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Foreign Exchange Management Act, 1999

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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. There are several purposes of the Foreign Exchange Management Act. To rectify and put together, the statutes related to foreign exchange is one of the important purposes of the FEMA Act. The Foreign Exchange Management Act aims at promoting foreign payments and trade in India. Another vital purpose of the Foreign Exchange Management Act is to improve and maintain the foreign exchange market in India. The Foreign Exchange Management Act also makes the offence related to foreign exchange civil offence. This Act came into force on 1 June 2000. This Act extends to the whole of India. Since its enforcement, this Act has been amended ninety-three times. This Act entitled a new foreign exchange management system congruent with the transpiring structure of the World Trade Organization. It has also cleared the way to the enactment of the Prevention of Money Laundering Act 2002, which came into force on 1 July 2005.


Before the Foreign Exchange Management Act was enacted, there was the inadequacy of the statutes related to the management of foreign exchange in India. Hence the Foreign Exchange Regulation Act was passed by the Indian Parliament in 1973, and it came into force on 1 January 1974. But the Foreign Exchange Regulation Act was not able to satisfy the post-liberalization policies. Passed in 1973, in the situation of critical shortage of Foreign Exchange in India, Foreign Exchange Regulation Act has remained in force for controversial twenty-seven years’ period during that period, many directors of the Corporate world of the country were led to the leniency of the Enforcement Directorate (E.D.). Hence, on 1 June 2000, the Foreign Exchange Regulation Act was repealed. Foreign Exchange Management Act 1999 replaced the Foreign Exchange Regulation Act 1973.

Objectives of FEMA

As discussed, the Foreign Exchange Management Act (FEMA) is an official Act that consolidates and amends the laws that regulate foreign exchange in India. The FEMA act’s primary objective is ‘facilitating external trade and payments and promoting the orderly development and maintenance of foreign exchange market in India.’ Enacted by the winter session of Parliament of India in the year 1998, FEMA came into regulation for replacing the Foreign Exchange Regulation Act (FERA) of 1973.

Features of the FEMA

Main features of FEMA are as follows:

  • FEMA is more clear in its applicability since this Act specifies the areas that require specific permissions to be taken from the RBI or Government of India upon acquiring or holding of foreign exchange.
  • This Act also provides the power to the Reserve Bank of India to specify the classes of capital account transactions in consultation with the central government and limitation to which the exchange is permissible for the transactions.
  • FEMA provides full liberty to the residents of India, who were resident outside India earlier, to hold or transfer or own any foreign security or immovable property which is situated outside country and acquired when he was resident.
  • Since FEMA comes under civil law hence the contraventions under the Act, provide for imprisonment only in exceptional cases.
  • This Act does not extend to an Indian citizen who is residing outside India.
  • FEMA also provides powers to the Central Government for the regulation of the flow of payments to and from a person residing outside the country.
  • All financial transactions related to foreign exchange or securities cannot be implemented without the sanction of this Act. Execution of all transactions through “Authorized Persons” only is mandatory under this Act.
  • Under FEMA, the Government of India can also restrict the authorized individual from undertaking foreign exchange deals from the current account, in the general interest of the public.
  • This Act empowers the Reserve Bank of India to impose restrictions on transactions via capital Account even if it is executed from an authorized individual.
  • According to this Act, Citizens residing in India, have the permission to regulate foreign security transactions, foreign exchange, or the right to own or hold immovable property in a foreign country in case currency, security or property was owned or acquired, when the individual was residing outside the country or when they have inherited the property from individual residing outside the country.
  • FEMA classifies the foreign exchange transactions in two categories, that is current account transactions and capital account transactions.
  • Current Account Transactions: Every transaction entered on by resident, outside India, which does not amend his assets or liabilities, are classified as current account transactions. Example: expenses related to foreign education or travel etc.
  • Capital Account Transactions: Capital Account Transactions means the transactions which are taken on by a resident of India in such mode that his assets or liabilities situated outside India are amended (either increased or decreased). Example: investment in foreign securities, acquiring immovable property outside India, etc.

Structure of the Foreign Exchange Management Act

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

Guidelines and Regulations for outward remittances

It is noteworthy that all forex-related offences are regarded as civil offences by the FEMA, whereas FERA is regarded as a criminal offence. The other important facts are:

  • It does not apply to Indian citizens residing outside India. The same eligibility depends on the number of days a person has resided in India during the previous financial year. It needs 182 days or more to be called as a resident under FEMA.
  • Under FEMA, for checking the residency, an agency, a branch or an office can also be considered as a person.
  • The central government is authorized by FEMA to impose restrictions and also to supervise few things, forex and foreign security deals, payments made to or received from a person residing outside India.
  • The FEMA is imposed on the areas around acquisition/holding of forex, requiring approval from the government or the Reserve Bank of India (RBI).
  • A capital account and a current account are the two categories under which foreign exchange transactions are being divided, as per law.
  • A capital account transactions altered the assets and liabilities outside India or inside India but of a person resident outside India. Thus, any transaction that changed overseas assets and liabilities for an Indian resident in a foreign country, or vice versa, was classified as a capital account transaction. Any other transaction fell into the current account category.

Difference between FERA and FEMA

It is clear from the name of the Act that the emphasis under Foreign Exchange Regulation Act was on ‘exchange regulation’ or exchange control, but under Foreign Exchange Management Act, the emphasis is on ‘exchange management’. Under the Foreign Exchange Regulation Act, it was mandatory to acquire permission from Reserve Bank of India, in regards to many regulations under the Act. However, Foreign Exchange Management Act brought a significant change in this matter, and no regulation of the Foreign Exchange Management Act provides for acquiring the Reserve Bank’s permission, except in Section 3, which is related to dealing in foreign exchange, etc. Also, the Foreign Exchange Management Act made all the criminal offences as civil offences. The offences under Foreign Exchange Regulation Act were mainly criminal offences punishable for imprisonment, whereas in Foreign Exchange Management Act seeks to make offences relating to foreign exchange civil offences.

Under the other laws, everything is permitted till it is not prohibited, but under the Foreign Exchange Regulation Act nothing was permitted unless specifically permitted. The FERA provided for imprisonment for very minor offence also. Under other laws, a person is presumed innocent unless and until proven guilty, whereas, under the FERA, a person was presumed guilty unless proven innocent.