Exchange controls impact the lives of many in India. The Indian Rupee is not fully convertible and there are various provisions of law that prescribe terms and conditions on which any person may buy or sell foreign exchange in India. Generally, the purchase and sale of foreign exchange is regulated by prescribing the need for special permission or general permission from the Reserve Bank of India (RBI).
The concept of regulating exchange controls by way of a special or general permission finds its roots in the much-dreaded Foreign Exchange Regulation Act, 1973 (FERA), which is now history. FERA prescribed the presumption of a culpable mental state and had criminal consequences for every violation. Rules, regulations and notifications made under FERA prescribed limits for purchase and holding of foreign exchange, conditions for usage of foreign exchange and required permission of the RBI for every single foreign currency unit purchased by any person resident in India.
Permission of the RBI was required for any foreigner to invest in India. A different permission was required to “export” documents / securities that were issued pursuant to such approval. Approval was required for investing abroad. Approval was required for virtually every single move of any muscle when it related to foreign exchange. Indeed, any Indian who travelled abroad would have been a criminal. The amount of per diem allowance permitted by the RBI for any Indian traveling abroad was invariably far lower than what could buy you a decent hotel room for a night, two reasonably nutritious square meals and some expenditure on local travel.
The black market for foreign exchange thrived. Those who were small but brave would carry foreign currency notes in between pages of their books in their bags and save foreign exchange in cash. The big and more brave had entire fortunes stashed away in private Banking accounts in Lichtenstein and Switzerland. The generally-compliant sorts sought and obtained approval wherever practicable and cheated the law wherever practicable.
Although the doors to investing in India were opened up significantly in 1991 and the Foreign Investment Promotion Board (FIPB) was set up, FERA continued to apply until the Foreign Exchange Management Act, 1999 (FEMA) was legislated. FEMA was brought into force in 2000 – indeed this event was celebrated as the “second Independence Day” in business circles.
However, till date, the mindset in government and among policy makers has not changed one bit. Regulation after regulation is written under exchange controls prescribed in terms of FEMA or in terms of the foreign investment policy of the Government of India, where approval of the government or approval of the RBI is prescribed. However, a fundamental requirement of the Indian Constitution continues to be violated by the lawmakers with impunity – in almost every instance where approval of the government or the RBI is prescribed, no criteria to be followed in the grant of approval is made known.
Such a dispensation has exposed the administration of exchange controls to the prospect of being entirely arbitrary, unreasonable and opaque. It is a settled principle of Constitutional law in India that any law ought not to be arbitrary. Particularly, “subordinate” law that is not made by Parliament but in terms of powers delegated by Parliament – all the regulations made under FEMA by the RBI fall in that category – ought not to be arbitrary since Parliament is not expected to legislate arbitrarily. Even the delegation of powers by Parliament to regulatory bodies can be held by courts to be unconstitutional if they excessively delegate and do not prescribe criteria for handing down decisions by the authority carrying the delegated powers.
Worse, there is no appellate authority that can hear appeals against decisions of the RBI or the government of India in terms of exchange controls. Serious interpretational issues have arisen due to lack of precision in the drafting of regulations by the RBI. For instance, under the external commercial borrowings policy, historically borrowings were permitted for deployment in the “real sector”. From time to time, the RBI has clarified what “real sector” would include. However, borrowing transactions completed on a legitimate interpretation of the term can lead to controversies, and there is no appellate remedy available against any interpretation of such terms.
An appellate authority to hear appeals from decisions of the RBI or even the government of India on matters of exchange controls is fast becoming an imperative. While that may be far cry – the government is too busy to fill up vacancies even in long-established Securities Appellate Tribunal – at the minimum, a good start would be to lay down transparent criteria for grant of approval under exchange controls.
(The author is a partner of JSA, Advocates & Solicitors. The views expressedherein are his own.)