The Foreign Exchange Management Act (FEMA) is a law enacted by the Indian government in 1999 to consolidate and amend the laws relating to foreign exchange transactions in India. FEMA replaced the Foreign Exchange Regulation Act (FERA) which was enacted in 1973. The objective of FEMA is to facilitate external trade and payments, promote orderly development and maintenance of the foreign exchange market in India and preserve the foreign exchange resources of the country.
FEMA is a comprehensive legislation that covers all aspects of foreign exchange transactions, including acquisition and transfer of foreign currency, transactions involving non-residents, holding of foreign exchange assets, and foreign investments in India. It also covers foreign exchange violations and penalties for non-compliance with the provisions of the Act.
Under FEMA, the Reserve Bank of India (RBI) is responsible for regulating foreign exchange transactions in India. The RBI has the power to make rules and regulations governing foreign exchange transactions and to issue notifications and guidelines for the same.
FEMA regulates the following areas related to foreign exchange transactions in India:
- Transactions involving foreign exchange – FEMA governs all transactions involving foreign exchange, including the purchase and sale of foreign currency, remittances, and payments.
- Transactions involving non-residents – FEMA governs all transactions between residents and non-residents, including investments, loans, and borrowings.
- Acquisition and transfer of immovable property outside India – FEMA regulates the acquisition and transfer of immovable property outside India by residents and non-residents.
- Holding of foreign exchange assets – FEMA regulates the holding of foreign exchange assets by residents and non-residents, including foreign currency accounts and foreign securities.
- Foreign investment in India – FEMA regulates foreign investment in India, including investments in equity and debt instruments, and also covers foreign direct investment and foreign portfolio investment.
- Enforcement and penalties – FEMA has provisions for the enforcement of the Act and penalties for non-compliance with its provisions.
FEMA has been amended several times since its enactment to keep pace with the changing foreign exchange environment and to simplify and liberalize the foreign exchange regulations in India. The Act has played an important role in promoting foreign trade and investment in India and ensuring the orderly development of the foreign exchange market in the country.