STATUTORY BASIS : Exchange control was introduced in India with the outbreak of second World War on September 3, 1939. This was done by virtual of the emergency powers derived under the financial provisions of the Defence of India Rules. The main purpose was to conserve the non-sterling area currencies and utilise them for essential purposes. India was a part of British Empire, hence, it was basically introduced to boost up the war-efforts of the United Kingdom's Government, When India became independent, she was having large foreign exchange balances held in her favour in London. The UK Government was impovertsheda s a result of the war and freeze the balances. India was in dire need for foreign exchange to meet the developmental requirements of the country, India's sources of foteig11 exchange were limited to exports of a few traditional items oily, such as tea, jute, gunny, etc. The income from exports, even when supplemented by large borrowings from abroad, fell far short of the total requirement. This resulted in huge deficits in her balance of payments. Hence, it became essential to conserve the country's scarce foreign exchange resources.
Thus, the foreign exchange control became essential to make the most prudent use of the foreign exchange resources, It wag, therefore, decided to place the control on a statutory basis and the Foreign Exchange Regulation Act of 1947 was enacted. The act, which came into force on March 25, 1947, was valid initially for five years only. In 1952, its life was extended till the end of 1957 and it was finally placed on a permanent basis in 1957. The act empowered the Reserve Bank and in certain cases the Central Government to control and regulate dealings in foreign exchange. This includes payments outside India export and import of currency notes and bullion, transfer of securities between residents and non-residents, acquisition of foreign securities, etc. The act was later replaced by a more comprehensive legislation. The new Foreign Exchange Regulation ct, 1973, came into force on January 1, 1974, while the basic structure of the 1973 act 1s the same as that of 1947 act, certain new provisions have been introduced besides amendment to some of the provisions of the earlier act, The bank has now been vested with additional powers to regulate the exchange process. This includes the investments and the trading, commercial and industrial activities in India of foreign companies (other than banking companies), foreign nationals and non resident individuals; commercial property abroad and the non resident individuals.
Commercial and industrial activities abroad by residents have also been brought under the control. Further the FERA 1973 has been substantially, amended by the Foreign Exchange Regulation (Amendment) Act, 1993. It has been again amended by the Finance Act, 1995.