Overview of Foreign Exchange Management Act (FEMA)

  • Blog|FEMA & Banking|
  • 12 Min Read
  • By Taxmann
  • |
  • Last Updated on 16 February, 2023


Table of Contents:

  1. Background of FEMA
  2. FEMA in changed situation
  3. Overall scheme of FEMA
  4. Spread of provisions of FEMA
  5. Late fee for delayed filing of returns
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1. Background of FEMA

India had for long time 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 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 In view of this, FERA has been repealed and FEMA (Foreign Exchange Management Act, 1999) has been passed. The Act has been made effective from 1st June, 2000.

As per Statement of Objects to the FEM Bill, the object of FEM Bill 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.

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1.1 Extra territorial jurisdiction of FEMA

This Act extends to whole of the India. It has some extra territorial jurisdiction too i.e. it also applies to all branches, offices and agencies outside India owned and controlled by a person resident in India and also to any contravention thereunder committed outside India by any person to whom the Act applies [section 1 of FEMA]

In British India Steam Navigation Co. Ltd. v. Shanmugha Vilas Cashew Industries (1990) 48 ELT 481 (SC), it was held that foreign ship on high seas, or her foreign owners or their agents in a foreign country are not covered under FERA unless the foreign ship enters Indian port or territorial waters.

1.2 Salient 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.

1.2.1 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. [section 36 of FEMA].

Though FEMA does not treat violation of FEMA provisions as criminal offence, preventive detention under COFEPOSA for violation of FEMA is permissible, as FEMA and COFEPOSA occupy different fields. – UOI v. Venkateshan 2002 AIR SCW 1978 = 38 SCL 669 (SC).

1.2.2 RBI to administer FEM (Non-debt Instruments) Rules

FEM (Non-debt Instruments) Rules, 2019, though notified by Central Government, shall be administered by the Reserve Bank of India. While administrating these rules, RBI may interpret and issue such directions, circulars, instructions, clarifications, as it may deem necessary, for effective implementation of the provisions of these rules – Rule 2(A) of FEM (Non-debt Instruments) Rules, 2019 inserted w.e.f. 27-7-2020.

1.3 Suspension of Act in extraordinary situations

FEMA has considerably liberalised provisions in respect of foreign exchange. However, some times, an extraordinary situation may arise. In such cases, Central Government can suspend operation of any or all provisions of FEMA in public interest, by issuing a notification. The suspension can be relaxed by issuing a notification. Copy of notification shall be placed before Parliament for 30 days. [section 40 of FEMA]

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2. FEMA in changed situation

In June 1991, foreign exchange reserves had fallen to only 1.1 billion US $, and it was feared that India might default in foreign exchange payments. However, after liberalisation, foreign companies are now welcome to invest in India.

The foreign exchange assets with RBI started rising. Foreign exchange reserves (which include Gold and SDR) were 29.967 billion US $ in December 1998, which went up to US $ 38 billion by end March 2000.

The foreign exchange reserves [including gold and Special Drawing Rights (SDR)]were 251.98 billion US dollars on 31-3-2009, USD 297.3 billion as on 31-12-2010. These were 292.0 on 31-3-2013, 304.2 billion USD on 31-3-2014 and 350.38 billion USD on 31-12-2015.

Most of the goods can be imported under OGL (Open General Licence), reducing the ‘licence and permit Raj’. Gold and Silver can be officially imported.

Rupee has been made fully convertible on current account. It is not fully convertible on capital account. Capital account means term loans, funds brought for long term investment in the form of shares etc. Thus, funds brought in India for long term investment and loans are not freely repatriable.

Since Rupee is convertible on current account, all current income (including rent, dividend, interest salary etc.) is repatriable, even in cases where principal amount is not repatriable. – – Current income of NRI like dividend, interest, pension, rent etc. can be credited to NRE account of NRI subject to TDS and obtaining CA certificate.

An Individual can now open account in foreign bank, can remit upto LRS limits per calendar year for purchase of immovable asset or shares abroad.

RBI has announced certain schemes for investment on repatriation basis e.g. portfolio investment schemes, investment by FIIs etc. If amount is invested in such schemes, the amount is freely repatriable. Otherwise, repatriation or even transfer of shares is not permissible without approval of RBI.

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3. Overall scheme of FEMA

Basically, FEMA makes provisions in respect of dealings in foreign exchange.

Section 3 of FEMA provides that making any payment to person not resident of India and receiving any payment from person resident outside India, acquiring any asset out of India or dealing with foreign currency or foreign security can be only as per general or special permission of RBI.

Section 4 of FEMA provides that no person resident in India shall acquire, hold, own or possess or transfer any foreign exchange, foreign security or any immovable property outside India only as per provisions of FEMA.

Broadly, all current account transactions are free. However, Central Government can impose reasonable instructions by issuing rules. [section 5 of FEMA].

Capital Account Transactions are permitted to the extent specified by RBI or Central Government by issuing regulations. [section 6 of FEMA- powers relating to non-debt capital account transactions have been transferred to Central Government w.e.f. 15-10-2019].

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 RBI. [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.

3.1 General relaxations from section 3 of FEMA

Section 3 of FEMA provides that making any payment to person not resident of India and receiving any payment from person resident outside India, acquiring any asset out of India or dealing with foreign currency or foreign security can be only as per general or special permission of RBI.

Following general relaxations have been given vide RBI Notification FEMA 16/2000-RB dated 3-5-2000 [GSR 403(E) dated 3-5-2000].

    • Receiving payment (a) made in Rupees when person resident outside India visits India (b) by cheque, bank drafts, postal order (c) made in foreign currency out of India
    • Making payment in Rupees (i) boarding, lodging and travelling and medical expenses when person resident out of India visits India (ii) payment in Rupees for payment of gold and silver brought in India as per law
    • Making payment to person resident out of India for guarantee given as per law
    • Payment by company to non whole time director when he visits India for his travel and sitting fees
    • Gift to NRI/OCI close relative by cheque/DD in his NRO account within LRS limit
    • Loan in Rupees to NRI relative in Rupees by cheque

3.2 Functions of Reserve Bank of India

FEMA envisages that RBI will have a key role in management of foreign exchange. In LIC v. Escorts Ltd. – (1986) 8 ECC 189 (SC) = AIR 1986 SC 1370 = (1984) 1 SCC 264 = (1986) 59 Comp Cas 548 (SC), it has been held that RBI is entrusted with sole responsibility of FERA and RBI is ‘sole guardian and only custodian’ of foreign exchange of India. – – – RBI alone is that has to decide whether permission may or may not be granted. [decision under FERA, but equally applicable to FEMA also].

RBI is a special, expert regulatory body that is insulated from the political arena. Its decisions are reflective of its expertise in guiding the economic policy and financial stability of the nation. RBI is empowered by FEMA to regulate, mange and supervise the foreign exchange of India, Regulations introduced by RBI are in nature of statutory regulation and demand a similar level of deference that is accorded to executive and Parliamentary policy – Akshay N Patel v. RBI (2022) 379 EIT 3 (SC 3 member bench).

Position of RBI as expert regulatory authority in matters of economic and financial policy has been reiterated in several decisions of Supreme Court – Chitra Sharma v. UOI (2018) 148 SCL 833 = 96 taxmann.com 216 (SC).

3.2.1 Main functions of RBI under FEMA

The main functions of RBI under FEMA are as follows –

(a) Control over dealings in foreign exchange by giving general or special permission for dealing in foreign exchange, excluding those cases where specific provisions have been made in Act, rules or regulations – section 3 of FEMA

(b) RBI cannot impose any restrictions on current account transactions. These can be imposed only by Central Government in consultation with RBI – section 5 of FEMA.

(c) Specifying conditions for payment in respect of capital account transaction involving debt instruments – section 6(2) of FEMA [powers in respect of non-debt instruments are with Central Government w.e.f. 15-10-2019].

(d) Regulate/prohibit/restrict specified transactions in foreign exchange – section 6(3) of FEMA

(e) Specify (by regulation) period and manner in which foreign exchange due from export of goods and services should be received – section 8

(f) To grant exemption from realisation and repatriation in cases specified u/s 9 [These cover provisions in respect of possession of foreign currency or foreign coins, foreign currency accounts, foreign exchange acquired from employment, business, trade, services etc.]

(g) Granting authorisation to ‘Authorised Person’ to deal in foreign exchange, to give directions to them and to inspect the authorised person – sections 10, 11 and 12.

(h) To make regulations – section 47

(i) Administer FEM (Non-debt Instruments) Rules, 2019

3.2.2 RBI can give ex post facto approval

In LIC of India v. Escorts Ltd. AIR 1986 SC 1370 = (1986) 59 Comp Cas 548 (SC) = (1986) 1 SCC 264 = (1986) 8 ECC 189, it has been held that approval [under section 29(1) of erstwhile FERA – comparable to section 3 of FEMA] can be granted ex post facto (i.e. after the transaction has already taken place). Such approval may be conditional or unconditional. As long as law does not state that prior approval should be obtained, such approval can be given later with retrospective effect. – followed in Dale & Carrington Investment v. P K Prathapan (2004) 54 SCL 601 = 122 Comp Cas 161 = AIR 2005 SC 1624 = 2004 AIR SCW 5143 * Texmaco Ltd. v. Dy Director, Enforcement (1997) 88 Comp Cas 228 (Cal HC DB).

3.2.3 Approval and permission – Distinction

When an approval is required, an action holds good. Only if it is disapproved, it loses its force. Only when a permission is required, the decision does not become effective till permission is obtained –High Court of Judicature for Rajasthan v. P P Singh (2003) 4 SCC 239 = 2003 AIR SCW 539 = AIR 2003 SC 1029 – quoted with approval in concurring judgment of Justice S B Sinha, in Prohibition & Excise Supdt. V. Toddy Tappers Coop Society 2003 AIR SCW 6271.

3.2.4 If prior permission is required, act without such prior permission would be void and unenforceable

In some cases, prior approval of RBI is required to acquire immovable property in India. In such cases, any sale or gift of property situated in India by a foreigner in contravention thereof, would be unenforceable in law – Asha John Divianathan v.Vikram Malhotra [2021] 167 SCL 138 = 124 taxmann.com 585 (SC 3 member bench).

3.2.5 Foreign Exchange department of RBI

RBI exercises control through its foreign exchange department (FED) at Central Office, Mumbai and partly at Delhi. It also has regional offices at various places in India.

Website –www.rbi.org.in

3.2.6 Directions issued by RBI have statutory force

Directions issued by RBI have statutory force and can be termed as law in force –Central Bank of India v. Ravindra (2001) 107 Comp Cas 416 (SC) – quoted with approval in Sudhir Shantilal Mehta v. CBI (2009) 96 SCL 403 (SC).

3.3 Information on web

Website of RBI http://www.rbi.org.in is really one of the best websites. All forms are available on the website.

Industrial Policy is available on http://www.dipp.gov.in. This gives policy in respect of

(a) Foreign Direct Investment

(b) Foreign Technical Collaborations

(c) Payment of royalty

(d) Policy/procedures for approval

(e) Prescribed forms.

Up-to-date information on corporate laws and tax laws is available on http://www.taxmann.com.

3.4 Financial Benchmarks India Pvt. Ltd. (FBPL)

Financial Benchmarks India Pvt. Ltd (FBPL), (website – www.fbil.org.in.) having office at Parel, Mumbai is jointly owned by FIMMDA, FEDAI and IBA to create financial benchmarks. Financial benchmarks are indices, values or reference rates used for the purpose of pricing, settlement and valuation of financial contracts.

Aim of FBPL is to develop and administer benchmarks relating to money market, government securities and foreign exchange in India.

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4. Spread of provisions of FEMA

Provisions of FEMA cannot be found at one place but are spread over at different places. The Foreign Exchange Management Act, 1999 contains only basic legal framework. The practical aspects are covered in rules made by Central Government and regulations made by RBI.

Section 11(1) of FEMA authorises RBI to give directions to ‘authorised person’ to ensure compliance with provisions of FEMA. RBI issues directions to Authorised Persons through AP(DIR) circulars. [AP stands for ‘Authorised Person’ and DIR stands for ‘Directions’]. Many circulars have been issued by RBI under this series.

Rules under FEMA Various rules have been issued under FEMA by Central Government. These are amended from time to time.

Regulations under FEMA RBI has issued various regulations. These are amended from time to time.

4.1 Master Directions by RBI

Provisions of RBI are spread in Act, Rules, Regulations, Notifications and AP(DIR) circulars. It is very difficult to keep track of all of them. Hence, RBI has issued Master Directions on various issues on 1-1-2016.

These are updated regularly on website of RBI as and when there are changes in statutory provisions and RBI instructions.

The Master Directions are as follows –

Master Direction Subject
No. 1/2016-17 Risk Management and Inter-Bank Dealings issued on 5-7-2016
No. 1/2016-17 Money Transfer Service Scheme (MTSS) (issued on 22-2-2017)- duplicate numbering
No. 2/2015-16 Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Non-resident Exchange Houses
No. 3/2015-16 Money Changing Activities
No. 4/2015-16 Compounding of Contraventions under FEMA
No. 5/2015-16 External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers
No. 6/2015-16 Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and NRI/PIO
No. 7/2015-16 Liberalised Remittance Scheme (LRS)
No. 8/2015-16 Other Remittance Facilities
No. 9/2015-16 Insurance
No. 10/2015-16 Establishment of Branch Office (BO)/Liaison Office (LO)/Project Office (PO) or any other place of business in India by foreign entities
No. 11/2017-18 Foreign Investment in India (Now it has become redundant w.e.f. 17-10-2019, as Central Government has issued Rules).
No. 12/2015-16 Acquisition and Transfer of Immovable Property under FEMA (Now it has become redundant w.e.f. 17-10-2019, in respect of immovable property in India, as Central Government has issued Rules. However, directions relating to immovable property out of India are still relevant).
No. 13/2015-16 Remittance of Assets
No. 14/2015-16 Deposits and Accounts
No. 15/2015-16 Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiary (WOS) Abroad
No. 16/2015-16 Export of Goods and Services
No. 17/2015-16 Import of Goods and Services
No. 18/2015-16 Reporting under FEMA
No. 19/2015-16 Miscellaneous Directions

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5. Late fee for delayed filing of returns

Late fees are payable for delayed filing of returns. RBI has issued circular No. AP (DIR) No. 16 dated 30-9-2022 prescribing late fees payable for delayed filing of returns. The late fees are as follows.

(1) Form ODI Part-II/ APR, FCGPR (B), FLA Returns, Form OPI, evidence of investment or any other return which does not capture flows or any other periodical reporting Rs. 7,500
(2) FC-GPR, FCTRS, Form ESOP, Form LLP(I), Form LLP(II), Form CN, Form DI, Form InVi, Form ODI-Part I, Form ODI-Part III, Form FC, Form ECB, Form ECB-2, Revised Form ECB or any other return which captures flows or returns which capture reporting of non-fund transactions or any other transactional reporting [7,500 + (0.025% × A × n)]


(a) “n” is the number of years of delay in submission rounded-upwards to the nearest month and expressed up to 2 decimal points.

(b) “A” is the amount involved in the delayed reporting.

(c) LSF amount is per return. However, for any number of Form ECB-2 returns, delayed submission for each LRN will be treated as one instance for the fixed component. Further, ‘A’ for any ECB-2 return will be the gross inflow or outflow (including interest and other charges), whichever is more.

(d) Maximum LSF amount will be limited to 100 per cent of ‘A’ and will be rounded upwards to the nearest hundred.

(e) Where an advice has been issued for payment of LSF and such LSF is not paid within 30 days, such advice shall be considered as null and void and any LSF received beyond this period shall not be accepted. If the applicant subsequently approaches for payment of LSF for the same delayed reporting, the date of receipt of such application shall be treated as the reference date for the purpose of calculation of “n”.

(f) The facility for opting for LSF shall be available up to three years from the due date of reporting/submission. The option of LSF shall also be available for delayed reporting/submissions under the Notification No. FEMA 120/2004-RB and earlier corresponding regulations, up to three years from the date of notification of FEM (Overseas Investment) Regulations, 2022 (i.e. from 22-8-2022).

(g) In case a person responsible for any submission or filing under the provisions of FEMA, neither makes such submission/filing within the specified time nor makes such submission/filing along with LSF, such person shall be liable for penal action under the provisions of FEMA, 1999.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

One thought on “Overview of Foreign Exchange Management Act (FEMA)”

  1. Does aiding and abetting commission of violation of fEMA also punishable under FEMA OR ANY OTHER LAW?

    Does It appeas that advisor or organiser of such violation can get scot free

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