Foreign Exchange Management Act (FEMA), 1999
The Foreign Exchange Management Act (FEMA) was enacted in 1999 to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments. In addition, it is also related to the amendment of the law relating to foreign exchange for promoting the orderly development and maintenance of foreign exchange market in India. It came into effect on 1st June 2000, replacing the Foreign Exchange Regulation Act (FERA), 1973.
Table of Content
As per the FEMA, foreign exchange means foreign currency and includes the following:
- Deposits, credits and payable balance
- All the traveller’s cheques, drafts, bills of exchange/letters of credit expressed or drawn in Indian currency and payable in foreign currency.
- All the drafts, traveller’s cheques, letters of credit or bills of exchange drawn by banks, institutions or people outside India but payable in Indian currency.
History of FEMA, 1999
To regulate foreign exchange in India, the Foreign Exchange Regulation Act (FERA), 1973 was enacted and came into effect from January 1, 1974. FERA imposed strict regulations on certain kinds of payments and dealt in foreign exchange and securities and those transactions that had an indirect impact on the foreign exchange.
The main purpose of this Act was to regulate the payments and dealings that indirectly affected the foreign exchange and import and export of currency to conserve the foreign exchange resources of the country. In the year 1999, FERA was replaced with the Foreign Exchange Management Act (FEMA), which liberalised foreign exchange controls and restrictions on foreign investment by the government. FEMA brought a new management regime of foreign exchange in line with the emerging framework of the World Trade Organization (WTO).
Salient Features of FEMA, 1999
The entire FEMA is divided into 7 chapters containing 49 sections. The first 3 chapters comprise 12 sections regarding the operational part of the Act. The last 4 chapters contain the remaining 37 sections, which deal with Penalties, Adjudication, Appeals, Enforcement Directorate, etc. The 46th section gives the Central Government power to make rules to carry out the provisions of the Act by notification.
Some salient features of FEMA, 1999 are as follows:
- FEMA consists of provisions for the progressive liberalisation of capital account transactions.
- It is also consistent with full current account convertibility
- It is more transparent in its application because it emphasises the areas requiring specific permissions of the RBI or the Government of India on the acquisition/holding of forex.
- Foreign exchange transactions are divided into two categories, which are capital account and current account transactions.
- It provides power to the RBI for specifying the classes of capital account transactions and limits to which exchange is admissible for such transactions.
- It provides full freedom to hold, own, or transfer any foreign security, immovable property situated abroad and acquired by a resident in India, who was earlier residing abroad.
- This act is a civil law and the contraventions of the Act provide for arrest only in exceptional cases.
- It does not apply to non-Indian residents.
- It empowers the central government to restrict deals in foreign exchange under the current account by an authorised person.
- The RBI may ask exporters to furnish their export details to ensure compliance with necessary requirements.
- It also imposes restrictions on Indian residents carrying out transactions in forex or foreign securities or those who own or hold immovable property outside India.
Differences Between FERA, 1973 and FEMA, 1999
Some key differences between FERA, 1973 and FEMA, 1999 are given in Table below:
| FERA, 1973 | FEMA, 1999 |
|---|---|
| FERA was passed by the Government of India in 1973. It came into effect in 1974. | The Government of India enacted FEMA in 1999. It came into effect in the year 2000. |
| It contained 81 sections and was very strict in nature. | FEMA is comparatively liberal in nature as well as smaller than FERA, comprising only 49 sections. |
| FERA was very conservative and restrictive in its approach towards foreign exchange transactions. | FEMA approaches foreign exchange transaction in a more positive and liberal manner |
| Violation of FERA could initiate criminal proceedings towards offenders including imprisonment | Violators of FEMA are penalised with monetary penalty only. However, imprisonment can be handed out on non-payment of monetary penalty |
| FERA was much wider in scope than FEMA. It controlled everything related to foreign exchange. | FEMA is narrower in scope, dealing in only specific foreign exchange transactions. |
