The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India “to consolidate and change 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”. It was passed in the winter session of Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA). This act makes offences related to foreign exchange civil offenses. It extends to the whole of India., replacing FERA, which had become incompatible with the pro-liberalization policies of the Government of India. It enabled a new foreign exchange management regime consistent with the emerging framework of the World Trade Organization (WTO). It also paved the way for the introduction of the Prevention of Money Laundering Act, 2002, which came into effect from 1 July 2005.
Objectives of FEMA
The main objective of FEMA was to help facilitate external trade and payments in India. It was also meant to help orderly development and maintenance of foreign exchange market in India. It defines the procedures, formalities, dealings of all foreignexchange transactions in India. These transactions are mainly classified under two categories — Current Account Transactions and Capital Account Transactions.
FEMA is applicable to all parts of India and was primarily formulated to utilize the foreign exchange resources in efficient manner. It is also equally applicable to the offices and agencies which are located outside India however is managed or owned by an Indian Citizen. FEMA head office is known as Enforcement Directorate and is situated in heart of city of Delhi.
Applicability of FEMA Act
- Exports of any foods and services from India to outside, foreign currency, that is any currency other than Indian currency,
- Foreign exchange,
- Foreign security,
- Imports of goods and services from outside India to India,
- Securities as defined in Public Debt Act 1994,
- Banking, financial and insurance services,
- Sale, purchase and exchange of any kind (i.e. Transfer),
- Any overseas company that is owned 60% or more by an NRI (Non Resident Indian) and
- Any citizen of India, residing in the country or outside (NRI)
Major Provisions of FEMA Act 1999
Here are major provisions that are part of FEMA (1999)
- Free transactions on current account subject to reasonable restrictions that may be imposed.
- RBI controls over capital account transactions.
- Control over realization of export proceeds.
- Dealing in foreign exchange through authorized persons like authorized dealer or money changer etc.
- Appeal provision including Special Director (Appeals)
- Directorate of enforcement
- Any person can sell or withdraw foreign exchange, without any prior permission from RBI and then can inform RBI later.
- Enforcement Directorate will be more investigative in nature
- FEMA recognized the possibility of Capital Account convertibility.
- The violation of FEMA is a civil offence.
- FEMA is more concerned with the management rather than regulations or control.
- FEMA is regulatory mechanism that enables RBI and Central Government to pass regulations and rules relating to foreign exchange in tune with foreign trade policy of India.