What is the Foreign Exchange Management Act (FEMA)?

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The Reserve Bank of India (RBI) recently released a draft 'Licensing Framework for Authorised Persons (APs)' under the Foreign Exchange Management Act (FEMA), 1999.

About Foreign Exchange Management Act (FEMA)

  • FEMA came in 1999 as a successor to the Foreign Exchange Regulation Act, or FERA, of 1973, with changing economic conditions in a post-liberalisation India.
  • The main objective of FEMA is to facilitate external trade and payments and promote the orderly development and maintenance of the foreign exchange market in India. 
  • FEMA deals with provisions relating to procedures, formalities, dealings, etc. of foreign exchange transactions in India. 
  • The FEMA regulates various aspects of foreign exchange transactions, including the acquisition and holding of foreign exchange, the payment and settlement of foreign exchange transactions, the export and import of currency, and other related activities.
  • The act also empowers the RBI to make rules and regulations to carry out the provisions of the act. 
  • Violations of the provisions of FEMA can result in penalties and fines.
  • FEMA's head office is known as the Enforcement Directorate and is situated in Delhi.
  • Applicability:
    • It is applicable to the whole of India and equally applicable to the agencies and offices located outside India (which are owned or managed by an Indian Citizen). 
    • FEMA is applicable to the following entities and transactions:
      • Foreign exchange.
      • Foreign security.
      • Exportation of any commodity and/or service from India to a country outside India.
      • Importation of any commodity and/or service from outside India.
      • Securities as defined under the Public Debt Act 1994.
      • Purchase, sale, and exchange of any kind (i.e. Transfer).
      • Banking, financial, and insurance services.
      • Any overseas company owned by an NRI (Non-Resident Indian) and the owner is 60% or more.
      • Any citizen of India, residing in the country or outside (NRI).

Who are Authorised Persons (APs) under FEMA?

  • Section 2(c) of the FEMA states that ‘authorized person’ means an authorized dealer, money changer, off-shore banking unit, or any other person authorized under section 10 (1) to deal in foreign exchange and foreign securities.
  • These are authorized by the RBI to deal in foreign exchange or in foreign securities.

Q1) What is the Enforcement Directorate (ED)?

The Enforcement Directorate was established in 1956 as an ‘Enforcement Unit’ under the Department of Economic Affairs. Later, in 1957, this Unit was renamed as ‘Enforcement Directorate’. ED is responsible for enforcement of the FEMA, and certain provisions under the Prevention of Money Laundering Act (PMLA). ED has the power to attach the asset of the culprits found guilty of the violation of FEMA. It has also been empowered to undertake, search, seizure, arrest, prosecution action, and survey, etc. against the offences committed under PMLA.

Source: RBI releases draft licensing framework for authorised persons under forex law