Foreign Exchange Management Act, 1999

With the liberalization and globalization, it was felt that the Foreign Exchange Regulation Act 1973
(FERA) should be replaced by a more business friendly enactment. With this view in mind, the Foreign
Exchange Management Act, 1999 (42 of 1999) (FEMA) was passed.

Objective:

The object of Foreign Exchange Regulation Act, 1973 (FERA) was to conserve the foreign resources,
whereas the objects of the Foreign Exchange Management Act, 1999 (FEMA) were to consolidate and
amend the law relating to Foreign Exchange with the objective of facilitating external trade and
payments for promoting the orderly development and maintenance of foreign exchange market by
India.

Scope of the Act: (Means where all this Act applies and How it applies)

1. This Act may be called the Foreign Exchange Management Act, 1999.

2. It extends to the whole of India.

3. It shall also apply to all branches, offices and agencies outside India owned or controlled by a
person resident in India and also to any contravention thereunder committed outside India by any
person to whom this Act applies.

4. The Foreign Exchange Management Act, 1999 (FEMA) as also the Rules, Notifications and Orders
issued by the Government of India and Reserve Bank of India (RBI) under the Act, form the statutory
basis of Foreign Exchange Management in India.

5. The Act has received the assent of President of India on 29-12-1999 and has come into force
with effect from 01-06-2000.

Salient Features of the Act:

The Foreign Exchange Management Act, 1999 (FEMA) is more transparent in its application. It has laid
down the areas where specific permission of the Reserve Bank / Government of India is required. In rest
of the cases no such permission would be needed and a person can remit funds and acquire assets, incur
liability in accordance with the specific provisions laid down in the Act or Notifications issued by the
Reserve Bank / Government of India under the Act, without seeking approval of the Reserve Bank /
Government of India.

The salient features of FEMA are given below:

1. Application of FEMA may be seen broadly from two angles viz., capital account transaction and
current account transactions.

(a) Capital Account Transactions: Capital Account Transactions release to movement of capital, e.g.,
transactions in property and investments and lending and borrowing money.

(b) Current Account Transactions: All other transactions, which do not fall in capital account
category, are current account transactions. They are freely permitted subject to few restrictions. Like
certain transaction needs permission from RBI and Central Govenrament.

(In the above two points a clear understanding is required between the two typs of transactions)

2. Some other Features of the FEMA are:

(a) The Foreign Exchange Management Act and Rules give full freedom to a person resident in
India, who was earlier resident outside India to hold or own or transfer any foreign security or
immovable property situated outside India and acquired when he/she was resident there. ---- Rights of
persons who is a resident Indian with regards to FEMA

(b) Similar freedom is also given to a resident who inherits such security or immovable property
from a person resident outside India.

(c) A person resident outside India is permitted to hold shares, securities and properties acquired
by him while he/she was resident in India.

The above three points discusses the rights or degree of freedom given to resident Indian and non
residant

To give effect to the provisions of the Act the Government of India have, among others, made Foreign
Exchange Management (Current Account Transactions) Rules, 2000 under section 5 read with Section 46
of the Act. The Reserve Bank of India has also made the following Rules/Regulations/ issued
Notifications under various provisions of the Act, which are:
(i) Rules relating to Current Account Transactions.

(ii) Regulations relating to Capital Account Transactions.

(iii) Regulations relating to Export of Goods Services.

(iv) Other Regulations / Notifications issued by Reserve Bank of India.

To whom it is applicable?
 It is applicable to the whole of India.
 Any branch, office, and agency, which is situated outside India, but it is
owned or controlled by a person resident in India. Any violation by
these entities committed outside India will be covered under this Act.

In general, FEMA includes three different types of categories and deals

separately which are:-

1. Person
2. A person resident in India
3. Person resident outside India

Now let’s discuss them in detail.

 Person
For the object of the Act, a person includes the following:-

 An individual,
  A Hindu undivided family,
 A company, 
 A firm,
 An association of persons or a body of individuals whether incorporated
or not,
 Any artificial judicial person not falling any of the preceding sub-
clauses and,
 Any agency office or branch owned or controlled by such person.

 Person resident in India 

A. A person residing in India for more than 182 days during the course of
a preceding financial year but it does not include-

a. A person who has gone out of India or stays outside India, in any one
of the cases-
  for taking up employment outside India, or 
  for carrying on outside India a business or vocation, or 
  for any other purpose, in such circumstances as would
indicate his intention to stay outside India for an uncertain
period.
b. A person who has come to or stays in India, in any of the following
cases-

 for taking up employment in India, or 

 for carrying on in India a business or vocation, or 
 for any other purpose, in such circumstances, as would indicate his
intention to stay in India for an uncertain period.

B. Any person or body corporate registered or incorporated in India.

C. An office, branch or agency in India owned or controlled by a person resident
outside India.

D. An office, branch or agency outside India owned or controlled by a person

resident in India.

 Person resident outside India 

It means a person who is not an Indian resident or not a resident in Indian.

Foreign currency
It means any currency but other than Indian currency.

Foreign Exchange
It means foreign currency and it also includes deposits, credits, and balances
which are payable in foreign currency. Also the drafts, travellers cheques,
letters of credit or bills of exchange which are expressed or drawn in Indian
currency but is payable in any foreign currency.

Also, the drafts, travellers cheques, letters of credit or bills of exchange drawn
by banks, or any institutions or person outside India but are payable in Indian
currency.

Foreign Security
It means any security which is in the form of shares, stocks, bonds, debentures
or any other instrument denominated or expressed in foreign currency. It also
includes foreign securities which are denominated or expressed in foreign
currency, but where the redemption or any form of return on these securities
such as interest or dividends should be payable in Indian currency.

Authorised Person

Section 2(c) of the Foreign Exchange Management Act,1999 defines Authorised person. An authorised
person is a person who has given the authority for the conversion of the foreign exchange.

For example, if an Indian resident wants to visit the USA and requires their currency which is dollars so
for the exchange he/she will only go to the authorised person or if a person residing abroad wants to
visit India and requires Indian currency then similarly he/she will approach an authorised person for the
foreign exchange.

How Inflow and Outflow of Foreign Exchange affects the Current and Capital Account Transaction?

So accounts are broadly classified into:-

Capital account transaction

Current account transaction

Current Account Transactions - (Section 5):

Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawn is a
current account transaction:

Provided that 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 prescribed.

However certain transactions are not restricted------(no restrictions examples)

1. payment for imports under open general license

2. payment of dividend on approved foreign investment

3. payment of interest on approved borrowed funds

4. salary to foreign directors

5. payment to airline bookings, shipping companies and for transfer of cargo

Capital Account Transactions-(Section 6):

(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or
from an authorized person for a capital account transaction.

(2) The Reserve Bank may, in consultation with the Central Government, specify :

(a) any class or classes of capital account transactions which are permissible;

(b) the limit up to which foreign exchange shall be admissible for such transactions:

(3) Restrictions of capital account transactions ------(Restrictions examples)

(a) transfer or issue of any foreign security by a person resident outside India;

(b) transfer or issue of any security by a person resident outside India;

(c) any borrowing or lending in foreign exchange or in Indian rupees in whatever form or by
whatever name called;

(d) deposits between persons resident in India and persons resident outside India;

(e) export, import or holding of currency or currency notes;

(f) transfer of immovable property outside India, other than a lease not exceeding five years, by a
person resident in India;

(g) acquisition or transfer of immovable property in India, other than a lease not exceeding five
years, by a person resident outside India;

(h) 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; and

(ii) by a person resident outside India.

Export of Goods and Services - (Section 7): --------rules while exporting

(1) Every exporter of goods shall:

(a) furnish to the Reserve Bank or to such other authority a declaration in such form and in such
manner as may be specified, containing true and correct material particulars, including the amount
representing the full export.

(b) furnish to the Reserve Bank such other information as may be required by the Reserve Bank for
the purpose of ensuring the realization of the export proceeds by such exporter.

(2) Every exporter of services shall furnish to the Reserve Bank or to such other authorities a
declaration in such form and in such manner as may be specified, containing the true and correct
material particulars in relation to payment for such services.
4. Contravention and Penalties:

Penalties-(Section 13):

(1) If any person contravenes any provision of this Act, or contravenes any rules, regulation,
notification, direction or order issued in exercise of the powers under this Act, or contravenes any
condition subject to which an authorization is issued by the Reserve Bank, he shall upon adjudication, be
liable to a penalty up to thrice the sum involved in such contravention where such amount is
quantifiable,

or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a
continuing one, further penalty which may extend to five thousand rupees for every day after the first
day during which the contravention continues.

(2) Any Adjudicating Authority adjudging any contravention under sub-section (1), may, if he thinks
fit in addition to any penalty which he may impose for such contravention direct that any currency,
security or any other money or property in respect of which the contravention has taken place shall be
confiscated to the Central Government and further direct that the foreign exchange holdings, if any, of
the persons committing the contraventions or any part thereof, shall be brought back into India or shall
be retained outside India in accordance with the directions made in this behalf.
Appeal to Appellate Tribunal - (Section 19):

Save as provided in sub-section (2), the Central Government or any person aggrieved by an order made
by an Adjudicating Authority, other than those referred to in sub-section (1) of Section 17, or the Special
Director (Appeals), may prefer all appeal to the Appellate Tribunal;

Conclusion

FEMA only permits an authorized person to deal in Foreign exchange or foreign security ( shares, stocks,
bonds etc). FEMA became the need of an hour to be replaced by an old act which was FERA as FERA was
stringent and FEMA is liberal and also more flexible than FERA.

Any person who wants to do business in a foreign country or to buy foreign securities he/she needs an
authorised person to do that and also to understand this Act in order to avoid penalties and he/she
should also be aware of the restrictions on it.

The main objective of FEMA was to consolidate and amend the laws relating to the foreign exchange
with the reason to facilitate the external trade and payments and for the maintenance of the foreign
exchange market in India. FEMA’s replacement with FERA to an extent has boosted the Indian economy
as it is flexible and also a civil offence in comparison with FERA.