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FEMA An Overview Shetty. Thrisha. Harish 6/12/2010

This project covers an overview of the Fore ign Exchange Management Act (FEMA), which replaced the Foreign Exchange Regulation Act (FERA) on 1st June, 2000.


Foreign Exchange Management Act, 1999

Meaning: An Act to consolidate and amend the law relating 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.

Background of FEMA: In 1999, the Indian Government formulated the Foreign Exchange Management Act (FEMA). On the 1st of June, 2000, FEMA came into force replacing the Foreign Exchange Regulation Act (FERA), which was formulated in 1973. FERA was enacted in the backdrop of acute shortage of  Foreign Exchange in the country and had a controversial 27 year stint during which many bosses of the Indian Corporate world found themselves in the mercy of the Enforcement Directorate (E.D.). Extensive economic reforms were undertaken in India in the early 1990s and this led to the deregulation and liberalization of the country's economy. Foreign Exchange Management Act (FEMA) was thus formulated in order to be compatible with the policies of pro  liberalization of the Indian government. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging frame work of the World Trade Organization (WTO). Enactment of FEMA brought with it Prevention of Money Laundering Act, 2002 which came into st effect from 1 July, 2005.

Scope of FEMA: It is applicable to the entire country. Agencies, branches, and offices, outside India, that are owned by Indian residents, also fall under the jurisdiction of this act. It also extends to any dispute that is committed in offices, agencies and branches outside India that are owned by individuals covered by this act.

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Objectives of FEMA: One of its important objectives is to revise and unite all the laws that relate to foreign exchange. Further FEMA aims to promote foreign payments and trade in the country. Another important objective of the Foreign Exchange Management Act (FEMA) is to encourage the orderly maintenance and development of the foreign exchange market in India.

FERA  The Naughty Act Under FERA, nothing was permitted unless specially permitted. It provided for imprisonment of  even a very minor offence. A person was presumed guilty unless he proved himself innocent whereas under other laws, a person is presumed innocent unless he is proven guilty.

RBI Guidelines: 1) A general or special permission of the Reserve Bank of India is required to:1. Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person; 2. Make any payment to or for the credit of any person resident outside India in any manner; 3. Receive otherwise through an authorized person, any payment by order or on behalf  of any person resident outside India in any manner; 4. Reasonable restrictions for current account transactions as may be p rescribed.

2) RBI can, by regulations, regulate:1. Transfer or issue of any foreign security by a person resident in India; 2. Transfer or issue of any security by a person resident outside India; 3. Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India; 4. Any borrowing or lending in foreign exchange in whatever form or by whatever name called; 5. Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India; 6. Deposits between persons resident in India and persons resident outside India; 7. Export, import or holding of currency or currency notes; 2|P a g e


8. Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India; 9. Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside I ndia; 10. Giving of a guarantee or surety in respect of any debt, obligation or liability incurred a. By a person resident in India and owed to a person resident outside India or b. By a person resident outside India. 3) 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:1. Any class or classes of capital account transactions which are permissible; 2. The limit up to which foreign exchange shall be ad missible for such transactions.

Investigation under the Act: 1) The Directorate of Enforcement investigate to prevent leakage of foreign exchange which generally occurs through the following malpractices:1. Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments. 2. Acquisition of foreign currency illegally by person in India. 3. Non  repatriation of proceeds of the exported goods. 4. Unauthorized maintenance of accounts in foreign countries. 5. Under-invoicing of exports and over-invoicing of imports and any other type of  invoice manipulation. 6. Siphoning off of foreign exchange against fictitious and bogus imports. 7. Illegal acquisition of foreign exchange through Hawala. 8. Secreting of commission abroad.

Implementation of FEMA: Extensive efforts have been undertaken to ensure the effective implementation of FEMA in India. Proper implementation measures and efficient supervision are important preconditions for the success of the Act.




Difference between FERA and FEMA Sl. Nature FEMA No. Foreign Exchange Management Act 1

2 3 4

FERA Foreign Exchange Regulation Act


To facilitate external trade and payments and maintenance of  foreign exchange market in India. Violation Its violation is a civil offence. Compounding of  Offences under it are offences compoundable. Residential status A stay of more than 182 days in India is the criteria to decide the residential status of a person under it.

To conserve foreign exchange and prevent its misuse in India. Its violation is a criminal offence. Offences under it were not compoundable. Citizenship was a criterion to determine the residential status of a person under it.

Foreign Exchange Transactions:

Foreign Exchange Transactions Current A/c

Capital A/c



F I ¡  






Remit tance

Profit / iv/ Int   

FII  Foreign Institutional investor

G R  Global epositary Receipt

RI  Residential Indian

NRI  Non-Residential Indian







Indian Source (G R/A R)

Foreign Source (FII)


Foreign Curren cy A/c (RI & NRI)


A R  American epositary Receipt   















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