreign Exchange Regulations involving over Rs 170 crores. These companies violated FERA by paying part of expat employee salaries abroad without seeking RBI permission.

After liberalization in 1992, various sectors were opened for FDI from time to time which radically changed the foreign exchange position.

Instead of negative balance, there was substantial foreign exchange reserve so it was felt necessary to drop out the draconian law of FERA.

Rules regarding foreign investments were simplified to encourage more foreign investment Made the procedure for foreign investment easy Under FEMA, violation of foreign exchange rules has ceased to be a criminal offence and would now be treated as a civil offence ED would no longer have the power to arrest persons for such offences.

Formulated in 1999 and came into existence on 1st June, 2000. Replacing the Foreign Exchange Regulation Act (FERA). To have compatibility with pro- liberalized policies.

To facilitate external trade/payment and promote the orderly development and maintenance of the Forex market in India.

To facilitate the external trade and payment

Orderly maintenance of the foreign exchange market In India.

Regulation of foreign capital in India.

To remove imbalance of payment.

To make strong and developed foreign exchange market.

Regulation of employment business and investment of nonresidents.

Freedom (only authorized dealer) to hold or transfer any foreign securities or immovable property situated outside India. The EEFC (Exchange Earners' Foreign Currency) account holders and RFC (Resident Foreign Currency) account holders are permitted to freely use the funds held in EEFC\RFC accounts for payment of all permissible current account transactions.

All current account transactions are permitted unless otherwise prohibited.

The limit for permitting overdraft against NRE (Nonresident External Rupee) accounts balance has been raised from 20,000 to 50,000.

All capital account transactions are prohibited unless otherwise permitted.

June 2007- A company incorporated in India having overseas offices, may acquire immovable property outside India for its business and for residential purposes of its staff.

May 2010 - Category-I banks may permit drawal of foreign exchange by persons for payment of royalty and lump-sum payment under technical collaboration agreements without the approval of Ministry of Commerce and Industry, Government of India.

Nov ,2011- Transfer of shares between Indians and non-residents would not require its permission in several key areas like financial services

Amendments would be required in future if concepts like "dual listing" are to be implemented. Although it would require major amendments to other laws such as Companies Act and full capital account convertibility.

Changes in FEMA to allow investments from Pakistan. Pakistan is the only country from where investment is not allowed in India. This has been recently proposed by commerce ministry.

In FEMA specified acts relating to foreign exchange are regulated while in FERA anything and everything that has to do anything with foreign exchange was controlled.

The aim of FEMA is to facilitate trade as against that of FERA, which was to prevent misuse of foreign exchange.

The theme of FERA was everything that is specified is under control while the theme of the FEMA is everything other than what is expressly covered is not controlled (lot of deregulation)

FEMA is a much smaller enactment only 49 sections as against 81 of FERA;

Many provisions in FERA like Indians taking employment abroad, employment of foreign technicians in India have no place in FEMA.

ET (Sep27, 2011) According to Surabhi Marwah, Senior Tax Professional, Ernst & Young

Global mobility has become a key catalyst of the Indian economy, both due to an increase in Indian outbound looking to attain international experience and a rise in "returning Indians", given the recession in the west and opportunities back home.
For full details refer http://articles.economictimes.indiatimes.com/2011-0927/news/30208373_1_bank-accounts-foreign-currencyoverseas-assets.

July 2011 :Rs 7,100-crore penalty on Etisalat DB for FEMA for suspected violations of foreign exchange rules inside and outside the country.

Violations included non-reporting of receipt of funds from abroad within the stipulated period to the Reserve Bank of India.

Competition Law for Mergers and Acquisitions eased.Thus, provide enhanced scope for expanding the business and customer base, entering into a new market or product segment. Liberalised and rationalised procedures and policies governing foreign direct investment in India have led to increase in FDI, thus increase capital available. Recent example being financial services firms and NBFCs. Ease of external commercial borrowings has led to increased sources of funds. (E.g. automatic approval in infrastructure sector).

Increase in business due to free flow of foreign exchange. Liberalised Forex facilities for individuals such as joint NRI and resident Indian accounts (NonResident (External) (NRE) Rupee Account and Foreign Currency (Non-Resident) (FCNR) Account). Increased funds for entrepreneurial ventures. Increased remittances due to policies like free NRI investment in any partnership or proprietorship firm (not engaged in agriculture/plantation/real estate).

According to the RBI data, remittances have increased substantially from US$ 43.5 billion in 2007-08 to US$ 55.6 billion in 2010-11.