Foreign Exchange Management Act, 1999

(FEMA): Basic Understanding

INTRODUCTION

A system of exchange control was first time introduced through a series of rules under
the Defense of India Act, 1939 on temporary basis. The foreign crises persisted for a
long time and finally it got enacted in the statute under the title Foreign Exchange
Regulation Act, 1947. Subsequently, this act was replaced by the Foreign Exchange
Regulation Act, 1973(FERA) which was came into force with effect from January 1,
1974 and regulating foreign exchange for more than 26 years under this Act.

In 1991 Government of India initiated the policy of economic liberalization. After this
foreign investment in many sectors were permitted in India. In 1997, Tarapore
committee on Capital Account Convertibility, constituted by the Reserve Bank of
India, recommended change in the legislative framework governing foreign exchange
transactions. Accordingly, the Foreign Exchange Regulation Act, 1973 was repealed
and replaced by the new Foreign Exchange Management Act, 1999 (FEMA) with
effect from June 01, 2000. Under FEMA the emphasis was on management of foreign
exchange.

APPLICABILITY OF FEMA

The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend
the law relating to foreign exchange with the objective of facilitating external trade
and for promoting the orderly development and maintenance of foreign exchange
market in India. FEMA extends to the whole of India. The Act also applies to all
branches, offices and agencies outside India owned or controlled by a person resident
in India and also to any contravention committed there under outside India by any
person to whom this Act is applies.

OVERALL STRUCTURE

The overall structure of Foreign Exchange Management Act, 1999 is covered by
legislations, rules and regulations. These legislations, rules and regulations relating to
Foreign Exchange Management Act, 1999, can be divided in to the followings:

1. FEMA contains 7 chapters divided into 49 sections (Supreme Legislation)

2. 5 sets of Rules made by Ministry under section 46 of FEMA. (Delegated
legislations)

3. 23 sets of Regulations made by RBI under section 47 of FEMA. (Subordinate
Legislations)

4. Master Circular issued by Reserve Bank of India every year.

5. Foreign Direct Investment (FDI) policy issued by Department of Industrial Policy
and Promotion (DIPP) time to time.

6. Notifications and Circulars issued by Reserve Bank of India.

7. Enforcement Directorate.

FEMA contains 7 Chapters divided into 49 sections of which 12 sections cover
operational part and the rest 37 sections deal with contraventions, penalties,
adjudication, appeals, enforcement directions, etc. FEMA makes provisions for
dealings in foreign exchanges. Broadly, all current account transactions are free.
However, Central Government can impose reasonable restrictions by issuing rules.
The capital account transactions will be regulated by RBI/Central Government for
which necessary circulars/notifications will have to be issued under FEMA.

All chapters of FEMA divided into 49 sections. Besides the FEMA, there are 5 Rules
and 23 regulations under the Act which help in implementation of the Act are
classified here:

Chapter I: Preliminary (Section 1 &2)
Chapter II: Regulation and Managements of Foreign Exchange (Section 3 -9)
Chapter III: Authorised Person (Section 10-12)
Chapter IV: Contraventions and Penalties (Section 13-15)
Chapter V: Adjudication and Appeal (Section 16-35)
Chapter VI: Directorate of Enforcement (Section 36-38)
Chapter VII: Miscellaneous (Section 39-49)

The Rules made by Central Government under section 46 of FEMA are:

1. Foreign Exchange Management (Encashment of Draft, Cheque, Instruments and
Payment of Interest) Rules, 2000

2. Foreign Exchange Management (Authentication of Documents) Rules, 2000

3. Foreign Exchange Management (Current Account Transaction) Rules, 2000

4. Foreign Exchange Management (Adjudications Proceedings and Appeal) Rules,
2000

5. Foreign Exchange Management (Compounding Proceedings) Rules, 2000

The Regulations made by Reserve Bank of India under section 47 of FEMA are:

1. Foreign Exchange Management (Acquisition and Transfer of Immovable Property
Outside India) Regulations, 2000

2. Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations,
2000

3. Foreign Exchange Management (Borrowing and Lending in Foreign Exchange)
Regulations, 2000

4. Foreign Exchange Management (Deposit) Regulations, 2000

5. Foreign Exchange Management (Export and Import of Currency) Regulations, 2000

6. Foreign Exchange Management (Guarantees) Regulations, 2000

7. Foreign Exchange Management (Issue of Security in India by a Branch, Office or
Agency of a Person Resident Outside India) Regulations, 2000

8. Foreign Exchange Management (Acquisition and Transfer of Immovable Property
in India) Regulations, 2000

9. Foreign Exchange Management (Establishment in India of Branch or Office or
Other Place of Business) Regulations, 2000

10. Foreign Exchange Management (Export of Goods and Service) Regulations, 2000

11. Foreign Exchange Management (Foreign Currency Accounts by a Person Resident
in India) Regulations, 2000

12. Foreign Exchange Management (Insurance) Regulations, 2000

13. Foreign Exchange Management (Investment in Firm or Proprietary Concern in
India) Regulations, 2000

14. Foreign Exchange Management (Manner of Receipt and Payment) Regulations,
2000

15. Foreign Exchange Management (Permissible Capital Account Transactions)
Regulations, 2000

16. Foreign Exchange Management (Possession and Retention of Foreign Currency)
Regulations, 2000

17. Foreign Exchange Management (Realization, Repatriation and Surrender of
Foreign Currency) Regulations, 2000

18. Foreign Exchange Management (Remittance of Assets) Regulations, 2000

19. Foreign Exchange Management (Transfer or Issue of Security by a Person resident
Outside India) Regulations, 2000

20. Foreign Exchange Management (Foreign Exchange Derivative Contracts)
Regulations, 2000

21. Foreign Exchange Management (Transfer or Issue of any Foreign Security)
Regulations, 2004

22. Foreign Exchange Management (Offshore Banking Unit) Regulations, 2002

23. Foreign Exchange Management (Withdrawal of General Permission to Overseas
Corporate Bodies (OCBs) ) Regulations, 2003.

AUTHORITIES AND ENFORCEMENT MACHINARY

FEMA in itself is not an independent and isolated law. The provisions of FEMA are
spread at different place and so there are regulatory bodies. Reserve Bank of India
makes Regulations for FEMA and the Rules are made by Central Government.
Authorities governing the enforcement of FEMA are:

1. Foreign Exchange Department of Reserve Bank of India.
2. Directorate of Enforcement, Department of Revenue, Ministry of Finance.
3. Capital Market Division, Department of Economic Affairs, Ministry of Finance.
4. Foreign Trade Division, Department of Economic Affairs, Ministry of Finance.

Machinery responsible for various aspect of FEMA is:

1. Enforcement Directorate: To investigate provisions of the Act, the Central
Government, have established the Directorate of Enforcement with Directors and
other officers as officers of the Enforcement.

2. Adjudicating Authorities: The Adjudicating Authorities will issue a notice to the
person who has contravened the provisions of the Foreign Exchange Management
Act, Rules, Regulations, Notifications or any directions issued by the RBI.

3. Special Director (Appeals): Any person aggrieved by an order made by the
Adjudicating Authority, being an Assistant Director of Enforcement or a Deputy
Director of Enforcement can prefer an appeal to the Special Director (Appeals.)

4. Appellate Tribunal: Any person aggrieved by an order made by the adjudicating
Authority, or the Special Director (Appeals) can prefer an appeal to the Appellate
Tribunal.

FEMA envisages that RBI shall have controlling role in management of foreign
exchange. Since RBI cannot directly handle foreign exchange transactions, it
authorizes Authorised Persons to deal in foreign exchange as per direction issued by
RBI.RBI is empowered to issue direction to such Authorised Persons. These
Directions are issued through AP(DIR) Circulars. (AP stand for Authorised Person
and DIR stand for Directions)