ALL YOU NEED TO KNOW ABOUT FEMA REGULATIONS

INTRODUCTION

The Government of India formulated FEMA or Foreign Exchange Management Act to

encourage the external payments and across the border trades in India. It was formulated in
the year 1999 while it replaced FERA (Foreign Exchange Regulation Act). This was meant to
close all the loopholes and drawback of FERA and hence major economic reforms were
introduced under this act. It was primarily formulated to de-regularize and have liberal Indian
economy.

The FEMA, also referred to as the Foreign Exchange Management Act was introduced in the
year 1999. The act was a replacement of the FERA or Foreign Exchange Regulation Act.
FEMA came into effect on 1st of June, 2000. FEMA was passed since FERA did not meet
the requirements of the policies being implemented after liberalization. FEMA introduced a
prominent change in the system by making all the offenses pertaining to foreign exchange as
the civil offenses, instead of criminal offenses (earlier applicable in the case of FERA). 

As far as FEMA is concerned, it basically aims at consolidating and amending the foreign
exchange law with an aim to facilitate external trading as well as payments. The act was
designed for promoting the development as well as maintenance of the Indian foreign
exchange market in an orderly manner. At present, FEMA can be applied across India as well
as across all the branches, agencies and offices outside of India controlled or owned by an
individual who is an Indian resident. FEMA’s head office, also referred to as Enforcement
Directorate is located in New Delhi and spearheaded by its Directors. 

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 foreign exchange 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.

1) APPLICABILITY OF FEMA ACT:

1. exports of any foods and services from India to outside, foreign currency, that is any
currency other than Indian currency, 
2. foreign exchange, 
3. foreign security, 
4. Imports of goods and services from outside India to India,
5. securities as defined in Public Debt Act 1994, 
6. banking, financial and insurance services, 
7. sale, purchase and exchange of any kind (i.e. Transfer), 
8. any overseas company that is owned 60% or more by an NRI (Non Resident
Indian) and
9. any citizen of India, residing in the country or outside (NRI)

2) MAJOR PROVISIONS OF FEMA ACT 1999:

Here are major provisions that are part of FEMA (1999) –

1. Free transactions on current account subject to reasonable restrictions that may be

imposed.
2. RBI controls over capital account transactions.
3. Control over realization of export proceeds. 
4. Dealing in foreign exchange through authorized persons like authorized dealer or
money changer etc.
5. Appeal provision including Special Director (Appeals)
6. Directorate of enforcement
7. Any person can sell or withdraw foreign exchange, without any prior permission from
RBI and then can inform RBI later. 
8. Enforcement Directorate will be more investigative in nature
9. FEMA recognized the possibility of Capital Account convertibility.
10. The violation of FEMA is a civil offence.
11. FEMA is more concerned with the management rather than regulations or control.
 12. 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.

3) THE MAIN FEATURES OF FOREIGN EXCHANGE MANAGEMENT ACT,

1999:

1. FEMA gives power to the central government for imposing restriction on activities like
making payments to a person situated outside of the country or receiving money through
them. Apart from this, foreign exchange as well as foreign security deals is also restricted by
FEMA. 

2. Transactions revolving around foreign security or foreign exchange as well as payments

made from any foreign country to India cannot be made without specific or general
permission of FEMA. All transactions must be carried out via an individual who has received
authorization for the same. 

3. The central government can restrict an authorized individual to carry out foreign exchange
deals within the current account, on the basis of general interest of the public. 

4. Even though drawing or selling of foreign exchange is carried out via an authorized
individual, the FEMA act empowers the Reserve Bank of India to place a number of
restrictions on the transactions of the capital account. 

5. Under the act, the Indian residents have the permission to conduct foreign exchange and
foreign security transactions or the right to hold or own immovable property in a foreign
country in case the security, property or currency was acquired or owned when the individual
was based outside of the country, or when they inherit the property from another individual
staying outside the country.

6. The act is not applicable on the resident (of an Indian citizen) based outside the country.
 4) Function of RBI under FEMA

Foreign Exchange Management Act (“FEMA”) envisages that Reserve Bank of India

(“RBI”) will have a key role in management of foreign exchange. The main functions of
RBI under FEMA are as follows:

a) Controlling dealings in foreign exchange by giving general or special permission for

dealing in foreign exchange, excluding those cases where specific provisions have been made
in Act, Rules or Regulations – Section 3.

b) RBI cannot impose any restrictions on current account transactions. These can be imposed
only by Central Government in consultation with RBI – Section 5. However, in certain cases,
prior approval of RBI is required for current account transactions as provided in Foreign
Exchange Management (Current Account Transactions) Rules, 2000.

c) Specifying conditions for payment in respect of capital account transaction – Section 6(2).

d) Regulate/prohibit/restrict the following, by issuing Regulations:

• Transfer or issue of foreign security to resident and Indian security to non-resident;

• Borrowing and lending in foreign exchange or to a foreign person;

• Export/import of currency or currency notes;

• Transfer of immovable property outside India;

• Giving guarantee or surety where foreign exchange transaction is involved – Section 6(3).

e) Specify (by regulation) period and manner in which foreign exchange due from export of
goods and services should be received – Section 8.

f) To grant exemption from realisation and repatriation in cases specified under Section 9.

g) Granting authorisation to ‘Authorised Person’ to deal in foreign exchange, to give

directions to them and to inspect the authorised person – Sections 10, 11 & 12.
5) COMPARISON BETWEEN FERA AND FEMA:

1. FERA was compiled with 81 different and complex provisions however FEMA have

only 48 simple sections to it.
2. Current account was not defined under FERA however it was introduced in FEMA.
3. FEMA have more widened definition of “Authorized Person” and have also included
banks in it.
4. Compatibility with IT was not at all dealt with under FERA however FEMA have
provision for IT.
5. Under FERA, its violation was a criminal offence which was changed to civil offence
in FEMA.
6. Under FERA, the appeal used to be sent to High Court however FEMA had provision
of Special Director (Appeals) and Special Tribunal.
7. Under FERA, no help was extended to the accused however as per section 32 of
FEMA, the accused have right to get help of a legal practitioner.
8. FERA was set up with main objective of conservation of foreign exchange however
FEMA was set up with main objective of management of foreign exchange.
9. FERA was formulated with an assumption that foreign exchange is a scarce resource
and hence must be protected and used with great care however FEMA was formulated
with assumption that foreign exchange is an asset and must be properly managed.
10. Under FERA only authorized dealers and money changers were defined as
Authorized Persons however under FEMA even offshore banking units were included
in this definition.
CASE LAWS

1. Delhi High Court in its judgment on 11 April 2017, in the case of Cruz
City v Unitech Ltd, considered whether a violation of FEMA would be
contrary to the public policy of India under section 48(2)(b). The court
considered the decisions of the Supreme Court in Renusagar and Shri
Lal Mahal v Progetto regarding the scope of “public policy” and
concluded that enforcement of a foreign award would be refused on the
grounds of public policy of India only if it were contrary to: (1) the
fundamental policy of Indian law; (2) the interests of India; or (3) justice
or morality. The court further held that a contravention of a provision of
law was not sufficient to invoke the defence of “public policy” and the
expression “fundamental policy of India” referred to the basic and
substratal rationale, values and principles which form the bedrock of laws
in the country.

2. Delhi High Court in the 2012 case of SRM Exploration Pvt Ltd v
N&S&N Consultants, where the court had held that the deletion of
section 47 of FERA from FEMA shows a legislative intent to not make a
transaction void even if it is in violation of FEMA. The division bench of
Delhi High Court stated: “We have perused the provisions of FEMA,
1999; section 3 thereof prohibits dealing in or transferring of any foreign
exchange save as otherwise provided therein or under the rules and
regulations framed thereunder without general or special permission of
RBI.