Introduction to FEMA
The Foreign Exchange Management Act (FEMA), 1999 is an important law governing foreign exchange transactions in India. It was enacted to facilitate external trade and payments and to promote the orderly development and maintenance of the foreign exchange market in India. FEMA replaced the earlier Foreign Exchange Regulation Act (FERA), 1973, which was a very strict law focused on controlling foreign exchange.
FEMA came into force on 1 June 2000. The shift from FERA to FEMA reflects India’s move from a control-based system to a management-based and liberalised system in line with economic reforms.
Objectives of FEMA
The main objective of FEMA is management of foreign exchange, not control. It aims to ensure that foreign exchange transactions are conducted in an orderly manner and support economic growth.
The key objectives include:
- Facilitating external trade and payments
- Promoting foreign investment in India
- Maintaining stability in foreign exchange market
- Encouraging smooth movement of foreign capital
This change in approach is very important from an exam point of view.
Scope and Applicability of FEMA
FEMA applies to:
- The whole of India
- All branches, offices, and agencies outside India owned or controlled by a person resident in India
- All persons resident in India
- Certain transactions involving persons resident outside India
Thus, FEMA has both territorial and extraterritorial applicability.
Important Definitions under FEMA
Person Resident in India
A person resident in India means a person who has resided in India for more than 182 days during the preceding financial year, but it excludes:
- Persons going abroad for employment, business, or indefinite stay
- Foreign nationals who stay in India for similar purposes
Residential status under FEMA is based on intention of stay, not citizenship.
Capital Account Transaction
A capital account transaction is a transaction that alters assets or liabilities outside India of persons resident in India, or in India of persons resident outside India.
Examples include:
- Foreign Direct Investment (FDI)
- Overseas investment
- External Commercial Borrowings (ECB)
- Acquisition of immovable property abroad
Capital account transactions are regulated under FEMA.
Current Account Transaction
A current account transaction refers to transactions other than capital account transactions. These are generally related to day-to-day trade and services.
Examples include:
- Import and export of goods
- Remittance for travel, education, or medical treatment
- Interest payments on loans
Current account transactions are generally permitted, unless specifically restricted.
Regulatory Framework under FEMA
FEMA provides a structured regulatory framework involving multiple authorities.
Reserve Bank of India (RBI)
RBI is the primary regulatory authority under FEMA. It:
- Regulates foreign exchange transactions
- Issues rules, regulations, and directions
- Controls capital account transactions
- Authorises banks as Authorised Dealers (ADs)
Central Government
The Central Government:
- Makes rules on current account transactions
- Specifies restrictions and limits
- Appoints adjudicating authorities and appellate tribunals
Authorised Persons
Authorised persons are entities permitted by RBI to deal in foreign exchange.
They include:
- Authorised Dealers (mostly banks)
- Money changers
- Offshore banking units
Banks play a critical role as Authorised Dealers under FEMA.
Permitted and Prohibited Transactions
FEMA adopts a permissive approach.
- Current account transactions are freely permitted unless prohibited.
- Capital account transactions are permitted only to the extent allowed by RBI.
Certain transactions like remittance for lottery, betting, or prohibited activities are not allowed.
Contraventions and Penalties under FEMA
Unlike FERA, FEMA treats violations as civil offences, not criminal offences.
If a person contravenes FEMA:
- Penalty up to three times the sum involved, or
- If amount is not quantifiable, penalty up to ₹2 lakh
- Additional penalty of ₹5,000 per day for continuing offence
This reflects the liberal and non-punitive nature of FEMA.
Adjudication and Appeals
FEMA provides a structured mechanism for dispute resolution.
- Adjudicating Authority decides penalties
- Appeal lies with Appellate Authority
- Further appeal can be made to Appellate Tribunal
- Final appeal lies with High Court
This ensures fairness and transparency.
Difference Between FEMA and FERA (Exam Favorite Topic)
FERA was restrictive, while FEMA is liberal.
FERA focused on control, FEMA focuses on management.
FERA treated offences as criminal, FEMA treats them as civil.
FERA assumed foreign exchange as scarce, FEMA recognises it as a resource.
Role of FEMA in Indian Banking System
For banks, FEMA is highly relevant as they act as Authorised Dealers.
Banks are responsible for:
- Ensuring compliance with FEMA rules
- Monitoring foreign exchange transactions
- Reporting to RBI
- Preventing misuse of foreign exchange
Knowledge of FEMA is essential for bankers handling forex, trade finance, and remittances.
Importance of FEMA for Indian Economy
FEMA has contributed significantly to:
- Liberalisation of foreign exchange regime
- Growth of foreign trade
- Increase in foreign investment
- Stability of forex market
It supports India’s integration with the global economy.
Conclusion
The Foreign Exchange Management Act, 1999 is a landmark legislation that transformed India’s foreign exchange framework from strict control to effective management. By facilitating trade, encouraging investment, and ensuring market stability, FEMA plays a crucial role in India’s economic development.