The Foreign Exchange Management Act, 1999 (FEMA) is a key legislation enacted by the Parliament of India aimed at facilitating external trade, payments, and promoting the development of a stable foreign exchange market in India. It came into force on 29 December 1999, replacing the Foreign Exchange Regulation Act (FERA) of 1973. FEMA aligns with the liberalization policies initiated in India during the 1990s and serves as a regulatory framework for foreign exchange, making offences related to foreign exchange civil in nature rather than criminal, as was the case under FERA.
Key Features of FEMA:
- Objective: FEMA aims to consolidate and amend laws related to foreign exchange to facilitate trade and payment and ensure the orderly functioning of the foreign exchange market.
- Replacement of FERA: The stringent FERA was replaced as it conflicted with the liberalization policies. FERA presumed guilt, while FEMA aligns with the global shift toward more relaxed foreign exchange policies, particularly in the context of World Trade Organization (WTO) norms.
- Management over Regulation: FEMA focuses on the “management” of foreign exchange rather than strict regulation, signaling a policy shift toward easier external trade and payments.
- Civil Offences: Under FEMA, violations related to foreign exchange are treated as civil offenses, as opposed to FERA’s approach, which criminalized them.
- Central Government and RBI’s Role: FEMA empowers the Reserve Bank of India (RBI) to regulate foreign exchange, while the Central Government is responsible for framing rules aligned with the country’s foreign trade policy.
- Simplification of External Trade: FEMA simplifies current account transactions, such as remittances for trade, student remittances, etc., and capital account transactions such as Foreign Direct Investment (FDI) and External Commercial Borrowings (ECB). These are categorized and treated separately under FEMA.
Major Differences Between FERA and FEMA:
- FERA: Everything was prohibited unless explicitly permitted, with a presumption of guilt until innocence was proven.
- FEMA: Everything is permitted unless specifically prohibited, with the presumption of innocence, following the broader approach of civil laws.
Current Account vs Capital Account Transactions:
- Current Account Transactions: These include all transactions except those related to capital, such as personal remittances, trade, and services, which are generally free unless restricted.
- Capital Account Transactions: These involve changes in foreign assets or liabilities and require government or RBI approval.
Key Provisions:
- Section 5: Permits current account transactions unless restricted by the Central Government.
- Section 6: Regulates capital account transactions and lays down conditions for FDI, debt, equity outflows, and more.
Foreign Contribution (Regulation) Act (FCRA), 2010:
FEMA also intersects with laws like the FCRA, 2010, which regulates the acceptance and utilization of foreign contributions by individuals, companies, or organizations in India. The act is applicable to the whole of India and even extends to Indian citizens or companies abroad.
Impact of Liberalization:
The shift from FERA to FEMA marked India’s transition toward economic liberalization, facilitating foreign investment and boosting trade. FERA’s rigid policies, like forcing multinational companies (e.g., Coca-Cola) to dilute their stakes, discouraged foreign investment, but FEMA allowed more flexibility and openness to foreign capital flows.
In conclusion, FEMA has played a crucial role in transforming India’s foreign exchange regime, promoting external trade, encouraging foreign investment, and aligning the country’s policies with global trade practices. Its primary aim remains the development and orderly maintenance of the foreign exchange market, contributing to India’s broader economic reforms.