The Foreign Exchange Management Act, 1999 (FEMA) was enacted by the Indian Parliament to consolidate and amend the law relating to foreign exchange. Its primary objective is to facilitate external trade and payments, and to promote the orderly development and maintenance of the foreign exchange market in India. FEMA came into force on June 1, 2000, replacing the earlier Foreign Exchange Regulation Act (FERA), 1973.
Key Aspects of FEMA
1. Objective
FEMA aims to regulate foreign exchange transactions in a manner that promotes external trade, facilitates cross-border payments, and ensures the development of a stable and efficient foreign exchange market in India.
2. Replacement of FERA
FEMA replaced the more stringent and control-oriented FERA, which treated most foreign exchange violations as criminal offenses. FEMA adopts a more liberal and management-based approach, treating violations as civil offenses, thereby enabling a more facilitative regulatory framework.
3. Shift in Focus: From Control to Management
A notable shift under FEMA is its focus on managing foreign exchange rather than controlling it. The Act provides greater operational flexibility for individuals and businesses to conduct foreign exchange transactions, subject to compliance with prescribed regulations.
4. Applicability
FEMA extends to:
- The whole of India, and
- All branches, offices, and agencies located outside India that are owned or controlled by persons resident in India.
5. Scope and Coverage
FEMA governs a wide range of foreign exchange transactions, including:
- Acquisition and transfer of immovable property in India by non-residents
- Current account transactions such as foreign travel, education, medical expenses, and remittances
- Capital account transactions including foreign investments, borrowings, and transfer of capital assets
- Dealings in foreign exchange by authorized persons (e.g., banks and money changers)
6. Role of the Reserve Bank of India (RBI)
The RBI is the principal authority responsible for the administration of FEMA. It issues regulations, circulars, and directions to implement the Act and to ensure orderly conduct of foreign exchange transactions in India.
7. Enforcement and Penalties
Non-compliance with the provisions of FEMA may attract civil penalties, which may include monetary fines. In cases of continued default, additional legal action may be initiated by the designated authorities.
8. Framework for Legal Transactions
FEMA provides a structured and legally compliant framework for residents and non-residents to engage in foreign exchange activities. It promotes transparency, accountability, and ease of doing business in the foreign exchange domain.
Conclusion
FEMA represents a progressive and pragmatic shift in India’s foreign exchange regime. By moving from a regulatory structure focused on control to one emphasizing management and facilitation, FEMA aligns India’s exchange control laws with global practices while safeguarding the country’s macroeconomic stability.
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