The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend the law relating to 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.[1] In fact it is the central legislation that deals with inbound investments into India and outbound investments from India and trade and business between India and the other countries.
The FEMA provides:
In the backdrop of acute shortage of Foreign Exchange in the country, the Foreign Exchange Regulation Act of 1973 (FERA) was enacted. This legislation was passed by the Indian Parliament by the government of Indira Gandhi but it came into force with effect from January 1, 1974. FERA had a controversial 27 year stint during which many bosses of the Indian Corporate world found themselves at the mercy of the Enforcement Directorate.
FERA imposed stringent regulations on certain kinds of payments. It dealt in foreign exchange and securities and the transactions which had an indirect impact on the foreign exchange and the import and export of currency. The purpose of the act, inter alia, was to “regulate certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of foreign exchange resources of the country”. It was repealed in 1999 by the government of Atal Bihari Vajpayee and replaced by the Foreign Exchange Management Act, which liberalised foreign exchange controls and restrictions on foreign investment.
FEMA had become the need of the hour since FERA had become incompatible with the pro-liberalisation policies of the Government of India. It brought a new management regime of Foreign Exchange consistent with the emerging framework of the World Trade Organisation (WTO). It is another matter that the enactment of FEMA also brought with it the Prevention of Money Laundering Act 2002, which came into effect from 1 July 2005.
FEMA contains 7 Chapters divided into 49 sections of which 12 sections cover operational part and the rest contravention, penalties, adjudication, appeals, enforcement directorate, etc.
As far as transactions on account of trade in goods and services are concerned, FEMA has by and large removed the restrictions except for the enabling provision for the Central Government to impose reasonable restrictions in public interest. The capital account transactions will be regulated by RBI /Central Government for which necessary circulars /notifications will have to be issued under FEMA.
CHAPTER I – Preliminary (Sec 1&2)
CHAPTER II- Regulation and Management of Foreign Exchange (Sec 3 –9)
CHAPTER III – Authorised Person (Sec 10 –12)
CHAPTER IV – Contravention and Penalties (Sec 13-15)
CHAPTER V – Adjudication and Appeal (Sec 16- 35)
CHAPTER VI – Directorate of Enforcement (Sec 36-38)
CHAPTER VII- Miscellaneous (Sec 39 – 49)
Besides the FEMA, there are 5 rules and 23 regulations under the Act which help in implementation of the Act.
FEMA in itself is not an independent and isolated law. The provisions of FEMA are spread at different places and so are there regulatory bodies. Reserve Bank of India (RBI) makes regulations for FEMA and the rules are made by Central Government.
Though RBI is the overall controlling authority in respect of FEMA, enforcement of FEMA has been entrusted to a separate “Directorate of Enforcement” formed for this purpose. (Section 36)
Authorities governing the enforcement of FEMA:
Machinery responsible for various aspects of FEMA is:
The Enforcement Directorate is an attached office of the Ministry of Finance, Department of Revenue. Prior to 1st May, 1956, the responsibility for enforcement of exchange control laws under FERA 1947 was discharged by the Investigation and Enforcement Section in the Exchange Control Department of the R.B.I.
This Directorate is under the administrative control of the Department of Revenue for operational purposes; the policy aspect of the Act and its legislation and its amendments are however within the purview of the Department of Economic Affairs. The background of keeping the policy aspects relating to the Act in the Department of Economic Affairs is that –
(i) the Department of Economic Affairs is more closely involved in the formulation of policy responses at the macro level to the changing economic scenario; and
(ii) the Department of Economic Affairs coordinates with RBI in respect of trade and invisible transactions and banking aspects of the Act.[3]
FIPB is mandated to play an important role in the administration and implementation of the Government’s FDI policy. It has a strong record of actively encouraging the flow of FDI into the country through speedy and transparent processing of applications, and providing on-line clarification. In case of ambiguity or a conflict of interpretation, the FIPB has always stepped in with an investor-friendly approach.
Foreign Exchange refers to money denominated in the currency of another nation or group of nations like Euro. Foreign exchange can be cash, funds available on credit cards and debit cards, traveler’s checks, bank deposits, or other short-term claims. Section 2(n) of FEMA states that “foreign exchange” means foreign currency and includes,-
(i) deposits, credits and balances payable in any foreign currency,
(ii) drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency,
(iii) drafts, travelers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency;
Manner of receipt in Foreign Exchange
Payment for Export can be received:
Repatriation of Foreign Exchange
“Repatriate to India” means bringing into India the realized foreign exchange and-
Manner of Repatriation -It can be done in the following manner:
Surrender of Foreign Exchange
These provisions are not applicable to Foreign Currencies of Nepal and Bhutan
As stated earlier all transactions between a resident and a non-resident is covered in FEMA, these transaction can be broadly classified in two groups current account transactions and capital account transactions.
As per Sec 2 (e) “Capital account transaction” means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in Sec 6(3). Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a current account transaction.
The Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be required from time to time.
The definition is inclusive and any expenditure which is not a capital account transaction will be current account transaction. It includes:
The following transactions are therefore regarded as Capital Account Transaction[8]
(a) Transfer or issue of any foreign security by a person resident in India;
(b) Transfer or issue of any security by a person resident outside India;
(c) Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
(d) Any borrowing or lending in foreign exchange in whatever form or by whatever name called;
(e) 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;
(f) Deposits between persons resident in India and persons resident outside India;
(g) Export, import or holding of currency or currency notes;
(h) Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
(i) Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
(j) Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred,-
(i) By a person resident in India and owed to a person resident outside India; or
(ii) By a person resident outside India.
Though the norms of Capital Account Transactions have been considerably relaxed, as a general rule all capital account are prohibited unless specifically allowed. Permissible capital account transactions are governed by the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 (Notification FEMA 1/2000-RB).
Release of Exchange for Travel
The following do not require any approval from RBI:
Business and Commercial Remittance Abroad
Restrictions on Current Account Transactions
The following requires prior approval of RBI:
Section 2 (j) of FEMA defines “capital account transaction” as a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions like:
As per the provisions laid down in Section 5, a person may sell or draw foreign exchange freely for his current account transactions, except in a few cases where limits have been prescribed The Central Government has the power to regulate current account transactions. Unless the transaction is restricted, Foreign exchange can be drawn for the same. Current Account transactions are governed by the Foreign Exchange Management (Current Account Transactions) Rules, 2000 (Notification No.GSR.381(E), dated 03/05/2000).
Drawal of foreign exchange for the following purposes are prohibited:
Drawal means drawal of foreign exchange from an authorized person and includes opening of Letter of credit or use of International Credit Card or International Debit Card or ATM Card or any other thing by whatever name called which has the effect of creating foreign exchange liability.[11]
Current Account Transactions are covered under the following:
Who can make FDI?
RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors.
The companies are however required to notify the concerned Regional office of the RBI about receipt of inward remittances within 30 days of such receipt and to file the required documents with the concerned Regional offices of the RBI within 30 days after issue of shares to the foreign investors or NRIs.[12]
Industrial Policy towards Foreign Investment
FDI in shares is permitted 100% in all industries except the following:
Activities requiring Government Approval – Activities that require government approval include Petroleum Sector, Investing Companies in Infrastructure and Service Sector, Defense & Strategic Industries ,Atomic Minerals, Print Media, Broadcasting, Postal Services, Courier Services ,Establishment & operation of Satellite , Development of Integrated Township.
The Reserve Bank of India (RBI) has recently come out with notifications under the FEMA to operationalise foreign direct investment (FDI) policy in multi-brand retailing, telecom and others. It has also widened the definition of the term ‘control’ under the Act which would have repercussions on downstream investment by an entity controlled by foreigners. The government had relaxed norms for 51 per cent multi-brand retail trading and eased the mandatory 30 per cent local sourcing norms for companies.[13] The cap in telecom was increased to 100 per cent from 74 per cent. FDI of up to 49 per cent can come through the automatic route.[14]
The Indian foreign exchange market has operated in a liberalised environment for more than a decade. A cautious and well-calibrated approach was followed while liberalising the foreign exchange market with an emphasis on the need to safeguard against potential financial instability that could arise due to excessive speculation.
Besides, with the Indian economy moving towards further capital account liberalisation, the development of a well-integrated foreign exchange market also becomes important as it is through this market that cross-border financial inflows and outflows are channelled to other markets. Replacing of FERA, 1973 by FEMA, 1999 helped removing the flaws and overcoming the hurdles posed by it.
Formatted on 19th March 2019.
[1] Objectives and Purpose, The Foreign Exchange Management Act, 1999.
