INTRODUCTION TO FEMA

The Foreign Exchange Management Act, 1999 (FEMA) came into force by an act of Parliament. It was enacted on 29 December 1999. This new Act is in consonance with the frameworks of the World Trade Organisation (WTO). It also paved the way for the Prevention of Money Laundering Act, 2002 which came into effect from July 1, 2005.

Quick Facts about FERA & FEMA

What is FEMA?

It is a set of regulations that empowers the Reserve Bank of India to pass regulations and enables the Government of India to pass rules relating to foreign exchange in tune with the foreign trade policy of India.

Which Act did FEMA replace?

FEMA replaced an act called Foreign Exchange Regulation Act (FERA).

What is FERA and when did it pass?

FERA (Foreign Exchange Regulation Act) legislation was passed in 1973. It came into effect on January 1, 1974. FERA was passed to regulate financial transactions concerning foreign exchange and securities. FERA was introduced when the Forex reserves of the country were very low.

Why was FERA replaced?

FERA did not comply with the post-liberalization policies of the Government.

What is the main change brought in FEMA compared to FERA?

It made all the criminal offences civil offences.

Main Features of Foreign Exchange Management Act, 1999

1. It gives powers to the Central Government to regulate the flow of payments to and from a person situated outside the country.
2. All financial transactions concerning foreign securities or exchange cannot be carried out without the approval of FEMA. All transactions must be carried out through “Authorised Persons.”
3. In the general interest of the public, the Government of India can restrict an authorized individual from carrying out foreign exchange deals within the current account.
4. Empowers RBI to place restrictions on transactions from capital Account even if it is carried out via an authorized individual.
5. As per this act, Indians residing in India, have the permission to conduct a foreign exchange, foreign security transactions or the right to hold or own immovable property in a foreign country in case security, property, or currency was acquired, or owned when the individual was based outside of the country, or when they inherit the property from individual staying outside the country.

 

 

 

 

Categories of Authorised Persons under FEMA

Category	Authorized Dealer – Category I	Authorized Dealer Category – II	Authorized Dealer Category – III	Full Fledged Money Changers
Entities	1.Commercial Banks 2.State Co-operative Banks 3.Urban Co-operative Banks	1. Upgraded FFMC 2. Co-operative Banks 3. Regional Rural Banks (RRB’s), others	1. Select Financial and other Institutions	1. Department of Post 2.Urban Co-operative Banks 3. Other FFMC
Activities Permitted	As per RBI guidelines, all current and capital account transactions	All activities permitted to FFMC and specified non-trade related current account transactions	Foreign exchange, transactions related	Purchase of foreign exchange and sale for private and business visits abroad

Structure of FEMA.

1. The Head Office of FEMA, also known as Enforcement Directorate, headed by the Director is located in New Delhi.
2. There are 5 zonal offices in Delhi, Mumbai, Kolkata, Chennai, and Jalandhar, each office is headed by Deputy Director.
3. Every 5 zones are further divided into 7 sub-zonal offices headed by Assistant Directors and 5 field units headed by Chief Enforcement Officers.

The above details would be of help to candidates preparing for the UPSC 2022 exams from the perspective of the mains examination.

Frequently Asked Questions related to FEMA

Is FEMA in force in India?

FEMA stands for ‘ Foreign Exchange Management Act ’, an official Act that consolidates and amends laws regulating foreign exchange in India. FEMA was enacted by the Parliament of India in the winter session of 1999 to replace the Foreign Exchange Regulation Act (FERA) of 1973. The RBI proposed FEMA in 1999 to administrate foreign trade and exchange transactions. The Foreign Exchange Management Act officially came into force on 1st June 2000.

What is the importance of FEMA?

The main objective of FEMA was to help facilitate external trade and payments in India. It was also meant to help orderly development and maintenance of foreign exchange market in India. It defines the procedures, formalities, dealings of all foreign exchange transactions in India.

Where is FEMA applicable in India?

FEMA (Foreign Exchange Management Act) 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). The head office of FEMA is situated at New Delhi and known as the Enforcement Directorate.

What are the features of FEMA?

FEMA gives power to the central government for imposing restrictions on activities like making payments to a person situated outside of the country or receiving money through them. Apart from this, foreign exchange as well as foreign security deals are also restricted by FEMA.

What is the penalty for violation of FEMA Act?

Under Fema, the adjudicator (an officer with the ED) can impose a penalty three times the size of the contravention involved where the sum is quantifiable. In case the contravention is not quantifiable, the penalty is set at Rs 2 lakh. Further, where the violation is a continuing one, an additional penalty of Rs 5,000 per day of contravention can be imposed.

How is FEMA better than FERA?

FERA is an act promulgated, to regulate payments and foreign exchange in India.FEMA is an act initiated to facilitate external trade and payments and to promote orderly management of the forex market in the country.