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Foreign Exchange Management Act (FEMA): Guide and RBI rules


With the aim of facilitating external trade and payments to foreign countries and promoting the orderly development of the foreign exchange market in India, the government of India passed the Foreign Exchange Management Act, (FEMA) in 1999. This Act replaced the Foreign Exchange Regulation Act (FERA), which had become unworkable following the pro-liberalisation policies of the government. The new Act enabled a new management regime, which was consistent with the World Trade Organisation. The FEMA also paved the way for the introduction of the Prevention of Money Laundering Act, 2002, which came into existence in July 2005. The FEMA also enabled the Reserve Bank of India (RBI) to pass regulations and rules related to foreign exchanges, in line with the foreign trade policy of India.

 

FEMA Foreign Exchange Management Act

 

What is FEMA?

The Foreign Exchange Management Act was passed by the central government, to encourage cross-border trade and payments. It outlines the rules and procedures for all foreign exchange transactions that happen in India. There are two types of foreign exchange (forex) transactions: capital account and current account. Capital account transactions involve all money-related transactions while current account comprises trade of merchandise.

See also: Can an NRI purchase or own a property in India?

 

Where is FEMA applicable?

The FEMA is applicable to all agencies and offices owned by an Indian citizen in India or in a location outside India. The Enforcement Directorate is an economic-intelligence wing responsible for enforcing the FEMA act.

 

What is prohibited under FEMA?

The following are foreign exchanges is prohibited under the FEMA:

  • Remittance out of winning lotteries, income on racing/riding, football pools, sweepstakes, banned/prescribed magazines, etc.
  • Commission payment on exports towards equity investment of Indian companies in joint ventures/wholly-owned subsidiaries abroad.
  • Payment regarding telephonic ‘call-back services’.
  • Remittance of interest earned on funds held in NRSR Account (Non-resident Special Rupees Scheme Account).

See also: Important guidelines for buying a property outside India

 

Things to know about FEMA

Payments to any person outside India or receipts from such persons, along with the deals in foreign exchange and foreign security, are restricted. It is the FEMA that gives the central government the power to impose the restrictions.

The central government can restrict foreign exchange deals under the current account by an authorised person, based on public interest generally.

Residents of India will be allowed to transact in foreign exchange, foreign security or to own or hold immovable properties abroad, if it was owned or acquired when they were living outside India, or when it was inherited by them from someone living outside India.

See also: How to buy and finance a property outside India

The FEMA empowers the RBI to subject the capital account transactions to a number of restrictions.

Transactions involving foreign security or foreign exchange and payments from outside the country to India, should only be made through authorised persons.

 

What is Foreign Exchange Regulation Act (FERA)?

The Foreign Exchange Regulation Act (FERA), which came into effect in 1973, was meant to regulate specific transactions in foreign exchange and levy restrictions on specific types of payments. It also aimed to monitor the transactions involving foreign exchanges and import and export of currencies and bullion.

 

Difference between FEMA and FERA laws

While the FERA is an old law, which has now been repealed, the FEMA is a replacement for the previous act. The FERA was repealed in 1998 while the FEMA came into force from June 2000.

While the FERA set the rules for activities with regard to foreign exchange, the FEMA relaxed the norms controlling foreign exchanges. The major difference between the two laws is that while the FERA regulated foreign payments, the FEMA aims to promote foreign payments and foreign trade in India and increase its foreign exchange reserves.

This way, the two acts differed in their objectives. While the old law was meant for the conservation of foreign exchanges, the new law focuses on the management of foreign exchanges.

 

FERA provisions

The FERA had 81 sections that dealt with:

  1. Class of officers of enforcement
  2. Appointment and power officers of enforcement
  3. Entrustment of functions of director of enforcement
  4. Authorised dealers in foreign exchange
  5. Money–changers
  6. Restrictions on dealing in foreign exchange
  7. Restrictions on payments
  8. Blocked accounts
  9. Restrictions on import and export of certain currency and bullion
  10. Acquisition by central government of foreign exchange
  11. Duties of people entitled to receive foreign exchange
  12. Payment for exported goods
  13. Payment for lease, hire or other arrangement
  14. Regulation of export and transfer of securities
  15. Restrictions on issue of bearer securities
  16. Restriction on settlement
  17. Restriction on holding of immovable property outside India
  18. Provisions on guarantee in respect of debt or other obligation
  19. Restrictions on establishment of business in India
  20. Prior permission of the Reserve Bank required for taking up employment, etc., in India by nationals of foreign states
  21. Restriction on acquisition, holding, etc., of immovable property in India
  22. Power to search suspected persons and to seize documents
  23. Power to arrest
  24. Power to stop and search conveyances
  25. Power to search premises
  26. Power to examine people
  27. Power to summon people to give evidence and produce documents
  28. Encashment of cheque, draft, etc.
  29. Prohibition of disclosure of documents or information except in certain cases
  30. Contracts in evasions of the Act
  31. False statements
  32. Offences and prosecutions
  33. Penalty
  34. Continuance of proceeding in the event of death or insolvency
  35. Penalty for contravention of direction of the Reserve Bank of India or for failure to file returns, etc.

 

FAQs

What FEMA means?

The FEMA stands for the Foreign Exchange Management Act, which regulates foreign exchange in India.

What are the FEMA guidelines?

FEMA guidelines are mentioned in this article.

What are the objectives of FEMA?

The main objective of the FEMA is to encourage external trade and development and maintenance of the foreign exchange market in India.

When was the FERA repealed?

The FERA was repealed in 1998.

How many sections did the FERA have?

The now-repealed FERA had 81 sections.

 

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