FEMA: Foreign Exchange Management Act

  • Blog|FEMA & Banking|
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  • Last Updated on 13 May, 2021

FEMA Background:

For a long time, India has had an adverse balance of payment position in international trade i.e. imports were more than exports; due to which there was shortage of foreign exchange in India. Foreign Exchange Regulation Act was introduced in 1947. This was later replaced with ‘the Foreign Exchange Regulation Act, 1973’ (FERA), which came into effect on 1st Jan. 1974. Government initiated the process of liberalisation of Indian economy in 1991. Foreign Investment in various sectors was permitted.

This increased flow of foreign exchange to India and foreign exchange reserves have increased substantially. In view of this, FERA has been repealed and FEMA has been passed. The act has been made effective from 1st June, 2000. As per Statement of Objects to the FEMA Bill, the object of FEMA is to consolidate and amend the law relating to foreign exchange with the object of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange markets in India.

Reserve Bank of India is the overall controlling authority in respect of FEMA.

Provisions of FEMA:

FEMA provides:

    • Free transactions on current account subject to reasonable restrictions that may be imposed
    • RBI control over capital account transactions
    • Control over realisation of export proceeds
    • Dealing in ‘foreign exchange through ‘Authorised Persons’ like Authorised Dealer / Money Changer / Off-shore banking unit
    • Adjudication of Offences
    • Appeal provisions including Special Director (Appeals) and Appellate Tribunal
    • Directorate of Enforcement

Enforcement of FEMA:

Though RBI exercises overall control over foreign exchange transactions, enforcement of FEMA has been entrusted to a separate ‘Directorate of Enforcement’ formed for this purpose.

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Overall Scheme of FEMA:

FEMA makes provisions in respect of dealings in foreign exchange. Broadly, all current account transactions are free. However, Central Government can impose reasonable instructions by issuing rules. [Section 3 of FEMA] Capital Account Transactions are permitted to the extent specified by RBI by issuing regulations. [Section 6 of FEMA]. FEMA envisages that RBI will have a controlling role in management of foreign exchange.

Since RBI cannot directly handle foreign exchange transactions, it authorises ‘Authorised Persons’ to deal in foreign exchange as per directions issued by RBL. [Section 10 of FEMA]. RBI is empowered to issue directions to such ‘Authorised Persons’ under section 11 of FEMA. These directions are issued through AP (DIR) circulars. FEMA also makes provisions for enforcement, penalties, adjudication and appeals.

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