Foreign Exchange Management Act, FEMA Objectives, Features, Provisions

The Foreign Exchange Management Act (FEMA), enacted in 1999 to replace the restrictive Foreign Exchange Regulation Act (FERA) of 1973, regulates foreign exchange transactions in India. FEMA facilitates trade, streamlines payments, and promotes foreign investments while ensuring market stability. 

FEMA differentiates between capital and current account transactions, providing clear guidelines for their management and specifying the responsibilities of authorised persons. With simplified compliance and a unified legal framework, FEMA ensures efficient regulation, enforced by the Directorate of Enforcement for strict adherence to its provisions.

FEMA Overview

The Foreign Exchange Management Act (FEMA), enacted by the Government of India in 1999, regulates foreign exchange transactions and management. FEMA provides a comprehensive legal framework for regulating foreign exchange transactions, cross-border trade, payments, foreign investments, and other aspects of foreign exchange management.

FEMA Objectives

FEMA aims to consolidate and amend laws related to foreign exchange. Its primary objectives include facilitating external trade and payments and promoting the structured growth and stability of India’s foreign exchange market.

FEMA Evolution

The Defence of India Act, of 1939, marked the initial regulation of foreign exchange, followed by the Foreign Exchange Regulation Act (FERA), of 1947, which evolved into FERA of 1973. FERA was restrictive, emphasising foreign exchange conservation and criminalising violations. 

With the liberalisation reforms of 1991-92, FERA was replaced by FEMA, which adopted a more facilitative approach to foreign exchange management. FEMA focuses on enabling trade, payments, and foreign investments.

FEMA Types of Transactions

The Foreign Exchange Management Act (FEMA) classifies transactions into two categories: Capital Account Transactions and Current Account Transactions. Each category is regulated under specific provisions. A detailed explanation of these transaction types is provided below:

Capital Account Transaction

These involve altering cross-border assets/liabilities and are regulated by the FEMA (Permissible Capital Account Transactions) Regulations, 2000. Capital transactions include investments, property transfers and foreign currency loans. The Reserve Bank of India (RB), in consultation with the Central Government, determines permissible classes, limits and conditions. However, specific restrictions apply to sectors like real estate and agriculture.

Current Account Transactions

These transactions pertain to day-to-day trade and service payments and are governed by the FEMA (Current Account Transactions) Rules, 2000. They include expenditures on trade, travel, education, and medical expenses, which are generally unrestricted under these rules. 

However, certain specific payments require prior approval from the government or RBI. These include donations exceeding specified limits, as well as payments related to cultural tours and advertising in foreign media.

Key Provisions of FEMA

The Foreign Exchange Management Act (FEMA) regulates foreign exchange, ensures compliance, and addresses violations with specified penalties, appeals, and enforcement by the Directorate of Enforcement. The key provisions are as follows: 

• Regulation of Foreign Exchange Transactions:
  • Section 3: Prohibits unauthorised dealings in foreign exchange, payments to non-residents, and acquisition of foreign assets without approval.
  • Section 4: Restricts residents from holding or transferring foreign exchange, securities, or immovable property outside India without permission.
  • Section 5: Permits current account transactions unless restricted by the Central Government.
• Role of Authorised Persons:
  • Section 10: Defines the duties of authorised persons (banks and money changers) in handling foreign exchange.
  • Section 11: Empower RBI to issue directions to authorised persons and call for information.
  • Section 12: Mandates authorised persons to maintain records and furnish information to RBI.
• Enforcement and Penalties:
  • Section 13: Outlines penalties for contraventions, including fines, imprisonment, and asset confiscation.
  • Section 14: Provides for the enforcement of penalties, including civil imprisonment for non-payment.
  • Section 37A: Allows for the seizure of equivalent properties in India for assets held abroad in violation of FEMA.
• Compounding of Offences and Appeals:
  • Section 15: Enables the compounding of offences to settle contraventions without litigation.
  • Section 17: Allows appeals to the Special Director (Appeals) against orders of adjudicating officers.
  • Section 19: Provides for appeals to the Appellate Tribunal for decisions made by adjudicating authorities or Special Directors.
  • Section 35: Allows appeals to the High Courton questions of law arising from orders of the Appellate Tribunal.
• Directorate of Enforcement:
  • Section 36: Establishes the Directorate of Enforcement to investigate and enforce FEMA provisions.
  • Section 37: Empowers the Directorate with search and seizure powers for investigating violations.

FEMA Significance

The Foreign Exchange Management Act (FEMA) provides a simplified framework to regulate foreign exchange, consolidating laws, defining entities, restricting transactions, and ensuring repatriation of earnings. Key features are outlined below:

• Simplified Approach: FEMA takes a facilitative stance compared to its predecessor, FERA, promoting ease of foreign exchange transactions and trade.
• Nature of Offence: Under the FEMA, 1999, violations of foreign exchange regulations are generally treated as civil offences, not criminal offences. 
  • This approach is a significant shift from the earlier FERA, 1973, where such violations were treated as criminal offences.
• Unified Legal Framework: Consolidates various laws related to foreign exchange management into a single, simplified framework to streamline compliance.
• Regulation of Substantial Financial Activities: Regulates major financial transactions like foreign investments, overseas loans, and acquisition of foreign assets.
• Permitted Entities: Identifies authorised entities such as banks, money changers, and offshore banking units for foreign exchange dealings.
• Transaction Restrictions: Prohibits or limits specific transactions to safeguard against illegal activities and maintain national security.
  • Establishes permissible limits for currency transactions, including sending, receiving, and carrying currency abroad.
  • Oversees the timely conversion and repatriation of foreign earnings to ensure compliance with Indian laws.

FEMA Penalties

The Foreign Exchange Management Act (FEMA) enforces penalties to ensure compliance, including fines, asset confiscation, and prosecution for violations. The key provisions related to penalties are detailed below:

• Monetary Penalty: A fine of up to three times the involved amount if quantifiable, or up to ₹2 lakh if not quantifiable. Continuing violations may incur an additional ₹5,000 per day.
• Property Confiscation: If a person unlawfully acquires foreign exchange, securities, or immovable property outside India exceeding specified thresholds, the equivalent value within India can be seized, alongside penalties up to three times the value.
• Prosecution and Imprisonment: Severe violations may result in prosecution, with imprisonment of up to five years and additional fines. Prosecution requires a written complaint by an officer of Assistant Director rank or higher.
• Confiscation Orders: The adjudicating authority may confiscate any currency, security, or related property involved in the contravention. They may also mandate the repatriation of foreign exchange or regulate its retention outside India.

FEMA UPSC PYQs

Q1. Which of the following statements regarding the Foreign Exchange Management Act (FEMA) is/are correct? (UPSC Prelims 2014)

1. FEMA was enacted in India in the year 1999 to replace the earlier Foreign Exchange Regulation Act (FERA) of 1973.
2. The primary objective of FEMA is to regulate foreign exchange transactions, cross-border trade, payments, and investments in India.
3. FEMA does not empower the Reserve Bank of India (RBI) to pass regulations related to foreign exchange transactions.
4. Under FEMA, all criminal offences related to foreign exchange transactions are considered civil offences.

(a) 1 only

(b) 1 and 2 only

(c) 1, 2 and 4 only

(d) All of the above

Ans: (c) 

FEMA FAQs

Q1. What is FEMA, and why was it enacted?

Ans. FEMA is a 1999 Indian law that regulates foreign exchange transactions to facilitate trade, payments, and foreign investments.

Q2. What are the two types of transactions under FEMA?

Ans. FEMA categorises transactions into capital accounts (investment and property transfer) and current accounts (trade, travel, education).

Q3. What are the penalties for violating FEMA provisions?

Ans. Violations may result in fines up to three times the amount involved, property confiscation, and imprisonment for severe breaches.

Q4. Who enforces FEMA regulations?

Ans. The Directorate of Enforcement investigates violations and enforces FEMA rules, with powers for search and seizure.

Q5. How can offences under FEMA be settled?

Ans. Section 15 allows the compounding of offences, enabling resolution without litigation through monetary settlements.