Foreign Exchange Management Act, 1999

The legal framework for administering foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999. In the winter session of the Parliament on 4 August 1998, the Foreign Exchange Management Act was presented. It aims to rectify and compile the statutes related to foreign exchange, promote foreign payments and trade in India, and improve and maintain the foreign exchange market. Another significant aspect of the Foreign Exchange Management Act is that it classifies offenses related to foreign exchange as civil offenses. This Act came into force on 1 June 2000 and extends to the whole of India. Since its enforcement, this Act has been amended ninety-three times. It established a foreign exchange system consistent with the World Trade Organization's evolving structure and paved the way for the enactment of the Prevention of Money Laundering Act 2002, which came into force on 1 July 2005.

History

Before the Foreign Exchange Management Act was enacted, there was an inadequacy of statutes related to the management of foreign exchange in India. Thus, the Foreign Exchange Regulation Act was passed by the Indian Parliament in 1973, coming into force on 1 January 1974. However, it could not satisfy the post-liberalization policies. Enacted during a critical foreign exchange shortage, the Foreign Exchange Regulation Act remained controversial for 27 years due to its stringent measures. It was repealed on 1 June 2000, and the Foreign Exchange Management Act 1999 replaced the Foreign Exchange Regulation Act 1973.

Objectives of FEMA

The Foreign Exchange Management Act (FEMA) consolidates and amends the laws governing foreign exchange in India. Its primary objective is to facilitate external trade and payments and promote the orderly development and maintenance of the foreign exchange market in India. Enacted by the Parliament of India in 1998, FEMA replaced the Foreign Exchange Regulation Act (FERA) of 1973.

Features of the FEMA

Main features of FEMA are as follows:

FEMA clearly specifies areas requiring permits from the Reserve Bank of India or Government of India for acquiring or holding foreign exchange.
This Act empowers the Reserve Bank of India to delineate classes of capital account transactions, in consultation with the central government, and limit permissible exchanges for these transactions.
FEMA permits past non-residents to hold or transfer foreign security or immovable property acquired while residing outside the country.
Being a civil law, FEMA provides for imprisonment only in exceptional contraventions.
This Act does not extend to Indian citizens residing outside India.
FEMA grants the Central Government authority over payments to and from persons residing outside the country.
Financial transactions related to foreign exchange or securities must comply with this Act and be conducted through "Authorized Persons".
The Government of India can restrict individuals from undertaking foreign exchange deals from the current account if it serves the public interest.
The Reserve Bank of India can impose restrictions on capital account transactions, even when executed by authorized individuals.
FEMA allows Indian residents to regulate foreign securities, exchanges, or hold property abroad if these were acquired during non-residency or inherited.
Transactions are categorized into current and capital account transactions. Current account transactions do not alter a resident's assets or liabilities abroad, while capital account transactions do.

Structure of the Foreign Exchange Management Act

The Head Office of the Foreign Exchange Management Act, known as the Enforcement Directorate, is located in New Delhi and headed by the Director.
It has five zonal offices in Delhi, Chennai, Kolkata, Mumbai, and Jalandhar, each led by a Deputy Director.
These zones are further divided into seven sub-zonal offices, led by Assistant Directors, along with five field units headed by Chief Enforcement Officers.

Guidelines and Regulations for Outward Remittances

FEMA regards forex-related offenses as civil, contrasting FERA's criminal classification. Key points include:

FEMA doesn't apply to Indian citizens residing outside India. Residency requires 182+ days of presence in India within the past financial year.
An agency, branch, or office can be considered a person under FEMA for residency checks.
The central government, authorized by FEMA, can impose restrictions and oversee forex, security deals, and payments involving non-residents.
This Act regulates the acquisition/holding of forex, requiring government or RBI approval.
Foreign exchange transactions are categorized into capital and current accounts. Capital account transactions alter foreign assets or liabilities, differentiating such changes for residents as capital account transactions while others fall into the current account category.

Difference between FERA and FEMA

Under FERA, 'exchange regulation' was prioritized, necessitating Reserve Bank of India permissions. FEMA shifted focus to 'exchange management', streamlining regulations, and requiring RBI permissions primarily as outlined in Section 3, related to foreign exchange dealings. FEMA also changed the classification of offences to civil, contrasting FERA's criminal sanctions. Under other laws, actions are permitted unless prohibited, while FERA mandated specific permissions. FERA presumed guilt until innocence was proven, whereas FEMA provides a more balanced legal framework.

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Frequently Asked Questions

Common questions about Foreign Exchange Management Act FEMA.

The Foreign Exchange Management Act (FEMA) is an Act of the Indian Parliament that consolidates and amends the laws regulating foreign exchange transactions in India. It replaced the earlier Foreign Exchange Regulation Act (FERA) in 1999 and came into effect on June 1, 2000.

The primary objectives of FEMA are to facilitate external trade and payments, promote the orderly development and maintenance of the foreign exchange market in India, and consolidate and amend the laws related to foreign exchange transactions.

Unlike FERA, which focused on exchange regulation and control, FEMA emphasizes exchange management. It also decriminalized foreign exchange offenses, making them civil offenses instead of criminal offenses punishable by imprisonment under FERA.

FEMA classifies foreign exchange transactions into two categories: current account transactions and capital account transactions. Current account transactions do not alter a resident's assets or liabilities outside India, while capital account transactions involve changes in overseas assets or liabilities.

FEMA gives the RBI the power to specify the classes of capital account transactions in consultation with the central government, and to impose limitations on the permissible foreign exchange for such transactions. The RBI also has the authority to regulate the flow of payments to and from persons residing outside India.

No, FEMA does not extend to Indian citizens residing outside India. The Act applies to residents of India, which is determined based on the number of days a person has resided in India during the previous financial year.

The FEMA enforcement agency, known as the Enforcement Directorate, is headquartered in New Delhi and headed by a Director. It has five zonal offices, each headed by a Deputy Director, and these zones are further divided into sub-zonal offices and field units.

FEMA grants the central government the authority to impose restrictions and supervise foreign exchange and foreign security deals, as well as payments made to or received from persons residing outside India. It also requires all foreign exchange transactions to be executed through authorized persons only.

Under FERA, a person was presumed guilty unless proven innocent, whereas under other laws, including FEMA, a person is presumed innocent unless proven guilty. FERA also provided for imprisonment for minor offenses, which is not the case under FEMA.

The Foreign Exchange Management Act was presented in the Parliament's winter session on August 4, 1998, and came into force on June 1, 2000. Since its enforcement, FEMA has been amended ninety-three times as of the time of writing this article.