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The Foreign Exchange Management Act 1999(FEMA) was an act passed in the winter session of Parliament in 1999 extends to the whole of India, which replaced Foreign Exchange Regulation Act 1973(FERA).

As most of us who are dealing with foreign exchange (currency or negotiable instrument equivalent of currency, of any country except Indian currency) must have heard or dealt with FEMA as it is the main statute which deals with transactions of foreign exchange. The main objectives of FEMA are :

01. To facilitate external trade and payments

02. To promote the orderly development and maintenance of foreign exchange market

FERA was the first statute/law passed by the parliament in year 1973 for governing foreign exchange dealings in India. As FERA come into existence at the time when India was facing a severe deficiency of foreign exchange, it was very harsh law and violation of this Law was always criminal offence. Unlike other laws where everything is permitted unless specifically prohibited, under this act everything was prohibited unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It required imprisonment even for minor offences. Under FERA a person was presumed guilty unless he proved himself innocent, whereas under other laws a person is presumed innocent unless he is proven guilty.

Since FERA had become incompatible with the pro-liberalization policies of the Government of India (Reform policies introduced in India in 1991 which make our economy open for outside business world to come and do business here) hence by perceiving the need of that time FEMA was introduced by repealing/replacing FERA in India in year 1999.

In terms of size FEMA is a small act containing only 49 sections, among them few of most important sections are as follows :


SECTION 3 of FEMA : Dealing In Foreign Exchange

It generally speaks that all below mentioned transaction in foreign exchange should be in accordance with the Act, Rules and Regulation of FEMA, or with prior permission of Reserve Bank of India:

a) to deal and transfer foreign exchange to any person except Authorized Dealer.

b) for making payment of credit taken by Non Resident.

c) taking payment on behalf of Non resident from any person except Authorized Dealer.

d) Enter in to any financial transaction in India as a consideration for or in. association with requisition or creation or transfer of a right to acquire any asset outside India by any person


SECTION 4 of FEMA : Holding of Foreign Exchange

Indian Resident shall acquire, hold, own, possess or transfer any foreign exchange/foreign security or any immovable property situated outside India only in accordance with FEMA Act.


SECTION 5 of FEMA : Current Account Transactions

Any person can sell or draw foreign exchange through authorized persons for using it for current account transactions. But Central Government can impose reasonable restrictions in public interest with this regard.


SECTION 6 of FEMA : Capital Account Transactions

Meaning u/s 2(e): Capital Account Transactions  means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6


Capital Account Transactions:-

Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction permitted by RBI in consultation with central Government. RBI prohibits, restricts or regulate the following,

(a) Transfer or issue of any foreign security by a person resident in India

(b) Transfer or issue of any foreign security by a person resident outside India

(c) Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India

(d) Any borrowing or lending in foreign exchange in whatever form or by whatever name called

(e) Any borrowing or lending in rupees in whatever form or whatever name called between a person resident in India and a person resident outside India;

(f) Deposits between persons resident in India and a person resident outside India

(g) Export, Import or holding of currency or currency notes

(h) Transfer of immovable property outside India other than a lease not exceeding five years by a person resident outside India

(i) Acquisition or transfer of immovable property in India other than a lease not exceeding five years by a person resident outside India

(j) Giving of guarantee or surety in respect of any debt obligation or the liability (1) By a person resident in India and owed to a person resident outside India; or (2) By a person resident outside India


SECTION 46 of FEMA : Central Governments’ Power to make RULES

The Central Government may by notification, make rules relating to :

01. Current Account Transactions

02. Compounding of contraventions

03. inquiry by Adjudicating Authority

04. Appeal and filing fees

05. salary and the other terms and conditions of service of Members of the Appellate Tribunal and the Special Director (Appeals)

06 or any other matters


SECTION 47 of FEMA : Reserve Banks’ Power to make REGULATIONS

The Reserve Bank may by notification, make regulations relating to :

01. Permissible classes of capital account transactions, the limits of admissibility

02. Repatriation of foreign exchange

03. limit up to which any person may possess foreign currency

04. or any other matters


SECTION 13 of FEMA : Contravention and penalties

• For any kind of contravention under this act defaulter is liable to pay up to thrice the amount involved where it is quantifiable, or up to Rs. 2 lakhs where not quantifiable

• If such contravention is continued further penalty which may extend to Rs. 5,000 for every day after the first day


Apart from that it is Reserve Bank of India which announce Master Circular categorized subject wise on 01st Day of July every year on sunset clause of one year, containing all applicable rule, regulations, sections, circulars and order relevant to that subject, which are very informative & must be read.

Published by

CS Usha
(Company Secretary)
Category Corporate Law   Report

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