Foreign Exchange Management Act, 1999 (FEMA)

The Foreign Exchange Management Act, 1999 (FEMA) is a major law passed by the Parliament of India to manage and regulate foreign exchange in the country. It was passed on 29 December 1999, during the government of Prime Minister Atal Bihari Vajpayee, and came into force on 1 June 2000. FEMA replaced the older Foreign Exchange Regulation Act (FERA), which had become outdated after India’s economic liberalisation of 1991.

The main objective of FEMA is to facilitate external trade, regulate payments, and promote an orderly and stable foreign exchange market in India. Unlike FERA, which treated violations as criminal offences, FEMA treats most violations as civil offences, making the law more business-friendly and less strict.

FEMA applies to the entire country and aligns India’s foreign exchange laws with global trade rules under the World Trade Organization (WTO). FEMA also enabled the creation of the Prevention of Money Laundering Act (PMLA), 2002.

In 2004, FEMA introduced the Liberalised Remittance Scheme (LRS), which allows resident individuals—including students and minors—to send money abroad more easily.

How FEMA is Different from FERA

Under FERA (1973), the approach was very strict:

  • Everything was prohibited unless specifically permitted.
  • Even minor violations could lead to imprisonment.
  • A person was considered guilty until proven innocent.

Under FEMA, the approach is relaxed and modern:

  • Current account transactions are allowed by default unless specifically restricted.
  • Capital account transactions are restricted unless specifically permitted.
  • The focus is on managing foreign exchange, not controlling it.
  • Violations are mostly civil offences, not criminal.

FEMA empowers the Reserve Bank of India (RBI) to issue regulations and the Central Government to issue rules related to foreign exchange.

History – From FERA to FEMA

Foreign Exchange Regulation Act (FERA), 1973

FERA was introduced when India had very low foreign exchange reserves. It assumed that all foreign exchange earned by Indian residents belonged to the government and must be surrendered to the RBI. It heavily restricted:

  • Foreign payments
  • Foreign currency transactions
  • Import/export of currency
  • Expansion of multinational companies

A famous example:
Coca-Cola left India in 1977 due to FERA rules requiring the company to dilute its shareholding.

With India’s economic reforms in 1991, FERA became incompatible with liberalisation. It was amended in 1993 and finally repealed in 1998, making way for FEMA (1999).

Why FEMA Was Introduced

FEMA was introduced to:

  • Encourage foreign trade
  • Make foreign exchange transactions easier
  • Support India’s growing global economy
  • Reduce restrictions on foreign investment
  • Replace FERA’s strict, criminal-based framework

Under FEMA, the foreign exchange market in India is managed in a more flexible and globally aligned manner.

Key Principle of FEMA

FEMA divides transactions into two major categories:

1. Current Account Transactions (Allowed unless prohibited)

These include:

  • Remittances
  • Trade payments
  • Student payments
  • Travel and medical payments

2. Capital Account Transactions (Prohibited unless permitted)

These include transactions that change assets or liabilities, such as:

  • Foreign Direct Investment (FDI)
  • Overseas Investment
  • External Commercial Borrowings (ECB)
  • Foreign portfolio investment

A company receiving FDI or making overseas investments must file an FLA Return (Foreign Liabilities and Assets) every year.

Regulations and Rules under FEMA

(All regulations issued under governments led by PM Atal Bihari Vajpayee and PM Narendra Modi)

Some important regulations include:

  • Foreign Exchange Management (Current Account Transactions) Rules, 2000
  • Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000
  • FEMA Regulations for foreign currency accounts
  • FEMA Rules for export and import of currency
  • FEMA Regulations for insurance, deposits, investments, remittances
  • FEMA (Overseas Investment) Rules, 2022
  • FEMA (Cross-Border Merger) Regulations, 2018
  • FEMA (Non-Debt Instruments) Rules, 2019
  • FEMA (Borrowing and Lending) Regulations, 2018
  • FEMA (Compounding Proceedings) Rules, 2024

These regulations govern the entire foreign exchange ecosystem—trading, payments, investments, property transactions, and overseas operations.

Related Law: Foreign Contribution Regulation Act (FCRA), 2010

FCRA regulates the acceptance and use of foreign donations by:

  • Individuals
  • NGOs
  • Associations
  • Companies

Its goal is to prevent foreign funds from being used in ways that harm India’s national interest.

Applicability of FCRA

FCRA applies to:

  • All of India
  • Indian citizens living abroad
  • Indian companies’ branches outside India

Laws Governing Foreign Contribution

  • FCRA, 2010
  • FCRA Rules, 2011

The earlier FCRA 1976 was repealed.

What Is “Foreign Contribution”?

Foreign contribution means:

  1. Any article (not for personal use above ₹25,000)
  2. Any currency (Indian or foreign)
  3. Any security or foreign security

It includes:

  • Money transferred from a foreign source through intermediaries
  • Income earned on foreign contributions (like bank interest)

But it does not include:

  • Fees paid by foreign students
  • Payments for business or services

Who is a “Person” under FCRA?

  • Individuals
  • Hindu Undivided Families
  • Associations
  • Section 8 (Non-profit) companies