An introduction to Foreign Exchange Regulations in India- The Foreign Exchange Management Act – FEMA

The Foreign Exchange Management Act was enacted by the Indian Central Government to facilitate external payments and cross-border trade in India. FEMA (Foreign Exchange Management Act) was enacted in 1999 to replace FERA (Foreign Exchange Regulation Act). FEMA was created to address all of the flaws and shortcomings of FERA (Foreign Exchange Regulation Act), and as a result, it enacted a number of reforms. FEMA was created primarily to de-regulate and liberalise India's economy.

FEMA's Objectives 

FEMA was introduced in India with the primary goal of facilitating international trade and payments. FEMA was also created to aid the development and maintenance of the Indian foreign currency market in an orderly manner. 

The Foreign Exchange Management Act (FEMA) establishes the rules and procedures for all foreign exchange transactions in India. Capital Account Transactions and Current Account Transactions are the two types of foreign exchange transactions. 

The balance of payment, as defined by the FEMA Act, is a record of transactions in commodities, services, and assets between citizens of different countries and divided into two primary types of accounts, Capital Account and Current Account.

The Capital Account includes all capital transactions, whereas the Current Account includes merchandise commerce. Current Account transactions are those that include the entry and outflow of money to and from a country or countries over the course of a year as a result of commodity, service, and income trading/rendering. 

The current account is a measure of a country's economic health. As previously stated, the balance of payment is made up of current and capital accounts, with the capital account accounting for the flow of capital in the economy as a result of capital receipts and expenditures. Domestic investment in foreign assets and foreign investment in domestic assets are both recognised in the capital account.

FEMA Act's Applicability 

FEMA (Foreign Exchange Management Act) applies to the entire country of India as well as agencies and offices operating outside of India (which are owned or managed by an Indian Citizen). The Enforcement Directorate, which is FEMA's headquarters, is located in New Delhi. 

FEMA is applicable to:

  • Foreign exchange.
  • Foreign security.
  • Exportation of any commodity and/or service from India to a country outside India.
  • Importation of any commodity and/or services from outside India.
  • Securities as defined under Public Debt Act 1994.
  • Purchase, sale and exchange of any kind (i.e. Transfer).
  • Banking, financial and insurance services.
  • Any overseas company owned by an NRI (Non-Resident Indian) and the ownership is 60% or more.
  • Any citizen of India, residing in the country or outside (NRI).

The FEMA Act categorises current account transactions into three components, which are as follows:

  • Transactions prohibited by FEMA,
  • The transaction requires Central Government’s permission,
  • The transaction requires RBI’s permission.

Prohibition on Drawal of Foreign Exchange

  • Any kind of remittance out of winning the lottery.
  • Any kind of remittance from the income on racing/riding etc,
  • Any remittance for buying of a lottery ticket, football pools, sweepstakes, banned/prescribed magazines etc.,
  • Commission payment on exports towards equity investment of Indian Companies in Joint ventures/wholly owned subsidiaries abroad.
  • Remittance of dividend by any company. However, this clause is applicable only if the requirement of dividend balancing is applicable.
  • Commission payment on exportation under Rupees State Credit Routes except commission up to 10% of invoice value of export of tea and tobacco.
  • Payment regarding “ Call back Services” of telephones.
  • A travel to Bhutan and/or Nepal.
  • Remittance of interest income on funds held in NRSR Account i.e. Non-resident Special Rupees Scheme account.
  • A transaction with a resident of Bhutan or Nepal.

Penalties Under FEMA
If a person violates the terms of FEMA or any rule, instruction, regulation, order, or notification issued under FEMA, he may be fined up to triple the amount involved in the violation or Rs.2 lakh. If the contravention continues, he would be subject to a further penalty of up to Rs.5,000 for each day the contravention continues.