FEMA: Foreign Exchange Management Act – Overview

By | August 26, 2019
FEMA - Foreign Exchange Management Act

FEMA – Foreign Exchange Management Act provided wings to Reserve Bank of India when it comes to the management of the foreign exchange.

Introduction

When the natives of two different country trade with each other, the transaction involves the exchange of currency between them. The trade may include exporting goods to another country or importing them from. When a person invests his money abroad, the rate of return of such investment is comparatively higher than other investments made by him. It is observed that foreign exchange is any monetary transaction that involves the citizens of two different countries.

These transactions can be further distinguished into two categories viz., trade transactions and non- trade transactions. Export and import of services and goods are some of the examples of trade transactions. On the other hand, getting medically treated abroad or going abroad on a trip are some of the instances exemplifying non-trade transactions.

Foreign Exchange Management Act or FEMA was legislated by the government of India with the motive to promote the payment and trades that are outside India. The legislature introduces this legislation in the year 1999 in order to replace the Foreign Exchange Regulation Act or FERA. There were many problems that were faced by the investors due to the drawbacks and loopholes of FERA.

FEMA came into force to do away with all these loopholes and thus with the help of this Act, the Government of India was able to introduce major economic reforms. Primarily, the aim of this Act was to de- regularize and liberalize the economy of India.

Objectives of FEMA

The main motto with which the Act was enacted was to extend support in facilitating external payments and trade in India. The idea of the Parliament behind the introduction of this Act was to support the well- ordered development and to maintain the market of foreign exchange in India. The concepts of formalities and procedures used for engaging in the transactions related to foreign exchange in India. These transactions can be distinguished into two categories viz., Capital Account Transactions and Current Account Transactions.

The applicability of this Act extends to the whole of India and this was enacted with the objective of utilizing the resources of foreign exchange in the most efficacious manner. This Act finds its applicability to the agencies and offices that are situated outside India in the same manner as it is applicable to the offices and agencies inside India.

However, the applicability of this Act is always regulated by a citizen of India. The head office from where FEMA is regulated is termed as Enforcement Directorate and is located in the city of Delhi.

Applicability of FEMA Act

The Foreign Exchange Management Act finds its applicability on the following:

  • Any citizen of India irrespective of him/ her being a resident of India or outside India
  • Any overseas company in which 60% of the total stakes are owned by any Non- Resident Indian (NRI)
  • Transfer i.e. exchange, sale and purchase of any kind
  • Services in relation to finance, banking and insurance
  • Securities as per the definition given in Public Debt Act 1994
  • Import of services and goods from a place situated outside India to India
  • Matters relating to foreign security
  • Transactions involving foreign exchange
  • The situation in connection with the matters involving the export of any services and foods from India to a place situated outside India
  • Matters relating to the foreign currency i.e. any currency other than the denomination of India currency

Major provisions in the Foreign Exchange Management Act, 1999

There are some major provisions in the Act formulated to regulate the foreign exchanges in India. Some of the provisions are:

  • A regulatory mechanism was introduced by the Parliament with the help of bringing FEMA for enabling the Central Government and RBI to pass various rules and regulations in relation to foreign exchange in consonance with the foreign trade policy of India.
  • The major concern of FEMA is upon the matters relating to management instead of controls or regulations.
  • Violation of any provision of FEMA is considered as a civil offence.
  • The scope of an investigation conducted by Enforcement Directorate has been widened.
  • An individual is provided with the liberty to withdraw or sell foreign exchange. It is not necessary to take prior approval from RBI for the same or to inform the RBI about the same later.
  • Establishment of the office of Directorate of Enforcement
  • Provision of Appeals including the office of Special Director
  • The transactions related to foreign exchange done by the persons who are authorised for the same such as authorised money changer or the authorised dealer
  • Keeping control over the realization of the proceeds of exports.
  • Control of RBI over the transactions relating to the capital account
  • Transactions on current account that are free of cost and subject to the reasonable restrictions which can be imposed by the authorities.

Difference between FEMA and FERA

  • As per the provisions of the FERA Act, the accused was not given any kind of help. On the contrast, FEMA extends a hand of help to the accused and provide them with the right of getting help from a legal practitioner according to section 32 of FEMA.
  • The main idea behind the introduction of FERA was to conserve the transactions related to the foreign exchange. While FEMA was introduced with the motive of managing the foreign exchanges.
  • The assumption during the formulation of FERA was that the foreign exchange is a resource that is scarce in nature. Pursuant to which, it must be conserved and dealt with great care. On the other hand, the assumption during the formulation of FEMA was that the foreign exchange must be managed in a proper manner because it is a type of asset for the country.
  • As per the provisions of the FERA Act, only money changers and authorized dealers were designated as the authorized persons. However, the provisions of FEMA went ahead to include offshore banking as well in the definition of the Authorized person.
  • The violation of any of the provision of the FERA was considered a criminal offence while it is considered to be a civil offence if anyone ends up violating the provisions of FEMA.

FERA never dealt with the use of technology while involving in the transactions of foreign exchange. However, FEMA has a provision for the same.

The provision of the current account is introduced by the FEMA while there was no provision in FERA regarding the same.

Functions of RBI under FEMA

Foreign Exchange Management Act provided wings to Reserve Bank of India when it comes to the management of the foreign exchange. There are various functions created by FEMA that RBI has to fulfil. Some of them are as follows:

  • Dealings in foreign exchange are being controlled by the RBI as it has to provide special or general permission to the entities that are dealing in foreign exchange. But this function is not extended to those matters which are specifically dealt with in the Rules, Act or Regulations.[1]
  • It is not in the control of RBI to impose any kind of restriction on the transaction arising out of the current account. This is to be done by the Central Government only after consulting RBI. In some of the cases, prior approval has to be taken from RBI for the transactions from the current account which has to be done in accordance with the provisions given in Foreign Exchange Management (Current Account Transactions) Rules, 2000.[2]
  • RBI has to lay down various conditions for the payment for the transactions arising out of the capital account.[3]
  • It also has to give repatriation as well as the realisation in all those cases that are specified under sec 9 of the Act.

[1] Section 3 of the Foreign Exchange Management Act

[2] Section 5 of the Foreign Exchange Management Act

[3] Section 6(2) of the Foreign Exchange Management Act


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