FOREIGN EXCHANGE

MANAGEMENT
ACT,1999
INTRODUCTION
• FEMA came into effect on the 1st of June, 2000, replacing the Foreign Exchange
Regulation Act (FERA). The intentions of the Foreign Exchange Management
Act are to perhaps, revise and unite laws that relate to transactions of foreign
exchange and encourage an orderly maintenance and development, of the
foreign exchange markets in India. FEMA is not as restrictive as some of the
FERA regulations, and in line with India's economic liberalization policies.
• FEMA consolidates and amend the law relating to foreign exchange
• facilitating external trade and payments
• promoting the orderly development and maintenance of foreign exchange
market in India
• Consists of 49 sections (with sub sections) divided into 7 chapters in the Act
• It was passed on 29 December 1999 in parliament, replacing the
Foreign Exchange Regulation Act (FERA).
• This act makes offences related to foreign exchange civil offenses.
• It extends to the whole of India,[2] replacing FERA, which had become
incompatible with the pro-liberalization policies of the
Government of India.
• It enabled a new foreign exchange management regime consistent
with the emerging framework of the World Trade Organization
(WTO).
Why FERA was repealed ?
• The Foreign Exchange Regulation Act (FERA) is legislation that was passed by the Indian Parliament in 1973 and came into
effect on January 1, 1974.
• FERA was an act to regulate dealings in foreign exchange and foreign securities with the objective of conservation of
foreign exchange resources of India and its proper utilization in the economic development of India. It extended to whole
of India and applied to all the citizens of India, outside India as well as in India and to branches and agencies of Indian
companies or body corporates, outside India.
• FERA imposed strict regulations on transactions involving foreign exchange and controlled the import and export of
currency. Unlike other laws where everything is permitted unless specifically prohibited, under FERA nothing is permitted
unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It provided for imprisonment for
violation of even a very minor offense. Under this act, a person was presumed guilty unless he proved himself innocent
whereas under other laws, a person is presumed innocent unless he is proven guilty. Therefore one had to be very careful
while dealing in foreign exchange and ensure that all legal compliances were carried out.
• Eventually the government realized that FERA rules were perhaps a hindrance to economic liberalization. A draft of the
Foreign Exchange Management Bill (FEMA) was prepared by the Government of India to replace FERA keeping in view the
liberal spirit of the Indian economy. However, until FEMA was enacted, the provisions of FERA were applicable.
• FERA was finally repealed by the government in 1999 by the Foreign Exchange Management Act (FEMA), which liberalized
foreign exchange controls and removed many restrictions on foreign investment. The need for replacing FERA with FEMA
was felt with the introduction of economic reforms in the country, there was a need to remove the drastic and rigorous
measures of FERA and replace it with a set of liberal foreign exchange management regulations.
Objectives of FEMA
• The main objective of FEMA was to help facilitate
external trade and payments in India.
• It was also meant to help orderly development and
maintenance of foreign exchange market in India.
• It defines the procedures, formalities, dealings of all
foreign exchange transactions in India.
Main Features of Foreign Exchange Management Act, 1999 (FEMA
Act)
• It gives powers to the Central Government to regulate the flow of payments to and
from a person situated outside the country.
• All financial transactions concerning foreign securities or exchange cannot be carried
out without the approval of FEMA. All transactions must be carried out through
“Authorised Persons.”
• In the general interest of the public, the Government of India can restrict an
authorized individual from carrying out foreign exchange deals within the current
account.
• Empowers RBI to place restrictions on transactions from capital Account even if it is
carried out via an authorized individual.
• As per this act, Indians residing in India, have the permission to conduct a foreign
exchange, foreign security transactions or the right to hold or own immovable
property in a foreign country in case security, property, or currency was acquired, or
owned when the individual was based outside of the country, or when they inherit
the property from individual staying outside the country.
Structure of FEMA
• The Head Office of FEMA, also known as the Enforcement Directorate, headed by the Director is
located in New Delhi.
• There are 5 zonal offices in Delhi, Mumbai, Kolkata, Chennai, and Jalandhar, each office is
headed by a Deputy Director.
• Every 5 zones are further divided into 7 sub-zonal offices headed by Assistant Directors and 5
field units headed by Chief Enforcement Officers.
Fundamental principle under
FEMA
• Under FEMA, the general principle is that all current account transactions are permitted unless
expressly prohibited and all Capital account transactions are prohibited unless expressly permitted. (see
Sections 5 and 6 of FEMA)
• “Capital account transaction” means a transaction which alters the assets or liabilities, including contingent
liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside
India, and includes transactions referred to in sub-section (3) of section 6; [14]
• It generally refers to Capital inflows like Equities, Grants and Debt. Inflows within the country are called as
'Foreign Direct Investment' (FDI). Capital debt is termed – External Commercial Borrowings (ECB).
• Equity outflows are termed as 'Foreign outbound investment' .
• Any corporate entity receiving FDI or making an outbound investment has to file an annual FEMA return called
as Foreign Liabilities and Assets (FLA). [15]
• Current Account transaction are defined as transactions other than capital account transactions. Mainly include
transactions pertaining to individual remittances, trade, student remittances etc. [14]
Applicability of FEMA
• FEMA (Foreign Exchange Management Act) is applicable to the whole of India and equally applicable to the agencies and offices located outside India
(which are owned or managed by an Indian Citizen). The head office of FEMA is situated in New Delhi and known as Enforcement Directorate. FEMA
is applicable to:
• Foreign exchange.
• Foreign security.
• Exportation of any commodity and/or service from India to a country outside India.
• Importation of any commodity and/or services from outside India.
• Securities as defined under Public Debt Act 1994.
• Purchase, sale and exchange of any kind (i.e. Transfer).
• Banking, financial and insurance services.
• Any overseas company owned by an NRI (Non-Resident Indian) and the owner is 60% or more.
• Any citizen of India, residing in the country or outside (NRI).

The Current Account transactions under the FEMA Act has been categorized into three parts which, namely-
• Transactions prohibited by FEMA,
• The transaction requires Central Government’s permission,
• The transaction requires RBI’s permission.
Penalties under FEMA
• If any person contravenes the provisions of FEMA or any rule, direction,
regulation, order or notification issued under FEMA, he shall be liable to pay a
penalty up to thrice the sum involved in such contravention or up to Rs.2 lakh.
Where such contravention is a continuing one, he shall be liable to pay a further
penalty which may extend to Rs.5,000 for every day during which the
contravention continues.
 Difference between FERA and FEMA
BASIS FERA FEMA

1. Provisions FERA consisted of 81 sections, and FEMA is much simple, and consist of
was more complex only 49 sections
2. Features Presumption of negative intention These presumptions of Mens Rea and
(Mens Rea) and joining hands in abatement have been excluded in
offence (abatement) existed in FERA FEMA

3. New terms Terms like Capital Account Terms like Capital Account
Transaction, Current Account Transaction, Current Account
Transaction, Person, Service etc. were Transaction, Person, Service etc. have
not defined in FERA. been defined in FEMA.

4. Definition of ‘Authorized person’ Definition of "Authorized Person" in The definition of “Authorized Person”
FERA was a narrow one (2(b)) has been widened to include banks,
money changes, off shore banking
units etc. (2(c))

5. Punishment Any offence under FERA, was a Here, the offence is considered to be
criminal offence , punishable with a civil offence only punishable with
imprisonment as per code of criminal some amount of money as a penalty.
procedure, 1973 Imprisonment is prescribed only
when one fails to pay the penalty
BASIS FERA FEMA
6. Quantum of penalty The monetary penalty payable under Under FEMA the quantum of penalty
FERA, was nearly the five times the has been considerably decreased to
amount involved. three times the amount involved.

7. Appeal An appeal against the order of The appeals against the order of
“Adjudicating office", before " Adjudicating Authority and Special
Foreign Exchange Regulation Director are passed over to the
Appellate Board went before High Appellate Tribunal and then later on
Court to High Court.

8. COMPOUNDING OF OFFENCES FERA did not permit such FEMA permits such compounding
compounding
9. Transactions All foreign exchange dealings FEMA made current account
required permission from RBI or transactions free from permissions
Central Government and certain Capital Account
transactions required special
permission from RBI

10. POWER OF SEARCH AND SEIZE FERA conferred wide powers on a The scope and power of search and
police officer not below the rank of a seizure has been curtailed to a great
Deputy Superintendent of Police to extent and have been confined to
make a search officers of Enforcement