The Foreign Exchange Management Act, 1999
Foreign Exchange Management Act, 1999 (FEMA)
Overview:
The Foreign Exchange Management Act (FEMA), 1999 is an Indian law enacted to facilitate external trade and payments and to promote the orderly development and maintenance of the foreign exchange market in India. It replaced the earlier Foreign Exchange Regulation Act (FERA), 1973, which was more restrictive.
FEMA focuses on managing foreign exchange with a goal of promoting India’s integration with the global economy while safeguarding its financial stability.
Background:
Before FEMA, foreign exchange was regulated by FERA, which was very stringent and penal in nature.
With liberalization in the early 1990s, India needed a more flexible, development-friendly law.
FEMA was introduced in 1999 and came into force on 1st June 2000.
It emphasizes regulation and management rather than strict control.
Objectives of FEMA:
Facilitate External Trade and Payments: Promote smooth and efficient foreign exchange transactions.
Promote Foreign Exchange Market: Encourage orderly development and maintenance of foreign exchange markets in India.
Protect Indian Economy: Prevent misuse or destabilization through foreign exchange dealings.
Encourage Foreign Investment: Support foreign investment inflows and Indian investments abroad within legal parameters.
Key Features of FEMA:
Regulatory Framework:
FEMA regulates all transactions involving foreign exchange and foreign securities.
It classifies transactions as “Capital Account Transactions” and “Current Account Transactions.”
Current Account Transactions:
Relate to day-to-day foreign exchange dealings like payments for imports, travel, education, medical expenses abroad, etc.
Generally allowed freely with few restrictions.
Capital Account Transactions:
Involve transfer of ownership of assets and liabilities across countries.
Include foreign investments, loans, securities, and remittances.
Require prior approval of the Reserve Bank of India (RBI) or the government in certain cases.
Authorized Persons:
Only authorized persons (like banks approved by RBI) can deal in foreign exchange.
All foreign exchange transactions must be routed through authorized persons.
RBI as the Regulator:
The Reserve Bank of India is the primary authority for implementing FEMA.
RBI issues rules, regulations, and notifications under FEMA.
It monitors foreign exchange transactions and enforcement.
Decriminalization:
FEMA is a civil law with civil liabilities.
Unlike FERA, which was criminal and punishable by imprisonment, FEMA violations attract penalties but are not criminal offenses.
Important Provisions under FEMA:
Definition of Foreign Exchange: Includes foreign currency, deposits, drafts, travelers’ cheques, securities, etc.
Export and Import of Currency: Limits on the amount of currency individuals can carry in and out of India.
Investments: Regulates foreign direct investment (FDI) and portfolio investment in India.
Remittances: Guidelines on sending money abroad or receiving foreign currency.
Acquisition and Transfer of Immovable Property: Restrictions on foreigners buying property in India.
Offenses and Penalties: Penalties can be imposed for contraventions, including fines up to three times the amount involved.
Differences Between FEMA and FERA:
| Aspect | FERA | FEMA |
|---|---|---|
| Nature | Criminal law | Civil law |
| Objective | Control and regulate foreign exchange | Management and promotion |
| Penalties | Imprisonment and fines | Only fines |
| Approach | Restrictive | Liberal and facilitative |
| Enforcement | Police and courts | RBI and civil authorities |
Impact and Importance of FEMA:
Encouraged Foreign Investment: Liberalized the framework for foreign investments.
Facilitated Trade: Made foreign exchange dealings smoother, aiding globalization.
Stable Forex Market: Helped maintain stability and confidence in foreign exchange transactions.
Legal Clarity: Provided a clear legal framework for foreign exchange matters.
Administration and Enforcement:
FEMA is enforced by the Reserve Bank of India (RBI) and the Directorate of Enforcement.
The government has powers to make rules and issue notifications to implement FEMA.
Appeals related to FEMA matters go to the Special Director (Appeals) and then to the Appellate Tribunal for Foreign Exchange.
Summary:
FEMA transformed India's foreign exchange laws by replacing a strict control regime with a more flexible regulatory regime. It balances the need for foreign exchange control with the goal of encouraging international trade and investment. Do write to us if you need any further assistance.
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