THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (FEMA)

Written by Priya Kalpushu on 10 April 2020
Updated by Drishti Grover on 26 November 2022

THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (FEMA)

I. ADOPTION OF FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) BY PARLIAMENT OF INDIA-THE MODUS OPERANDI

Foreign Exchange Regulation Act, 1973 (FERA) was introduced with an object of having stringent control to conserve foreign exchange and utilize the scarce resources in the best interest of the country.

After liberalization there was an increased flow of foreign exchange in India so there arise and need to review the provisions of FERA.

The Reserve Bank of India was accordingly asked to undertake fresh exercise and suggest a new legislation. A task force was constituted for this purpose in 1993 which submitted its report in 1994 thereby recommending substantial changes in the FERA.

On recommendations of the RBI Task Force, the Central Government decided to introduce the Foreign Exchange Management Bill and repeal the FERA, 1973.

Finally the Foreign Exchange Management Act, 1999 was adopted by the Parliament of India and came into force with effect from 1 June 2000.

The adoption of Foreign Exchange Management Act, 1999 (FEMA) by the Parliament of India is aimed at consolidating and amending the law relating to foreign exchange with the objective of facilitating trade and payments and for promoting the orderly development and maintenance of foreign exchange markets in India.

II. EXTENT AND APPLICATION OF FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (FEMA) [SECTION 1]

The Foreign Exchange Management Act, 1999 that has come into force with effect from June 1, 2000 extends to the whole of India. Also, it applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention thereunder committed outside India by any person to whom this act applies.

III. SCOPE OF FEMA (THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999)

Although the Scope of FEMA is limited in comparison to FERA's rules, yet FEMA, 1999 sensibly covers all the key areas of foreign currency and its regulation in India.

The scope of FEMA envisages applicability of FEMA to:
1. Foreign Exchange in India
2. Imports of Goods And Services From Outside India To India
3. Exports of Any Foods And Services From India To Outside
4. Foreign Currency i.e., Any Currency other than Indian Currency
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)
8. Sale, Purchase, and Exchange of Any Kind (i.e. Transfer) of property in India or outside India by Any Citizen of India whether residing in the country or outside (NRI)
9. Foreign banking and finance related activities (Current Account Transactions, Capital Account Transactions etc.)

IV. OVERALL SCHEME OF FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (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 ‘Authorized 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 ‘Authorized Persons’ under section 11 of FEMA. These directions are issued through AP (DIR) circulars. FEMA also makes provisions for enforcement, penalties, adjudication, and appeals.

V. ENFORCEMENT OF FEMA THROUGH DIRECTORATE OF ENFORCEMENT [SECTION 36 TO 38]

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. Section 36 of FEMA Act, 1999 provides that the Central Government shall establish a ‘Directorate of Enforcement’ with the director and such other officers or class of officers as it thinks fit who shall be called ‘Officers of Enforcement’.

Role of Directorate of Enforcement under FEMA, 1999:

Subject to such conditions and limitations as the Central Government may impose, an Officer of Enforcement may exercise the powers and discharge the duties confirmed or imposed on him under FEMA such as power of search, seizure etc.

VI. DIFFERENCE BETWEEN FEMA AND FERA

Some major points of difference between FEMA and FERA are as follows:

Difference	FERA - The Foreign Exchange Regulation Act,1973	FEMA - The Foreign Exchange Management Act,1999
Provisions	FERA consisted of 81 sections and was more complex.	FEMA is much simpler and consists of only 49 sections.
Features	Presumption of malafide intention i.e., Mens Rea and joining hands in offense existed in FERA.	The presumption of Mens Rea and abetment have been excluded in FEMA.
Scope	The scope of FERA was very wide. It dealt with all the transactions that were related to foreign exchange.	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.
New Terms in FEMA	Terms like capital account transaction current account transactions, persons, services etc. were not defined in FERA.	All these terms have been defined in detail under the scope of FEMA.
Definition of ‘Authorized Person’	The definition of “Authorized Person” in FERA was a narrow one. [Section 2 (b)].	The definition of Authorized person has been bound to include banks, money changes, offshore banking units etc.
Meaning of Resident as compared with the Income Tax Act	There was a big difference in the definition of “Resident” under FERA and Income Tax Act.	The scope of FEMA has been designed in such a manner so as to be consistent with the Income Tax Act, in respect of the definition of term “Resident”. Now the criteria of “In India for 182 days” to make a person resident has been brought under the scope of FEMA. Thus, a person who qualifies to be a non-resident under the Income Tax Act, 1961 will also be considered a non-resident under the scope of FEMA.
Punishment	Any offense under FERA was a criminal offense punishable with imprisonment as per Code of Criminal Procedure, 1973.	Under the scope of FEMA, all offences are considered to as civil offences only punishable with some amount of money as a penalty. Imprisonment is prescribed only when one fails to pay the penalty.
Quantum of Penalty	The monetary penalty payable under FERA was nearly 5 times the amount involved.	Under the scope of FEMA the quantum of penalty has been considerably decreased to 3 times the amount involved.