Foreign Exchange Management Act (FEMA)

The Foreign Exchange Regulation Act of 1973 (FERA) in India was repealed on 1st June, 2000. It was replaced by the Foreign Exchange Management Act (FEMA), which was passed in the winter session of Parliament in 1999. Enacted in 1973, in the backdrop of acute shortage of Foreign Exchange in the country, FERA had a controversial 27 year stint during which many bosses of the Indian Corporate world found themselves at the mercy of the Enforcement Directorate (E.D.). Any offense under FERA was a criminal offense liable to imprisonment, whereas FEMA seeks to make offenses relating to foreign exchange civil offenses. FEMA, which has replaced FERA, had become the need of the hour since FERA had become incompatible with the pro-liberalization policies of the Government of India. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging frame work of the World Trade Organization (WTO).  It is another matter that enactment of FEMA also brought with it Prevention of Money Laundering Act, 2002 which came into effect recently from 1st July, 2005 and the heat of which is yet to be felt as “Enforcement Directorate” would be investigating the cases under PMLA too.

Unlike other laws where everything is permitted unless specifically prohibited, under FERA nothing was permitted unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It provided for imprisonment of even a very minor offence. 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.

Objectives and Extent of FEMA

The objective of the Act is 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. FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India owned or controlled by a person who is a resident of India and also to any contravention there under committed outside India by any person to whom this Act applies.

Except with the general or special permission of the Reserve Bank of India, no person can :-

  • deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;
  • make any payment to or for the credit of any person resident outside India in any manner;
  • receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner;
  • reasonable restrictions for current account transactions as may be prescribed.

Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. The Reserve Bank may, in consultation with the Central Government, specify :-

  • any class or classes of capital account transactions which are permissible;
  • the limit up to which foreign exchange shall be admissible for such transactions

However, the Reserve Bank cannot impose any restriction on the drawing of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.

The Reserve Bank can, by regulations, prohibit, restrict or regulate the following :-

  • Transfer or issue of any foreign security by a person resident in India;
  • Transfer or issue of any security by a person resident outside India;
  • Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
  • Any borrowing or lending in foreign exchange in whatever form or by whatever name called;
  • Any borrowing or tending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;
  • Deposits between persons resident in India and persons resident outside India;
  • Export, import or holding of currency or currency notes;
  • Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
  • Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
  • Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred

(i) by a person resident in India and owed to a person resident outside India or

(ii) by a person resident outside India.

A person, resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.

The Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. Every exporter of goods and services must :-

  • Furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India;
  • Furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter.

The Reserve Bank may, for the purpose of ensuring that the full export value of the goods    or such reduced value of the goods as the Reserve Bank determines, having regard to the prevailing market-conditions, is received without any delay, direct any exporter to comply with such requirements as it deems fit. Where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.

FEMA Rules & Policies

The Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000. With the introduction of the new Act in place of FERA, certain structural changes were brought in. The Act consolidates and amends the law relating to foreign exchange to facilitate external trade and payments, and to promote the orderly development and maintenance of foreign exchange in India.

From the NRI perspective, FEMA broadly covers all matters related to foreign exchange, investment avenues for NRIs such as immovable property, bank deposits, government bonds, investment in shares, units and other securities, and foreign direct investment in India.

FEMA vests with the Reserve Bank of India, the sole authority to grant general or special permission for all foreign exchange related activities mentioned above.

Section 2 – The Act here provides clarity on several definitions and terms used in the context of foreign exchange. Starting with the identification of the Non-resident Indian and Persons of Indian origin, it defines “foreign exchange” and “foreign security” in sections 2(n) and 2(o) respectively of the Act. It describes at length the foreign exchange facilities and where one can buy foreign exchange in India. FEMA defines an authorised dealer, and addresses the permissible exchange allowed for a business trip, for studies and medical treatment abroad, forex for foreign travel, the use of an international credit card, and remittance facility

Section 3 prohibits dealings in foreign exchange except through an authorised person. Similarly, without the prior approval of the RBI, no person can make any payment to any person resident outside India in any manner other than that prescribed by it. The Act restricts non-authorised persons from entering into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire any asset outside India.

Section 4 restrains any person resident in India from acquiring, holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act.

Section 6 deals with capital account transactions. This section allows a person to draw or sell foreign exchange from or to an authorised person for a capital account transaction. RBI in consultation with the Central Government has issued various regulations on capital account transactions in terms of sub-sect ion (2) and (3) of section 6.

Section 7 covers the export of goods and services. All exporters are required to furnish to the RBI or any other authority, a declaration regarding full export value.

Section 8 puts the responsibility of repatriation on the persons resident in India who have any amount of foreign exchange due or accrued in their favour to get the same realised and repatriated to India within the specific period and in the manner specified by the RBI.

The duties and liabilities of the Authorised Dealers have been dealt with in Sections 10, 11 and 12, while Sections 13 to 15 cover penalties and enforcement of the orders of the Adjudicating Authority as well as the power to compound contraventions under the Act.