Evolution of FEMA

The government of India enacted the Foreign Exchange Regulation Act, 1973 (FERA) to tackle the foreign exchange crisis in the country. The purpose of FERA was to regulate foreign exchange dealings and other related activities to conserve the country’s foreign exchange reserves.

The stringent FERA rules were not amenable to integrating the Indian economy into the world economy. The Act became incompatible with the post-liberalisation policies of the Government. Foreign Exchange Management Act (FEMA) of 1999 came into effect in India effective from June 1, 2000, replacing the earlier law FERA 1973. The objective is to facilitate foreign trade and payments and develop the foreign exchange market. The enactment of the new Act aligns with the frameworks of the World Trade Organisation (WTO).

The major difference between FERA and FEMA is that under the FEMA Act violation of the Act was a criminal offence, whereas under FEMA violation is a civil offence. Under FEMA the dealings of foreign exchange are managed instead of regulated under FERA (Foreign Exchange Regulation Act).

Salient features of FEMA

The payments made to any person outside India or receipts from them in foreign exchange and foreign security are subject to specific permission under FEMA.

The transactions involving the current account for external trade do not require RBI’s permission. However, on the grounds of public interest current account dealings can be restricted by the Central Government.

RBI is empowered to subject the capital account transactions to several restrictions, although the selling or drawing of foreign exchange is routed through an authorized dealer (AD).

In terms of Section 5 of the FEMA, persons resident in India 1 are free to buy or sell foreign exchange for any current account transaction except for those transactions for which drawal of foreign exchange has been prohibited by Central Government, such as remittance out of lottery winnings; remittance of income from racing/riding, etc., or any other hobby; remittance for purchase of lottery tickets, banned / proscribed magazines, football pools, sweepstakes, etc.; remittance of dividend by any company to which the requirement of dividend balancing is applicable; payment of commission on exports under Rupee State Credit Route except commission up to 10% of invoice value of exports of tea and tobacco; payment of commission on exports made towards equity investment in Joint Ventures / Wholly Owned Subsidiaries abroad of Indian companies; remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme and payment related to “call back services” of telephones.

The violation in FEMA provisions or a rule, direction, regulation, notification, or order under the act is subject to a penalty of thrice the amount involved in the violation or up to ₹2 lakhs. In case of repeated violations, the person has to pay an additional penalty of up to ₹5,000 for each day till the violation continues. The adjudicating authority may direct the party to turn over any property, currency, money, or securities involved in the violation to the central government. If the party violating FEMA compliance fails to pay the penalty amount within 90 days of getting a notice, he/she is subject to civil imprisonment.

The FEMA Act has been facilitating foreign trade and payments and promotes the development and working of the Indian foreign exchange market. It ensured the efficient utilisation of foreign exchange resources in India. The Act prevented misuse of foreign exchange and thereby facilitated the conservation of foreign exchange in the country.

Read the following articles related to FEDAI rules

1. What is the role of FEDAI?
2. Important FEDAI Rules
3. FEDAI rules regarding Foreign Exchange Contracts
4. FEDAI rule: Transfer of funds between Vostro Accounts with two banks explained
5. FEDAI rules related to clean instruments/ inward remittance
6. FEDAI rules related to import transactions
7. FEDAI RULEs related to export transactions
8. FEDAI Rule: Export Bills sent for collection
9. FEDAI rules: Interest/Swap charges in case of Substitution/Change in Tenor of a bill
10. FEDAI rules related to the Normal Transit Period and the notional due date
11. FEDAI RULES: Business Hours for quoting FX rates

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