India’s Foreign Exchange Management Act (FEMA) 1999
Introduction:
Foreign Exchange Management Act (FEMA) might sound like a mouthful, but it’s a crucial piece of legislation in India that affects anyone involved in foreign transactions, whether it’s individuals, businesses, or financial institutions. In this blog post, we’ll break down Foreign Exchange Management Act(FEMA) in simple terms, exploring its purpose, key provisions, and its impact on the Indian economy.
The Foreign Exchange Management Bill (FEMA) was introduced by the Government of India in Parliament on August 4, 1998. The Bill aims “to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India “ It was adopted by the Parliament in 1999 and is known as the Foreign Exchange Management Act 1999.
Chapter 2 of Foreign Exchange Management Act (FEMA) deals with the regulation and management of foreign exchange Section 3 states that except as otherwise provided in this Act no person shall in any manner deal in or transfer any foreign exchange or foreign security to any person not being an authorised person Section 4 states that except as otherwise provided in this Act no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange foreign exchange foreign security or any immovable property situated outside India.
What is FEMA?
FEMA stands for the Foreign Exchange Management Act, which was introduced in 1999 to consolidate and amend laws relating to foreign exchange transactions in India. Essentially, it governs all aspects of foreign exchange in the country, from transactions to investments and external commercial borrowings.
Current Account and Capital Account Transaction :
Sections 5 and 6 deal with current account and capital account transactions. According to Section 5, any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction. However, the Central government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.
According to Sub-section 1of Section 6, any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction subject to provisions of Sub-section 2. Sub-section 2 states that Reserve Bank may in consultation with the Central government specify –(a) any class or classes of capital account transactions which are permissible ; (b) the limit upto which foreign exchange shall be admissible for such transactions.
Sub-section 4 of Section 6 states that a person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.
Sub-section 5 states that a person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.
Realisation and Repatriation of Foreign Exchange:
Section 8 lays down that save as otherwise provided in the Act , where any amount of foreign exchange is due or has accrued to any person resident in India such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.
Contravention and Penalties:
Chapter 4 deals with the issue of contravention and penalties . Section 13 says that if any person contravenes any provisions of this Act he shall, upon adjudication be liable to a penalty upto thrice the sum involved in such contravention where such amount is quantifiable, or upto two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.
Section 14 says that if the person concerned fails to make full payment of the penalty imposed on him within a period of ninety days, he shall be liable to civil imprisonment.
Adjudication and Appeal:
Chapter 5 deals with the issue of adjudication and appeal. Section 16 states that the Central government may appoint Adjudicating Authorities for holding an inquiry in the manner prescribed after giving the accused person a reasonable opportunity of being heard for the purpose of imposing any penalty. Section 17 provides for the appointment of one or more Special Directors (Appeals) to hear appeals against the orders of the Adjudicating Authorities.
Section 18 says that the Central government shall, by notification, establish an Appellate Tribunal to be known as the Appellate Tribunal Tribunal for Foreign Exchange to hear appeals against the orders of the Adjudicating Authorities and the Special Director (Appeals) under this Act.
Directorate of Enforcement:
Chapter 6 deals with the establishment of the Directorate of Enforcement and its powers, etc. Sub-section 1 of Section 36 states that the Central government shall establish a Directorate of Enforcement with a Director and such other officers or class of officers as it thinks fit, who shall be called Officers of Enforcement for the purpose of this Act . Sub-section 3 of Section 37 states that the Director of Enforcement and other officers of Enforcement shall exercise the like powers which are conferred on Income-tax authorities under the Income-tax Act, 1961 and shall exercise such powers , subject to such limitations laid down under the Act.
FEMA: A MAJOR DEPARTURE FROM FERA
As is clear from the name of the Act itself, the emphasis under Foreign Exchange Management Act (FEMA) is on ‘exchange management’ whereas under FERA the emphasis was on ‘exchange regulation’ or exchange control. Under FERA it was necessary to obtain Reserve Bank’s permission, either special or general, in respect of most of the regulations thereunder.
Foreign Exchange Management Act (FEMA) has brought about a sea change in this regard and except for Section 3 which relates to dealing in foreign exchange, etc. no other provisions of Foreign Exchange Management Act (FEMA) stipulate obtaining Reserve Bank’s permission. The demand for new legislation was basically on the following counts: (a) FERA was introduced in 1974 when India’s foreign exchange reserve position was not satisfactory.
Accordingly, stringent controls were required on the use of foreign exchange. With improvement in foreign exchange position, it is argued that such stringent controls are not now required; (b) India had given notice to the IMF in August 1994 that it had attained Article 8 status.
This notice meant that no restrictions will be imposed on remittances of foreign exchange on account of current account transactions ; and (c) the private corporate sector had been complaining for long against, what it termed, the ‘draconian provisions’ of FERA which gave unbridled powers to the Enforcement Directorate to arrest any person, search any premises, seize documents and start proceedings against any person for contravention of FERA or for preparations of contravention of FERA.
The contravention under FERA was treated as a criminal offence and the burden of proof was on the guilty.
Foreign Exchange Management Act (FEMA) has changed all this. As stated earlier, the purpose of Foreign Exchange Management Act (FEMA) is to ‘facilitate external trade and payments’ and ‘promote the orderly development and maintenance of foreign exchange market in India.’ As far as the promotion of orderly development and maintenance of foreign exchange market is concerned, Foreign Exchange Management Act (FEMA) is silent.
Why Does Foreign Exchange Management Act (FEMA) Exist?
Purpose of Foreign Exchange Management Act (FEMA):
The primary goal of Foreign Exchange Management Act (FEMA) is to facilitate external trade and payments, promote orderly development and maintenance of the foreign exchange market, and ensure proper utilization of foreign exchange resources in India. It aims to regulate and manage foreign exchange efficiently to promote the country’s economic stability and growth.
Facilitating External Trade and Payments: It ensures smooth transactions in foreign exchange for trade and payments, promoting international trade and investment.
Maintaining External Stability: Foreign Exchange Management Act (FEMA) helps maintain stability in India’s external sector by regulating capital flows, which can impact the country’s currency value and overall economic stability.
Safeguarding Foreign Exchange Reserves: India’s foreign exchange reserves are vital for ensuring confidence in the currency and meeting external obligations. Foreign Exchange Management Act (FEMA) helps safeguard these reserves by regulating their usage and acquisition.
Key Provisions of Foreign Exchange Management Act (FEMA):
Regulation of Transactions: Foreign Exchange Management Act (FEMA) regulates all foreign exchange transactions, including imports, exports, remittances, and foreign investments. It mandates that these transactions must be conducted through authorized dealers such as banks or authorized entities.
Current and Capital Account Transactions: Foreign Exchange Management Act (FEMA) distinguishes between current account transactions (related to trade in goods and services) and capital account transactions (related to investments and borrowing). Different rules and regulations apply to each category.
Foreign Exchange Violations: Foreign Exchange Management Act (FEMA) lays down penalties for violations, including unauthorized foreign exchange transactions, holding foreign exchange outside India, and non-compliance with its provisions. Penalties can include fines, confiscation of assets, and imprisonment.
Authorized Persons: Foreign Exchange Management Act (FEMA) designates certain individuals and entities as authorized persons to deal in foreign exchange transactions. These include authorized dealers, authorized banks, and authorized money changers.
Reserve Bank of India (RBI) Oversight: The Reserve Bank of India (RBI) plays a central role in implementing Foreign Exchange Management Act( FEMA). It issues guidelines and regulations to govern foreign exchange transactions and monitor compliance with Foreign Exchange Management Act (FEMA) provisions.
Key Features of FEMA:
Regulation of Transactions: Foreign Exchange Management Act (FEMA) regulates various types of transactions involving foreign exchange, including capital account transactions (like investments and loans) and current account transactions (like trade and remittances).
Authorized Persons: Under Foreign Exchange Management Act (FEMA), certain authorized persons, such as authorized dealers, are designated to facilitate foreign exchange transactions. These include banks and financial institutions authorized by the Reserve Bank of India (RBI).
Enforcement and Penalties: Foreign Exchange Management Act (FEMA) empowers authorities to enforce its provisions and imposes penalties for violations. However, the emphasis is more on compliance and facilitation rather than punitive measures.
Liberalization: While FEMA provides a regulatory framework, it also embraces liberalization, allowing for greater flexibility and ease of doing business in foreign exchange transactions.
How Does FEMA Impact You?
You might not realize it, but FEMA affects various aspects of your life:
International Travel: If you’re planning a trip abroad, FEMA governs your foreign exchange transactions, such as buying currency or using international payment cards.
Overseas Investments: Whether you’re investing in foreign stocks or buying property overseas, FEMA regulations come into play, ensuring that these transactions comply with Indian laws.
Importing and Exporting: If you’re involved in import-export business, FEMA regulates your foreign trade transactions, including payments and receipts for goods and services.
Remittances: If you’re sending money abroad for personal or business purposes, FEMA regulates these remittances, ensuring they are done through authorized channels.
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Impact of FEMA:
FEMA has significant implications for various stakeholders in the Indian economy:
Businesses: Companies engaged in international trade must comply with FEMA regulations when dealing with foreign exchange transactions. This includes obtaining necessary approvals for investments abroad and repatriating earnings from foreign subsidiaries.
Individuals: Individuals traveling abroad, making foreign investments, or receiving remittances from overseas must adhere to FEMA guidelines to ensure legal and hassle-free transactions.
Government: FEMA helps the government maintain control over foreign exchange reserves and regulate capital flows to safeguard the country’s economic stability.
Conclusion:
In a nutshell, FEMA is like the invisible hand guiding India’s interactions with the global economy. While its regulations may seem complex, they ultimately aim to promote economic stability, facilitate international trade, and safeguard the country’s interests in the global arena. So, the next time you engage in any foreign exchange transaction, remember that FEMA is there, working behind the scenes to ensure everything runs smoothly.
Very informative content,keep it up👍