Foreign exchange management act

1. Foreign Exchange Management Act
The Foreign Exchange Management Act, 1999
(FEMA) is an Act of the Parliament of India “to con-
solidate and amend the law relating to foreign exchange
with the objective of facilitating external trade and pay-
ments and for promoting the orderly development and
maintenance of foreign exchange market in India”. It was
passed in the winter session of Parliament in 1999, re-
placing the Foreign Exchange Regulation Act (FERA).
This act makes offences related to foreign exchange civil
offenses. It extends to the whole of India.,[1]
replacing
FERA, which had become incompatible with the pro-
liberalisation policies of the Government of India. It en-
abled a new foreign exchange management regime con-
sistent with the emerging framework of the World Trade
Organisation (WTO). It also paved the way for the in-
troduction of the Prevention of Money Laundering Act
2002, which came into effect from 1 July 2005.
Unlike other laws where everything is permitted unless
specifically prohibited, under this act everything was pro-
hibited unless specifically permitted. Hence the tenor and
tone of the Act was very drastic. It required imprison-
ment 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. [2]
FEMA is a regulatory mechanism that enables the Re-
serve Bank of India and the Central Government to pass
regulations and rules relating to foreign exchange in tune
with the Foreign Trade policy of India.
1 Switch from FERA
FERA, in place since 1974, did not succeed in restricting
activities such as the expansion of transnational corpora-
tions (TNCs). The concessions made to FERA in 1991-
1993 showed that FERA was on the verge of becoming
redundant.[3]
After the amendment of FERA in 1993, it
was decided that the act would become the FEMA. This
was done in order to relax the controls on foreign ex-
change in India, as a result of economic liberalization.
FEMA served to make transactions for external trade
(exports and imports) easier – transactions involving cur-
rent account for external trade no longer required RBI’s
permission. The deals in Foreign Exchange were to be
‘managed’ instead of ‘regulated’. The switch to FEMA
shows the change on the part of the government in terms
of foreign capital.[4]
2 Need for this management
The buying and selling of foreign currency and other debt
instruments by businesses, individuals and governments
happens in the foreign exchange market. Apart from be-
ing very competitive, this market is also the largest and
most liquid market in the world as well as in India.[5]
It
constantly undergoes changes and innovations, which can
either be beneficial to a country or expose them to greater
risks. The management of foreign exchange market be-
comes necessary in order to mitigate and avoid the risks.
Central banks would work towards an orderly functioning
of the transactions which can also develop their foreign
exchange market.[6]
Whether under FERA or FEMA’s control, the need for
the management of foreign exchange is important. It is
necessary to keep adequate amount of foreign exchange
from Import Substitution to Export Promotion.[7]
3 Main Features
• Activities such as payments made to any person out-
side India or receipts from them, along with the
deals in foreign exchange and foreign security is re-
stricted. It is FEMA that gives the central govern-
ment the power to impose the restrictions.
• Restrictions are imposed on residents of India who
carry out transactions in foreign exchange, foreign
security or who own or hold immovable property
abroad.
• Without general or specific permission of the MA
restricts the transactions involving foreign exchange
or foreign security and payments from outside the
country to India – the transactions should be made
only through an authorised person.
• Deals in foreign exchange under the current account
by an authorised person can be restricted by the Cen-
tral Government, based on public interest generally.
• Although selling or drawing of foreign exchange is
done through an authorized person, the RBI is em-
powered by this Act to subject the capital account
transactions to a number of restrictions.
1
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2. 2 8 EXTERNAL LINKS
• Residents of India will be permitted to carry out
transactions in foreign exchange, foreign security
or to own or hold immovable property abroad if
the currency, security or property was owned or ac-
quired when he/she was living outside India, or when
it was inherited by him/her from someone living out-
side India.
• Exporters are needed to furnish their export details
to RBI. To ensure that the transactions are carried
out properly, RBI may ask the exporters to comply
to its necessary requirements.[8]
4 Regulations/Rules under FEMA
• Foreign Exchange Management (Current Account
Transactions) Rules, 2000
• Foreign Exchange Management (Permissible Capi-
tal Account Transactions) Regulations, 2000
• Foreign Exchange Management (Transfer or Issue
of any Foreign Security) regulations, 2004
• Foreign Exchange Management (Foreign currency
accounts by a person resident in India)Regulations,
2000
• Foreign Exchange Management (Acquisition and
transfer of immovable property in India) regula-
tions, 2000
• Foreign Exchange Management (Establishment in
India of branch or office or other place of business)
regulations, 2000
• Foreign Exchange Management (Manner of Receipt
and Payment) Regulations, 2000
• Foreign Exchange Management (Export of Goods
and Services) regulations, 2000
• Foreign Exchange Management (Realisation,
repatriation and surrender of Foreign Ex-
change)regulations, 2000
• Foreign Exchange Management (Possession and Re-
tention of Foreign Currency) Regulations, 2000
• Foreign Exchange (compounding proceedings)
rules, 2000
5 Related legislation
• Foreign Contribution (regulation) Act, 2010
6 See also
• Law of India
7 References
[1] “FEMA, 1999”. Dept of Revenue, Govt of India.
Archived from the original (PDF) on 9 September 2012.
Retrieved 9 September 2012.
[2] AC Fernando. Business Environment. Pearson. p. 427.
Retrieved 29 July 2014.
[3] Dutt and Sundaram. Indian Economy. p. 541.
[4] “FEMA: A Closer Look”.
[5] Raj Kumar. International Economics. p. 307.
[6] “Foreign Exchange Market” (PDF).
[7] “Foreign Exchange Management Policy in India”.
[8] Francis Cherunilam (5th edition). International Eco-
nomics. p. 456. Check date values in: |date= (help)
8 External links
• Reserve Bank of India FEMA website
• FEMA from the Finance Ministry
• NRIs can now open joint accounts with resident In-
dian
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3. 3
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