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Since its inception, the Foreign Exchange Management Act has been contributing to the efficient use of foreign exchange resources in India. It is compliant with the post-liberalisation reforms of India and the guidelines of the World Trade Organisation.
The Foreign Exchange Management Act was enacted in December 1999 to consolidate and amend foreign exchange laws in India. Its objective is to facilitate foreign trade and payments and promote the development of the foreign exchange market in the country.
Let us find out more about FEMA, why it was enacted and other related aspects.
History of the Foreign Exchange Management Act
The government of India enacted the Foreign Exchange Regulation Act, 1973 (FERA) to tackle the foreign exchange crisis in the country. The purpose of FERA was to regulate foreign exchange dealings and other related activities to conserve the country’s foreign exchange reserves.
However, FERA rules were stringent and made it difficult for the Indian economy to integrate with the world economy. Since the act became incompatible with the post-liberalisation policies of the government, it was repealed in 1999 and replaced by the Foreign Exchange Management Act.
FEMA also ensured compliance with the World Trade Organisation (WTO) guidelines. It resulted in the efficient use of foreign exchange resources and a positive impact on the Indian economy.
Difference Between FERA and FEMA
Here’s how FERA and FEMA differ from each other:
FERA |
FEMA |
The objective was to prevent misuse and conserve foreign exchange |
The objective is to facilitate foreign trade and payments and develop the foreign exchange market |
FERA emphasised exchange regulation or control |
FEMA emphasises foreign exchange management |
Violation of the act was a criminal offence |
Violation of the act is a civil offence |
Salient Features of the Foreign Exchange Management Act
The salient features of FEMA are as follows:
- The FEMA gives the central government the powers to regulate foreign exchange.
- Financial transactions involving foreign exchange or securities must be carried out by “Authorised Persons” with the approval of the FEMA. Authorised persons include authorised dealers, money changers, offshore banking units, etc.
- Foreign exchange transactions are categorised into capital account and current account transactions.
- The balance of payments under FEMA records transactions of assets, goods and services between nationals of various countries.
- The FEMA Act gives authority to the Reserve Bank of India to establish the categories of capital account dealings and exchange restrictions applicable to such dealings in consultation with the government of India.
- It includes provisions related to the gradual liberalisation of capital account transactions.
- The act allows an individual living in India who previously resided abroad to own, hold and transfer real estate or foreign securities acquired while living outside India.
- FEMA violation allows for arrest only in extreme circumstances.
Applicability of the Foreign Exchange Management Act
The applicability of the FEMA extends to the whole of India as well as offices, branches and agencies abroad that are owned or controlled by people residing in India. The applicability of the FEMA regulations includes:
- Foreign exchange and foreign security
- Any kind of purchase, sale and exchange (Transfer)
- Securities defined under the Public Debt Act, 1994
- Banking, finance and insurance services
- Exportation of commodities or services from India to other countries
- Importation of commodities or services from other countries to India
- Foreign corporation in which a Non-Resident Indian holds a minimum of 60% of the ownership
- Indian nationals residing inside or outside India
Authorised Persons Under FEMA
FEMA divides authorised persons into four categories. Each category comprises a group of entities. The table below lists the authorised persons under the act:
Categories |
Authorised persons |
Permitted activities |
Category I |
Commercial banks, State Co-operative banks and Urban Co-operative banks |
All current and capital account transactions as per the RBI directives |
Category II |
Co-operative banks, commercial banks, Regional Rural Banks (RRBs), upgraded Full Fledged Money Changers (FFMCs) |
All FFMC-approved activities and current account transactions that are not related to commerce |
Category III |
Select financial and other institutions |
Transactions related to foreign exchange |
Category IV |
Urban Co-operative banks, the Department of Post and other FFMCs |
Purchase and sell of foreign currency for personal and professional travels abroad |
Foreign Exchange Management Act Penalties
- Any party violating the FEMA provisions or a rule, direction, regulation, notification or order under the act is subject to a penalty of thrice the amount involved in the violation or up to ₹2 lakhs.
- In case of repeated violations, the person has to pay an additional penalty of up to ₹5,000 for each day till the violation continues.
- The adjudicating authority may direct the party to turn over any property, currency, money or securities involved in the violation to the central government.
- If the party violating FEMA compliance fails to pay the penalty amount within 90 days of getting a notice, he/she is subject to civil imprisonment.
Structure of FEMA
- The head office of FEMA is known as the Enforcement Directorate. It is located in New Delhi and is headed by the Director.
- The five zonal offices of FEMA are located in Delhi, Kolkata, Mumbai, Jalandhar and Chennai. Each zonal office is headed by a Deputy Director.
- Each zone is further divided into seven sub-zonal offices headed by Assistant Directors and five field units headed by Chief Enforcement Officers.
Conclusion
The Foreign Exchange Management Act was a step in the right direction as it created a liberalised environment for the Indian foreign exchange market. Make sure you comply with the act while dealing in foreign trade and payments to avoid penalties.
Understanding FEMA rules is also essential if you are an NRI since it affects how you can send and receive funds to and from India. As an NRI, you must also be familiar with the income tax filing for NRI* rules.
