Foreign Exchange Management Act (FEMA): Overview

27 December, 2023

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Introduction

FEMA (Foreign Exchange Management Act) is an important piece of legislation that governs and regulates the foreign exchange transactions and foreign exchange market in India respectively. It was enacted on December 29, 1999, with an aim “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.” This Act aligns with the framework of WTO (World Trade Organization). FEMA replaced the Foreign Exchange Regulation Act (FERA), 1973, because FERA did not fit with the liberalization policies which restrict expansion in the role of foreign as well as private investment due to its restrictive nature. The overall globalization of the Indian economy was hindered by the strict provisions of FERA. In order to facilitate external trade and payments as well as to preserve Foreign Exchange reserves, FEMA was formulated with a total of 49 Sections divided into 7 chapters. In this Article, an overview of the Foreign Exchange Management Act, of 1999 will be provided along with its important guidelines, features, and applicability.

Applicability of FEMA

According to Section 1 of the FEMA, 1999, the Act applies to the whole of India including all the branches, agencies, and offices outside India controlled or owned by a person resident in India. In general, it deals with three different types of categories which are defined under Section 2 of the Act which are a person, a person resident in India, and a person resident outside India. Moreover, it applies to any foreign security, foreign exchange, imports, exports, purchase, sale, transfer, financial and insurance services, banking, any overseas company owned by a Non-Resident Indian (NRI), and any Indian citizen either residing abroad or in the country. Now let us discuss some of the important guidelines of FEMA.

Important Guidelines: FEMA

In case, the sale or withdrawal of foreign exchange is a current account transaction then any individual can sell or draw foreign exchange to or from any authorized dealer or person.
FEMA permits a former Indian resident to hold security, properties, and shares acquired by them while they were Indian residents. Moreover, it also allows NRIs to hold a property that is inherited by them from a resident of India.
It empowers the RBI (Reserve Bank of India), in consultation with the central Government, to place limitations or restrictions on transactions from a capital account although it has been performed by an authorized person.
It provides guidelines for Foreign Institutional Investment (FII), Foreign Direct Investment (FDI), and External Commercial Borrowings (ECB) to ensure accountability and transparency.
Every exporter of goods should provide detailed information on the export value of exported goods to the RBI as well as ensure the repartition and realization of export proceeds within the time as prescribed by RBI.

Authorities

The Central Government and the Reserve Bank of India (RBI) are the primary authorities where the former enacts the laws and the latter ensures their enforcement. The Directorate of Enforcement (ED) is the managing and administrative authority. As per Section 10(1) of the FEMA, 1999, “The Reserve Bank may, on an application made to it on this behalf, authorize any person to be known as an authorized person to deal in foreign exchange or in foreign securities, as an authorized dealer, money changer or off-shore banking unit or in any other manner as it deems fit.” Moreover, according to the provisions of this Act, authorized person means “an authorized dealer, money changer, off-shore banking unit or any other person for the time being authorized under sub-section (1) of section 10 to deal in foreign exchange or foreign securities.”

Penalties

Section 13 of the Foreign Exchange Management Act, 1999, deals with penalties imposed on any individual who contravenes any provision of the Act. It states that “If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, a further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.”

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Conclusion

FEMA, with its progressive provisions, has attracted foreign investment, facilitated cross-border trade, and helped maintain stability in the foreign exchange market. It helps promote India’s integration into the global economy as it ensures the management of foreign exchange resources. Moreover, it only allows an authorized dealer to deal with foreign exchange transactions. The replacement of FERA with FEMA boosted the Indian economy as it introduced various provisions making it flexible.