##city. the liberalisation of the exchange control regime was started in the mid - 1980 ’ s and gathered momentum in the 1990 ’ s. the liberalisation process ultimately culminated in replacement of fera, 1973 with the foreign exchange management act, 1999. 8. what did fema involve? for an economic agent or a market participant, the act per se did not bring any sea change in the way he was dealing with his foreign exchange requirements. please recall that we had already attained full convertibility on the current account and compliance with article viii of the imf. significant capital account liberalisation had already taken place to enable us to contemplate full capital account convertibility in 1997. though fema did several things, the most important was that it changed the way we should look at issues relating to foreign exchange transactions. it heralded the move away from conservation / restriction of foreign exchange transactions to their facilitation. the preamble to the act read : “ an act 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. ” the earlier discussion relating to fera 1947 and fera 1973 had underscored the point that laws or regulations relating to foreign exchange has to respond to the evolving economic situation. the objective and content of fema made it explicit. while fema formalised the current bis central bankers ’ speeches account convertibility with the common law principle “ all that is not forbidden is permitted ”, it did the reverse with respect to capital account transactions : “ all that is not permitted is forbidden ”. i shall discuss this at some length later. 9. the regulatory framework provided under fema has another important ingredient – it casts a great responsibility on the “ authorised persons ” the immediate and necessary counterparty to every agent / participant for any foreign exchange transaction. in the fera regime, their job was pretty much simple ; they just had to carry out a transaction as per the rbi permit. as and when we attain full capital account convertibility, their job will perhaps be simpler. but in the regime that obtains now, they have the difficult but important task of making a judgement on permissibility of a transaction. recognising this, fema empowers “ authorised persons ” to satisfy themselves about any foreign exchange transaction that the customer may wish to carry out, but at the same time provides that in case an “ authorised person ” forms

an opinion that a transaction is not permissible, it has to do so in writing and giving reasons. 10. let me go back to the preamble of fema. as we have seen an important part of the objective of fema is to facilitate trade and payments. with current account fully convertible, almost entire focus of the regulatory framework under fema is on the capital account transactions. the question then is this. is the regulatory framework that faces an economic agent or a market participant – be it an investor or an investee, a lender or a borrower – conducive enough to facilitate various capital account transactions? lest i am misunderstood, let me clarify that i am not advocating a greater degree of capital account openness or being more permissive in respect of this or that class of capital account transactions. the pace of capital account liberalisation will be dictated by a host of factors including macroeconomic conditions, financial stability issues and so on. my limited point is that once the policy framework has been spelt out, the implementation has to be such that anyone – a resident or more importantly a non - resident – contemplating a capital account transaction knows clearly and unambiguously what can be done, how it can be done and within what timeframe it can be done. i do not think we have succeeded too well in this objective, at least not as much as we should have. let me elaborate. 11. let us start with the regulatory framework. excluding the 26 original notifications containing regulations pertaining to mostly capital account transactions, there have been a total of 263 notifications amending the regulations originally made or subsequently amended. another dozen or so amendments are in the pipeline. after fema was introduced, the number of directives issued to the “ authorised persons ” was 36 in 2001 – 02 ; it had increased to 138 during 2011 – 12, 122 during 2012 – 13 and as many as 77 in less than 5 months in the current year. the two gigantic volumes of taxman ’ s exchange management manual – in small and close prints – look as formidable as any elaborate commentary on the most complex law. indeed, it will not surprise me if someone points out an inconsistency or contradiction between two different directions or notifications. so have we simplified or complicated? is it time for a comprehensive review? to my mind, it is an emphatic yes. 12. an important factor in this context is that capital account management has often been used as an instrument