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Foreign Exchange Management Act, 1999 (FEMA)

Introduction
Foreign Exchange Management Act, 1999 (FEMA) came into force by an act of Parliament. It was
enacted on 29 December 1999. This new Act is in consonance with the frameworks of the World
Trade Organisation (WTO). It also paved the way for the Prevention of Money Laundering Act,
2002 which came into effect from July 1, 2005.
On the other hand, FEMA was introduced with the changes because of the new, liberal and changing
environment.
Also, earlier FERA was passed due to the insufficient foreign exchange in the country and FEMA
was passed with the objective to relax the controls on foreign exchange in India.
The head office of FEMA is situated in New Delhi known as Enforcement Directorate and is headed
by a Director.

Meaning
It is a set of regulations that empowers the Reserve Bank of India to pass regulations and enables the
Government of India to pass rules relating to foreign exchange in tune with the foreign trade policy
of India.

Authorities
Reserve Bank of India and the Central Government is the controlling authority- Central Government
enacts the laws and RBI ensures its enforcement.
The Directorate of Enforcement is the administrative and managing authority.

Objectives
To reinforce and amend the law relating to foreign exchange.
To simplify and ease the external trade and payments.
To promote the systematized development and maintenance of a healthy foreign exchange market in
India.
To remove disparity of payments.
To control and direct the employment business and investment of the non-residents.
To utilise the foreign exchange resources effectively for the country.

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Main Features/ Provisions of Foreign Exchange Management Act, 1999

The following are some of the important features of Foreign Exchange Management Act:

i. It is consistnt with full current account convertibility and contains provisions for progressive
liberalisation of capital account transactions.

ii. It is more transparent in its application as it lays down the areas requiring specific permissions of
the Reserve Bank/Government of India on acquisition/holding of foreign exchange.

iii. It classified the foreign exchange transactions in two categories, viz. capital account and current
account transactions.

iv. Provisions relating to capital account transactions

• It provides power to the Reserve Bank for specifying, in , consultation with the central
government, the classes of capital account transactions and limits to which exchange is
admissible for such transactions.
• Foreign nationals are not allowed to invest in any company which is engaged in the business
of Chit Fund or in Agricultural or Plantation activates or in Real Estate business or
construction of farm houses or trading in Transferable Development Rights .
• Detailed rules and regulations are provided on borrowing and lending in Foreign Currency
• Authorised dealers are now permitted to grant rupee loans to NRIs against security of shares
or immovable property in India, subject to certain terms and conditions

v. It gives full freedom to a person resident in India, who was earlier resident outside India, to
hold/own/transfer any foreign security/immovable property situated outside India and acquired when
s/he was resident.

vi. Provisions relating to contravention and penalties

• Section 13 to 15 state that If any body or person contravenes the rules and regulation of
FEMA, she will be liable to a penalty three times of sum involved in contravention.
• If contravention will continue, then he will pay upto Rs. 5000 per day during the time of
contravention.

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• This act is a civil law and the contraventions of the Act provide for arrest only in exceptional
cases.

vii. FEMA does not apply to Indian citizen’s resident outside India.

Viii Regulation for Current Account Transaction:

• Any person can sell or draw foreign exchange to or from an authorised dealer except for
certain prohibited transactions like remittance of lottery winnings, remittance of interest
income on funds held in Non-Resident Special Rupee (NRSR) account scheme, etc.
• Reserve Bank approval is required for importers availing of Supplier’s Credit beyond 180
days and Buyer’s Credit irrespective of the period of credit.
• Authorised dealers are permitted remittance of surplus freight/passage collections by
shipping/airline companies or their agents, multimodal transport operators, etc. after
verification of documentary evidence in support of the remittance.

Ix Regulations relating to export of goods and services

• Export proceeds are required to be realised within a period of 6 months from the date of
shipment.
• An enabling provision has been made in this regulation to delegate powers to authorised
dealers to allow extension of time.
• Export of goods on elongated credit terms beyond six months requires prior approval of
Reserve Bank.

X Provision regarding authorised dealers

• RBI can authorise any body who can dal in money exchange or off shore transaction and
foreign exchange
• . She has to follow the rules an guidelines of RBI
• . RBI can revoke the authorisation any time
• . In case of contravention of rules , liable to pay penalty upto 10000 and Rs 2000 per day
during which contravention continues.
Categories of Authorised Persons under FEMA

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Category Authorized Dealer Authorized Dealer Authorized Full Fledged

– Category I Category – II Dealer Money Changers
Category – III

Entities 1.Commercial Banks 1. Upgraded FFMC 1. Select 1. Department of

2.State Co-operative 2. Co-operative Banks Financial and Post
Banks 3. Regional Rural other 2.Urban Co-
3.Urban Co- Banks (RRB’s), others Institutions operative Banks
operative Banks 3. Other FFMC

Activities As per RBI All activities Foreign Purchase of foreign

Permitted guidelines, all permitted to FFMC exchange, exchange and sale
current and capital and specified non- transactions for private and
account transactions trade related current related business visits
account transactions abroad

Structure of FEMA.

1. The Head Office of FEMA, also known as Enforcement Directorate, headed by the Director
is located in New Delhi.
2. There are 5 zonal offices in Delhi, Mumbai, Kolkata, Chennai, and Jalandhar, each office is
headed by Deputy Director.
3. Every 5 zones are further divided into 7 sub-zonal offices headed by Assistant Directors and
5 field units headed by Chief Enforcement Officers.
.

Conclusion
FEMA only permits an authorized person to deal in Foreign exchange or foreign security ( shares,
stocks, bonds etc). FEMA became the need of an hour to be replaced by an old act which was FERA
as FERA was stringent and FEMA is liberal and also more flexible than FERA.
Any person who wants to do business in a foreign country or to buy foreign securities he/she needs
an authorised person to do that and also to understand this Act in order to avoid penalties and he/she
should also be aware of the restrictions on it.
The main objective of FEMA was to consolidate and amend the laws relating to the foreign exchange
with the reason to facilitate the external trade and payments and for the maintenance of the foreign

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exchange market in India. FEMA’s replacement with FERA to an extent has boosted the Indian
economy as it is flexible and also a civil offence in comparison with FERA.

Difference between FERA and FEMA

Basis FERA FEMA

FERA was implemented to FEMA aims to promote foreign trade,

regulate foreign payments and to foreign payments and to increase the
Meaning
ensure optimum use of foreign size of foreign exchange reserve in
currency in India. the country.

It is an old enactment and was It is a new enactment and was

Enactment approved by the Parliament in approved by the Parliament in the
the year 1973. year 1999 and is currently in force.

It has 49 Sections divided into 7

Number of Sections It had 81 Sections.
chapters.

When this was When foreign exchange reserves were

When foreign exchange reserves
introduced(position of adequate but required regulation and
were very low.
foreign exchange) balance.

Outlook towards foreign

A rigid approach was there. A flexible approach is there.
exchange reserves.

Determining the residential Through citizenship only it was More than 182 days/ 6 months stay in
status determined. India.

There is no requirement of the pre-

A person has to take permission
approval from RBI regarding the
Transfer of funds from RBI relating to the transfer
transfer of funds relating to the
of funds to external operations.
external operations, funds or trade.

If any violation of the provision If any violation of the provision or

contravention/violation or order then it will be order then it will be considered as a
considered as a criminal offence. civil offence.

The guilty person will be The guilty person will be held liable
Punishment for the violation
sentenced to imprisonment. to pay a fine and if the fine is not paid

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within stipulated time then will be

sentenced to imprisonment.

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