FEMA-The Foreign Exchange Management Act, 1999

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The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India “to consolidate and change the law relating to foreign exchange to facilitate external trade and payments and promote the orderly development and maintenance of foreign exchange market in India”. It was passed in the winter session of Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA). This act makes offences related to foreign exchange civil offences. It extends to the whole of India., replacing FERA, which had become incompatible with the pro-liberalization policies of the Government of India. It enabled a new foreign exchange management regime consistent with the emerging framework of the World Trade Organization (WTO). It also paved the way for the introduction of the Prevention of Money Laundering Act, 2002, which came into effect on 1 July 2005.

Objectives of FEMA

The main objective of FEMA was to help facilitate external trade and payments in India. It was also meant to help the orderly development and maintenance of the foreign exchange market in India. It defines the procedures, formalities, and dealings of all foreign exchange transactions in India. These transactions are mainly classified under two categories — Current Account Transactions and Capital Account Transactions.

FEMA applies to all parts of India and was primarily formulated to utilize foreign exchange resources efficiently. It is also equally applicable to the offices and agencies located outside India but managed or owned by an Indian Citizen. FEMA's head office is known as Enforcement Directorate and is situated in the heart of Delhi.

Applicability of FEMA Act

  • Exports of any foods and services from India to outside, foreign currency, that is any currency other than Indian currency,

  • Foreign exchange,

  • Foreign security,

  • Imports of goods and services from outside India to India,

  • Securities as defined in the Public Debt Act 1994,

  • Banking, financial and insurance services,

  • Sale, purchase and exchange of any kind (i.e. Transfer),

  • Any overseas company that is owned 60% or more by an NRI (Non-Resident Indian) and

  • Any citizen of India, residing in the country or outside (NRI)

Major Provisions of FEMA Act 1999

Here are major provisions that are part of FEMA (1999)

  • Free transactions on current accounts are subject to reasonable restrictions that may be imposed.

  • RBI controls capital account transactions.

  • Control over the realization of export proceeds.

  • Dealing in foreign exchange through authorized persons like authorized dealers or money changers etc.

  • Appeal provision including Special Director (Appeals)

  • Directorate of Enforcement

  • Any person can sell or withdraw foreign exchange, without any prior permission from RBI and then can inform RBI later.

  • Enforcement Directorate will be more investigative in nature

  • FEMA recognized the possibility of Capital Account convertibility.

  • The violation of FEMA is a civil offence.

  • FEMA is more concerned with management rather than regulations or control.

  • FEMA is a regulatory mechanism that enables the RBI and Central Government to pass regulations and rules relating to foreign exchange in tune with the foreign trade policy of India.

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