Foreign Exchange Management Act (FEMA), 1999

Foreign Exchange Management Act (FEMA), 1999
10 April 2020

Foreign Exchange Management Act (FEMA), 1999

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India with an objective "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 foreign exchange market in India". It was passed in the winter session of Parliament in 1999 and has been introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA). The Foreign Exchange Management Act, 1999 (FEMA) came into the act on the 1st day of June 2000. The Foreign Exchange Management Act, 1999 (FEMA) applies to all parts of India. The act is also applicable to all branches, offices, and agencies outside India owned or controlled by a person who is a resident of India.

The Government of India initiated the process of liberalization of the Indian economy in 1991. Foreign Investment in various sectors was allowed. This increased flow of foreign exchange to India and foreign exchange reserves have increased significantly. In view of this, FERA has been revoked and FEMA has been passed. The act has been made effective from 1st June 2000. Reserve Bank of India (RBI) is the overall administering authority with respect to FEMA.

Overall Scheme Of FEMA :

The Foreign Exchange Management Act, 1999 (FEMA) makes provisions regarding the dealings in foreign exchange. Generally, all current account transactions are free. However, the Central Government can impose reasonable instructions by issuing rules. [Section 3 of FEMA]

Capital Account Transactions are allowed to the extent specified by Reserve Bank of India (RBI) by issuing regulations. [Section 6 of FEMA].

The Foreign Exchange Management Act, 1999 (FEMA) envisages that Reserve Bank of India (RBI) will have an administering role in the management of foreign exchange. Since Reserve Bank of India (RBI) cannot directly handle foreign exchange transactions, it sanctions ‘Authorised Persons’ to deal in foreign exchange as per directions furnished by Reserve Bank of India (RBI). [Section 10 of FEMA].

Reserve Bank of India (RBI) is empowered to issue directions to such ‘Authorised Persons’ under section 11 of FEMA. These directions are issued through AP (DIR) circulars. FEMA also makes provisions for enforcement, penalties, adjudication, and appeals.

Enforcement of FEMA:

Though Reserve Bank of India (RBI) exercises overall authority over foreign exchange transactions, enforcement of The Foreign Exchange Management Act, 1999 (FEMA) has been entrusted to a separate ‘Directorate of Enforcement’ formed for this purpose.

Applicability of FEMA Act:

The head office of FEMA is situated in New Delhi and known as Enforcement Directorate. FEMA is applicable to:

  1. Foreign exchange,
  2. Banking, financial and insurance services,
  3. Exports of any foods and services from India to outside, foreign currency, that is any currency other than Indian currency,
  4. Imports of goods and services from outside India to India,
  5. Securities as defined in the Public Debt Act 1994,
  6. Foreign security,
  7. Any overseas company that is owned 60% or more by an NRI (Non-Resident Indian) and
  8. Any citizen of India, residing in the country or outside (NRI),
  9. Sale, purchase, and exchange of any kind (i.e. Transfer).
Major Provisions of FEMA Act 1999:

Some major provisions that are part of FEMA (1999) are as follows :

  1. FEMA is more concerned with the management rather than regulations or control.
  2. FEMA recognized the possibility of Capital Account convertibility.
  3. FEMA is a regulatory mechanism that enables Reserve Bank of India (RBI) and the Central Government to pass regulations and rules relating to foreign exchange in tune with foreign trade policy of India.
  4. Reserve Bank of India (RBI) controls over capital account transactions.
  5. Any person can sell or withdraw foreign exchange, without any prior permission from Reserve Bank of India (RBI) and then can inform RBI later.
  6. Appeal provision including Special Director (Appeals)
  7. Control over the realization of export proceeds.
  8. Directorate of enforcement.
  9. Dealing in foreign exchange through authorized persons like an authorized dealer or money changer etc.
  10. Enforcement Directorate will be more investigative in nature
  11. Free transactions on current accounts subject to reasonable restrictions that may be imposed.
  12. The violation of FEMA is a civil offense.
Difference Between FEMA And FERA :

Some major points that differentiate between FEMA and FERA are as follows :

1. Scope:

FEMA: The scope of FEMA is narrow. It only deals with specified transactions related to foreign exchange i.e. checking and controlling of only those transactions which are specifically mentioned in the act and does not deal with transactions that are not specifically mentioned in the act.

FERA: The scope of FERA was very wide. It dealt with all the transactions that were related to foreign exchange.

2. Content:

FEMA: It is a small enactment with 49 sections out of which 12 sections relate to the operational part and rest with the penal provisions.

FERA: It was a long enactment with 81 sections out of which 32 sections were related to the operational part and rest deals with the appeals, penalty, etc.

3. Nature:

FEMA: It is civil law.

FERA: It was considered as criminal law.

4. New Terms:

FEMA: Captial account transactions, current account transactions, persons, services like new terms are introduced.

FERA: These terms were not defined.

5. Penalty Provisions:

FEMA: It provides only for a monetary penalty for violing the provisions. Imprisonment is imparted only on non-payment of the monetary penalty.

FERA: Penalty provisions were very hard. In this act, imprisonment was imparted to persons violating its provisions.