FEMA: All about Foreign Exchange Management Act

[ecis2016.org] The Foreign Exchange Management Act was passed by the central government to replace the FERA and to encourage cross-border trade and payments

What is Foreign Exchange Management Act?

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, better known as the FEMA Act in 1999.

You are reading: FEMA: All about Foreign Exchange Management Act

The FEMA 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.

What is FEMA Act?

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.

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Where is FEMA Act applicable?

The FEMA act 1999 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?

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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).

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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.

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

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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.

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