FOREIGN EXCHANGE

MANAGEMENT ACT, 1999

(FEMA)

The Act was introduced as a part of

liberalization process by the Government of
India. The Act came into force on 1st June,
2000.
Back ground
 Earlier known as FERA- FOREIGN EXCHANGE
REGULATION ACT
 Many stringent provisions in FERA.
 Liberalization was announced in 1991.
 Foreign investment was allowed in all sectors.
 Foreign investment flowed.
 Hence, to regulate in a more liberalized
manner, FEMA was enforced in place of FERA
OBJECTIVE
 TO CONSOLIDATE AND AMEND THE
LAW RELATING TO FOREIGN
EXCHANGE
 WITH THE OBJECT OF FACILITATING
EXTERNAL TRADE AND PAYMENTS,
AND
 PROMOTING THE ORDERLY
DEVELOPMENT AND MAINTENANCE
OF FOREIGN EXCHANGE MARKETS.
OBJECTIVE OF FERA
 Was to conserve foreign exchange
 Control transactions directly/indirectly
affecting foreign exchange, and
 Prevention of leakage of foreign exchange
 Hence, objective of FEMA is from
conservation to FACILITATION, and
 From control to REGULATION
 RBI is the overall controlling/ regulatory
authority under FEMA
Extra territorial in application
 Extends to the whole of India
 And sometimes to outside India also.
 i.e. to all branches, offices and
agencies outside India owned and
controlled by a person resident in
India
 And also to any contravention of the
Act happening outside India by any
person to whom the Act applies.
BROAD STRUCTURE OF FEMA
 It mainly deals with matters pertaining to foreign
exchange
 All current account transactions are free
 However, Central government can impose restrictions
by issuing rules. S.3
 Capital accounts transactions are permitted to the
extent specified by RBI regulations s.6
 RBI controls management of foreign exchange
 Since it cannot directly deal with foreign exchange it
authorises” authorised persons”to deal in foreign
exchange according to RBI Regulations s.10
 RBI issues directions to such persons u/s.11
 These directions are issued through AP(DIR) circulars.
Authorised Persons (Directions)
PROVISIONS FOR FEMA CANNOT
BE FOUND AT ONE PLACE
 FEMA has provisions for enforcement, penalties,
adjudication and appeals
 SO FEMA CONTAINS ONLY THE BASIC LEGAL FRAME
WORK.
 THE PRACTICAL ASPECTS ARE SPREAD OVER RBI
DIRECTIONS AND CIRCULARS ISSUED BY CENTRAL
GOVERNMENT AND VARIOUS POLICIES ISSUED BY
SEPARATE MINISTRIES
 Industrial policy announced by Ministry of Industry contains
provisions for FDI’s (foreign direct investment), foreign
technical collaborations, royalty payments, joint ventures
abroad etc. which also has relevance in understanding
FEMA.
 Policy in external commercial borrowing announced by
Ministry of Finance has relevance in FEMA
 SEBI guidelines and Income tax provisions also find
relevance in understanding FEMA provisions.
IMPORTANT DEFINITIONS
UNDER FEMA

1. PERSONS
2. CURRENCY AND TRADE
3. MISCELLANIOUS
PERSONS Section 2(u)
1. PERSONS include
 Individual
 HUF
 Company
 Firm
 Association of persons
 Agency
 Office or branch owned or controlled by
such person
Persons resident in India Section
2(v)
 (iA) a person residing in India for more
than 182 days during the course of
preceding financial year. This does not
include a person who has gone outside
India for
1. Employment outside India
2. Carrying on any business/vocation outside
India
3. For any other purpose such that his
intention is to stay outside India for an
uncertain period
(iB) A person residing in India for
more than 182 days in the
preceding financial year
 However, it includes a person who has
come to India for
1. Employment in India
2. Carrying on any business/vocation in
India
3. For any other purpose such that his
intention is to stay in India for an
uncertain period
Also….
 (ii)- any body corporate registered or
incorporated in India
 (iii) – any office, branch or agency in
India owned or controlled by a person
resident outside India
 (iv)-Any office, branch or agency
outside India owned or controlled by
a person resident in India
‘RESIDENT IN INDIA’ MEANS-
 To brief, a person resident in India includes
persons of India (except those staying
abroad for work or business or other
purpose)
 And, foreign persons who have come to
India or stay in India for employment,
carrying out any business or other purpose
with an intention to stay in India for an
uncertain period.
 Even, office, branch or agency can be a
person
STUDENT GOING ABROAD FOR
UNCERTAIN PERIOD
 HE/SHE is not a resident if the period of
stay abroad is ’uncertain’ or for any reasons
has been extended beyond the time initially
thought of while leaving India.
 ‘stay’ is different from ‘reside’. Stay is not
permanent, while residence is permanent.
An airline pilot having a stay in INDIA
cannot be said to have residence in India.
PERSONS RESIDENT OUTSIDE
INDIA 2(w)
 It means a person not being a resident of India.
 NRI- Non Resident Indian- Persons of Indian origin
residing abroad or Non-residents of Indian nationality
are usually called as NRI under various statutes. NRI
is not defined under FEMA. But under the FEMA
regulations, it include-
1. Person resident outside India who is a citizen of
India, and
2. Person of Indian Origin (PIO)
Under various regulations of FEMA, PIO has got a very
restrictive interpretation.
NRI’s and PIO’s have been given certain
special privileges for investments in India
under FEMA.

 Bank accounts & deposits- NRE a/c, FCNR (B) A/c,

NRO A/c
 Repatriation – up to USD 1 Million/ year from NRO A/c
 Investments on repatriation basis- units of domestic
mutual funds, shares and debentures in Indian
companies, deposits with Indian companies,
government dated security and treasury bills etc.
 Investment on non-repatriation basis- units of money
markets mutual funds of India
 Immovable property- other than agricultural/
plantation property or farm house
 Housing loans
 Facilities to returning NRI/PIO- RFC A/c. proceeds of
sale assets outside India can be credited to RFC a/c
2. Currency and trade
 Permitted currency/ convertible
currency/ hard currency
a. A foreign currency which is freely
convertible as per Regulation 2(v) of FEM
(Manner and payment ) Regulations, 2000.
major currencies among these are: USD,
Pound sterling UK, EURO, Swiss Frank, Yen.
b. Also called as hard currency
c. Indian rupee is not fully convertible
Currency s. 2(h)
 Includes-
a. All currency notes
b. Postal notes
c. Money orders
d. Cheques
e. Drafts
f. Traveller’s cheques
g. Letter of credit
h. Bills of exchange
i. Promissory notes
j. Credit cards or
k. Such other similar instruments as notified by RBI. Vide RBI
Notification dated 3rd March 2000, these list also includes
l. Debit cards, ATM cards or any other instruments by what ever name
called that can be used to create a ‘financial liability’, as ‘currency’.
Currency notes include cash in the form of bank notes and coins. S. 2(i)
Foreign exchange s. 2(n)
 Means foreign currency and includes;
i. Deposits, credits and balances payable in
foreign currency
ii. Drafts, traveller’s cheques, letter of credit
or Bill of exchange expressed or drawn in
Indian currency but payable in foreign
currency
iii. Drafts, traveller’s cheques, letter of credit
or Bill of exchange drawn by banks,
institutions or persons outside india, but
payable in Indian currency
Repatriate to India s. 2(y)
 Means bringing into India the realized
foreign exchange and
i. Selling of that foreign exchange to an
authorised person in India in exchange for
rupees
ii. The holding of realised amount in account
with an authorised dealer in India to the
extent notified by RBI.
iii. ALSO, includes use of that realised amount
for discharge of a debt or liability
denominated in foreign currency.
Repatriation outside India
 Buying or drawing of foreign
exchange from authorised dealer in
India and remitting it outside India
through normal banking channels or
crediting it on to the account
denominated in foreign exchange or
to an account in Indian currency
maintained by an authorised person
from which it can be converted in
foreign currency.
Miscellaneous definitions
 Authorised persons- RBI cannot do all transactions in
foreign exchange by itself. Therefore, this power is
delegated to authorised persons with suitable
guidelines, to deal in foreign exchange and foreign
securities.
 Authorised person means an authorised dealer,
money changer, off-shore banking unit or any
other person authorised u/s. 10 (1) to deal in
foreign exchange and foreign securities.
 Generally, all nationalised banks, leading non-
nationalised banks and foreign banks are appointed as
authorised dealers. They can deal in all forms of
foreign exchange.
 Money changers can deal only with coins, notes and
traveller’s cheques. American express, Thomas cook etc.
are full fledged money changers (FFMC)
 Some hotels and shops, leading travel agencies etc. are
appointed as Restricted money changers(RMC). They
cannot sell foreign exchange but can purchase foreign
currency and traveller’s cheques.
 FFMC’s and RMC’s have to surrender foreign exchange with
them to authorised dealers.
 Surrender means selling of foreign exchange to an
authorised dealer in India in exchange for rupees.
 Offshore Banking Units (OBU’S) can be appointed as
authorised persons. They are foreign branches of Indian
banks working inside SEZ premises. They deal with SEZ and
SEZ developers only. They can source foreign currency fund
from abroad. They deal in international rates. They will deal
only in foreign exchange.
Duties of authorised persons
 They should act only by RBI guidelines
 Should submit reports to RBI
 Their acounts can be inspected by RBI
 AD’s and FFMC’s can appoint agents/ franchises for
undertaking restricted money changing.
 An authorised person can deal only with those
matters to which the authorisation has been received
from RBI.
 He should take written undertaking/ declaration from
person to satisfy himself that there is no violation of
FEMA.
 If there is any evasion found, the matter has to be
reported immediately to RBI. S. 10(5)
Revocation of authorisation by RBI
 The authorisation shall always be in writing
 RBI can revoke the authorisation at any time, if
satisfied that-
a. It is in public interest
b. The authorised person has failed to comply with the
requirements subject to which authorisation was
granted
c. Or has contravened any provisions of the Act, rule,
regulation, notification, circulars etc.
d. Revocation can be done after giving an opportunity
for the dealer for a representation. S. 10(3)
e. For contravention of any direction a penalty of
10000/- may be imposed. If the default is continued
penalty of 2000/- per day may be imposed. S. 11
f. RBI can inspect all record books of the authorised
person.
General provisions of regulation
and management
 Powers in respect of routine matters have been
delegated to authorised persons by RBI
 If remittance is in accordance with guidelines/
regulations, it is permitted by authorised
dealers
 All current account transactions are freely
permitted
 Even in capital account transactions, the
transactions which are freely permitted can be
allowed by authorised dealer without
permission from RBI.
PROCEDURE FOR REMITTANCE
UNDER FEMA
 Application
to Supporting
authorized documents
dealer

CA/ PCS
Remittance
certificate

Payment to TDS
authorized dealer Certificate
Applications have to be given to authorised dealer
for remittance of foreign currency in India
 Separate application forms are prescribed.
 If a person has to open a foreign currency a/c in India
application has to be given to RBI
 For eg. Remittance upto USD 5000(Small value) can
be done by a simple letter specifying all particulars
about the applicant without any accompanying papers
to the the authorised dealer
 Separate forms are there for other remittances. E.g.
FORM A1 for remittance foreign currency for import of
goods to India.
 Any individual can remit up to USD 25000/ calendar
year for holding/ acquiring immovable property
abroad, acquiring shares outside India, opening of
foreign currency a/c with a Bank outside India. No
permission of RBI is required. This is applicable for all
current and capital a/c’s and a combination of both.
The authorised dealers usually banks will issue
certificate of remittance for all inward clearances
exceeding 15000/-.

 If the authorised dealer/money

changer purchases foreign currency
from a foreign tourist, they will issue
an encashment certificate.
BANK ACCOUNTS IN INDIA
IN RUPEES
NRE – Non-resident (external)
rupee account scheme
 Principal and interest are freely repatriable
 Transfer from FCNR(B) A/c is freely permitted
 Opened by Non resident Indians (NRI) with authorized
dealers and banks
 Can be opened by account holder himself and not by
POA holder
 Entities and nationals of Bangladesh, Pakistan will
require special approval of RBI
 Joint a/c with another NRI and not with an Indian
resident is permitted. nomination in the name any
individual is permitted (in the name of NRI)
 The A/c may be maintained in any form- savings,
current, recurring or FD/ term deposits
 On the event of non-resident becoming resident, the
NRE a/c may be redesigned as resident a/c.
 POA holder can operate a/c with respect to local
payments only
 Loans may be given to NRI of the a/c
 Separate cheque books are issued showing NRE
status
 Overdrawing up to 50000/- is permissible
 Remittance may be in any form of foreign currency
only
 Penalty for premature withdrawal of term deposits
 The only disadvantage is that when rupee
depreciates, the savings of NRI counted in USD also
reduces
NRO- Non resident ordinary rupee
account
 A/c is maintained in India rupee
 Any NRI can open an NRO A/c, except
nationals of Bangladesh and Pakistan
only with the prior approval of RBI
 Current income is freely repatriable but
principal amount only up to 1 million
USD.
 Rest all provisions are similar to NREa/c
Foreign currency accounts
 Accounts held or maintained in currency
other than currency of India, Nepal or
Bhutan
 May be maintained as current/ savings
a/c or FD when the a/c Holder is an
individual and as current and term
deposit in all other cases
 Can be maintained singly or jointly
Resident foreign currency account
RFC
 Opened and maintained by NRI/PIO who has returned to
India after working abroad
 E.g the a/c may be held to maintain pensions or any other
annuities from the employer abroad, gifts or inheritance
from a person abroad etc.
 There are no restrictions on investment using the money in
RFC in India except a few like in lottery, transactions with
Nepal, Bhutan etc.
 Thus a resident in India can maintain an RFC if-
1. The foreign exchange was earned when he was abroad,
2. He inherited it or obtained gift from a person who was not
a resident of India
FCNR (B)- Foreign currency (Non-
resident) Account (Bank) scheme
 Maintained in foreign exchange
 Fluctuations of currency has no effect
 NRI can open
 Can be maintained using funds remitted from
outside India using normal banking channels
or funds received in rupees to the a/c of a
non-resident bank or by transfers from
NRE/FCNR a/c’s.
 Only term deposits are permitted
Regulation and management of
foreign exchange
The main provisions of the Act are:-

 It permits only authorised person to deal in foreign

exchange or foreign security. Such an authorised
person, under the Act, means authorised dealer,
money changer, off-shore banking unit or any other
person for the time being authorised by Reserve Bank.
 The Act thus prohibits any person who:-

 Deal in or transfer any foreign exchange or foreign security to

any person not being an authorized person;

 Make any payment to or for the credit of any person resident

outside India in any manner;
 Receive otherwise through an authorized person, any
payment by order or on behalf of any person resident
outside India in any manner;

 Enter into any financial transaction in India as

consideration for or in association with acquisition or
creation or transfer of a right to acquire, any asset
outside India by any person;

 is resident in India which acquire, hold, own, possess

or transfer any foreign exchange, foreign security or
any immovable property situated outside India.
The Act regulates two types of foreign exchange
transactions, namely 'Capital Account
Transactions' and 'Current Account Transactions'.

 According to the Act, 'Capital account transaction' means

a transaction which alters the assets or liabilities,
including contingent liabilities, outside India of persons
resident in India or assets or liabilities in India of persons
resident outside India, and includes the following
transactions referred in the Act:-

 Transfer or issue of any foreign security by a person

resident in India;

 Transfer or issue of any security by a person resident

outside India;
 Transfer or issue of any security or foreign security by
any branch, office or agency in India of a person
resident outside India;

 Any borrowing or lending in rupees in whatever form or

by whatever name called;

 Any borrowing or lending in rupees in whatever form or

by whatever name called between a person resident in
India and a person resident outside India;

 Deposits between persons resident in India and persons

resident outside India;
 Export, import or holding of currency or currency
notes;

 Transfer of immovable property outside India, other

than a lease not exceeding five years, by a person
resident in India;

 Acquisition or transfer of immovable property in India,

other than a lease not exceeding five years, by a
person resident outside India;

 Giving of a guarantee or surety in respect of any debt,

obligation or other liability incurred-

(i) By a person resident in India and owed to a person

resident outside India; or
(ii) By a person resident outside India.
It also defines the term 'current account transaction' as a
transaction other than a capital account transaction and
without prejudice to the generality of the foregoing such
transaction includes:-

 (i) payments due in connection with foreign trade, other

current business, services, and short-term banking and credit
facilities in the ordinary course of business;
 (ii) payments due as interest on loans and as net income from
investments;
 (iii) remittances for living expenses of parents, spouse and
children residing abroad; and
 (iv) expenses in connection with foreign travel, education and
medical care of parents, spouse and children.
The Act has empowered the Reserve Bank of
India (RBI) to specify, in consultation with
the Central Government, the permissible
capital account transactions and the limits up
to which foreign exchange may be drawn for
such transactions. But it shall not impose any
restriction on the drawal of foreign exchange
for payments due on account of amortization
of loans or for depreciation of direct
investments in the ordinary course of
business.
Any person may sell or draw foreign
exchange if such sale or drawal is a
current account transaction. Under the
Act, 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.
Every exporter of goods shall:-
 (i) furnish to the Reserve Bank or to such other
authority a declaration in such form and in such
manner as may be specified, containing true and
correct material particulars, including the amount
representing the full export value or, if the full export
value of the goods is not ascertainable at the time of
export, the value which the exporter, having regard to
the prevailing market conditions, expects to receive on
the sale of the goods in a market outside India;

 (ii) furnish to the Reserve Bank such other information

as may be required by it for the purpose of ensuring
the realisation of the export proceeds by such exporter.
The Reserve Bank may, at any time, cause an inspection to
be made, by any officer specially authorised in writing by it
in this behalf, of the business of any authorised person as
may appear to it to be necessary or expedient for the
purpose of:-

 (i) verifying the correctness of any

statement, information or particulars
furnished to the Reserve Bank;
 (ii) obtaining any information or particulars
which such authorised person has failed to
furnish on being called upon to do so;
 (iii) securing compliance with the provisions
of this Act or of any rules, regulations,
directions or orders made thereunder.
Enforcement
 Enforcement is with enforcement directorate
 The central government has appointed Directors of
Enforcement, Additional directors, Special Director,
Deputy Director and Assistant Directors for
enforcement of FEMA. S. 36
 Powers are similar to Income tax authorities
 Main powers include inspection and investigation of
violations of FEMA provisions.
 Cheques and other NI’S recovered during enforcement
will be deposited with RBI. If Indian currency is found,
it shall be deposited in a separate a/c in the name of
Director of enforcement.
 The central government will indemnify the enforcement
authority for encashing the NI’s.
Penalties under FEMA
 Offenses under FEMA are civil offenses.
 Central government appoints the adjudicating
authority. S.16(1)
 They conduct enquiry on the complaint received from
an authorised person.
 It should give the verdict within 1 year, if not should
state the reason.
 While adjudicating the case, it acts as a quasi judicial
body and has to follow the principles of natural
justice.
 Opportunity should be given to the respondent to
represent his case.
An officer not below the rank of
Assistant director can file the
complaint
 The adjudicating authority has got the powers of a civil
court
 The penalty can be upto thrice the sum involved in
contravention where the amount is quantifiable. If not,
penalty can be up to Rs. 2 lakhs. If the transgression
continues all officers in default will be liable to pay 5000/
per day. S. 13(1)
 The foe may be confiscated. S.13 (2)
 A person on whom the verdict is passed has to make
payment within 90 days. If not he is liable to civil
imprisonment. S. 14(1)
 For amount less than 1 crore- 6 months
 For amount more than 1 crores- up to 3 years s. 14(11)
 Compunding is permitted within 180 days
Appeals
 Assist. Director/deputy director to special directors
 Further appeal lies with Appellate Tribunal for foreign
exchange
 The tribunal consists of chair person and members
 It sits in Delhi or other places as may be notified
 Division bench will hear matters above 5 lakhs
 Jurisdiction of civil court is barred when the matter is
pending before the tribunal
 Second appeal lies to high courts and supreme court