Foreign Exchange Management Act (FEMA) 1999

Introduction

The Foreign Exchange Management Act (FEMA) is an Act of the Parliament of India that was enacted in 1999. It is the primary legislation that governs foreign exchange transactions in India. The objective of FEMA is 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 the foreign exchange market in India.

Key Provisions of FEMA

Some of the key provisions of FEMA include:

  • Definition of foreign exchange: FEMA defines foreign exchange as “all currency other than Indian currency”. This includes foreign currency notes, coins, travelers’ cheques, demand drafts, bills of exchange, and letters of credit.
  • Division of foreign exchange transactions: FEMA divides foreign exchange transactions into two categories: current account transactions and capital account transactions.
    • Current account transactions are those that are related to the normal course of trade and commerce. They include imports and exports of goods and services, payments for travel and education, and remittances to family members living abroad.
    • Capital account transactions are those that involve the transfer of capital assets, such as investments, loans, and gifts.
  • Regulatory framework: FEMA establishes a regulatory framework for foreign exchange transactions. This framework includes the following:
    • Authorized dealers: FEMA empowers the Reserve Bank of India (RBI) to designate certain banks as authorized dealers. Authorized dealers are authorized to deal in foreign exchange on behalf of their clients.
    • Foreign exchange regulations: The RBI has issued a number of regulations and directions under FEMA to prescribe the terms and conditions for various types of foreign exchange transactions.
    • Penalties: FEMA provides for penalties for violations of its provisions. These penalties can include fines, imprisonment, or both.

MCQs

Here are some MCQs on FEMA 1999:

  1. Which of the following is not a current account transaction?
    • Import of goods
    • Remittance of money abroad for education
    • Investment in shares of a foreign company
    • Repayment of a foreign loan
    • The correct answer is (c). Investment in shares of a foreign company is a capital account transaction, not a current account transaction.
  2. Which of the following is not required for an Indian resident to remit money abroad for education?
    • Prior approval from the RBI
    • A valid passport
    • A visa for the country of education
    • A letter of admission from the educational institution
    • The correct answer is (a). Prior approval from the RBI is not required for an Indian resident to remit money abroad for education. Instead, the resident must only submit a declaration to the RBI stating the purpose of the remittance and the amount of money being remitted.
  3. What is the maximum amount of money that an Indian resident can remit abroad for medical treatment?
    • USD 200,000
    • USD 500,000
    • USD 1 million
    • There is no limit
    • The correct answer is (b). The maximum amount of money that an Indian resident can remit abroad for medical treatment is USD 500,000.
  4. Which of the following sectors is not open to FDI in India?
    • Telecommunications
    • Insurance
    • Banking
    • Education
    • The correct answer is (d). Education is not open to FDI in India. Instead, the only sectors that are open to FDI in India are telecommunications, insurance, and banking.

Conclusion

These are just some of the key provisions of FEMA 1999. For more information, please refer to the FEMA Act, 1999 and the regulations and directions issued by the RBI.