FOREIGN EXCHANGE

MANAGEMENT ACT (FEMA)

-
ABOUT FEMA:
 An Act of the Parliament of India "to consolidate and
amend the law relating to foreign exchange
 With objective of facilitating external trade and payments
and
 for promoting the orderly development and maintenance
of foreign exchange market in India“.

 It was passed in the Parliament in 1999, replacing the

Foreign Exchange Regulation Act (FERA). This act makes
offences related to foreign exchange civil offenses.
 It extends to the whole of India replacing FERA, which had
become incompatible with the pro- liberalization policies of
the Government of India
 More About FEMA..

 It enabled a new foreign exchange management

regime consistent with the emerging framework
of the World Trade Organization (WTO).

 It also paved the way for the introduction of the

Prevention of Money Laundering Act, 2002, which
came into effect from 1 July 2005.
 WHAT IS FEMA GENERALLY ?!

 Unlike other laws where everything is permitted unless

specifically prohibited, under the Foreign Exchange Regulation
Act (FERA) of 1973 (predecessor to FEMA) everything was
prohibited unless specifically permitted. Hence the tenor and
tone of the Act was very drastic. It required imprisonment even
for minor offences. Under FERA, a person was presumed guilty
unless he proved himself innocent, whereas under other laws a
person is presumed innocent unless he is proven guilty.

 FEMA is a regulatory mechanism that enables the Reserve Bank

of India to pass regulations and the Central Government to pass
rules relating to foreign exchange in tune with the Foreign
Trade policy of India.
 HISTORY

 Before independence Inflows and Outflows were under the

control of Britishers.

 After independence the responsibility of managing the inflow

and outflow came under the control of Government of India
and RBI.

 Foreign Exchange Regulation Act 1973.

 HISTORY

 The main objective of FERA was to regulate and control

and ensure proper utilization of foreign exchange.

 Due to liberalization in 1991, there was demand for

modifications in FERA which lead to formation of new
act, Foreign Exchange Management Act, 1999

 It came into effect in 1 June, 2000 with the objective of

facilitating external trade in India
FERA TO FEMA
Introduction 

The Foreign Exchange Regulation Act (FERA):

 It was a legislation passed by the Indian Parliament in
1973 and came into force with effect from January 1,
1974.
 FERA emphasized strict exchange control over
everything that was specified, relating to foreign
exchange.
 Law violators were treated as criminal offenders.
 Aimed at minimizing dealings in foreign exchange and
foreign securities.
 Objectives
 The objective of FERA was to regulate certain payment
dealings in foreign exchange and securities
transactions that indirectly affects foreign exchange of
import and export of currency and to conserve precious
foreign exchange and to optimize the proper utilization
of foreign exchange so as to promote the economic
development of the country.
  FERA proceeded on presumption that all foreign
exchange earned by Indian residents rightfully belonged
to the Government of India and had to be collected and
surrendered to the Reserve Bank of India (RBI).
 FERA primarily prohibited all transactions that are not
permitted by RBI. 
 Need for FEMA
The demand for new legislation was basically on
two main counts .
 The FERA was introduced in 1974 when India’s
foreign exchange reserves position was not
satisfactory. It required stringent controls to
conserve foreign exchange and to utilize in the
best interest of the country. Very strict
restrictions have outlived their utility in the
current changed scenario.

 there was a need to remove the draconian

provisions of FERA and have a forward-looking
legislation covering foreign exchange matters.
FEMA: Main Features
 FEMA gives the central government the
power to impose the restrictions.

 Realisation, repatriation and surrender of

foreign exchange is now governed by FEMA

 It provides power to the Reserve Bank for

specifying the classes of capital account
transactions and limits to which exchange is
admissible for such transactions.
 It is consistent with full current account convertibility.

 It contains provisions for progressive liberalisation of

capital account transactions.

 It is more transparent in its application as it lays down

the areas requiring specific permissions of the Reserve
Bank/Government of India on acquisition/holding of
foreign exchange.

 
 It classified the foreign exchange transactions
in two categories, viz. capital account and
current account transactions.

 All current account transactions are permitted

unless otherwise prohibited.

 All capital account transactions are prohibited

unless otherwise permitted.
 It gives full freedom to a person resident in
India, who was earlier resident outside India, to
hold/transfer any foreign security situated
outside India and acquired when she/he was
resident.

 This act is a civil law and the contraventions of

the Act provide for arrest only in exceptional
cases.

 FEMA does not apply to Indian citizen’s resident

outside India.
 Offences under FEMA are compoundable

 Approach towards Forex transactions is

flexible

 Stay of more than 182 days in India is the

criteria to decide residential status under
FEMA
Rules and Regulations
FEMA
 Foreign Exchange Management (Current Account
Transactions) Rule, 2000

In a current account transaction, any person can sell or draw

foreign exchange from an authorised person.
Current Account Transactions include:-
i. Expense in connection with foreign travel, medical care of
spouse .
ii. Remittance for relatives living abroad.
iii. Payment for import of goods etc.

All current account transactions are permitted,unless they are

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

Transactions which alters assets or liabilities outside India for a

resident in India and inside India for a resident outside.
It includes :-
i. Borrowing and Lending
ii. Change in assets and liabilities
iii. Transfer/Issue of securities

Capital account transactions are deemed to be prohibited unless

permitted.
 Foreign Exchange Management (Export of Goods and
Services) regulations, 2000

 Every exporter of the goods shall furnish to the reserve bank

information as may be required by the reserve bank for the
purpose of ensuring realisation of Exports.

 The reserve bank ensures that full export value of goods

determined by them is received without any delay

 Every exporter shall furnish to the reserve bank a form

containing true and correct details in relation to payment.