INTERNATIONAL

TRADE
AND
FINANCE

Foreign Exchange
Management Act (FEMA)

GROUP NO. 2
STUDENT’S NAME ROLL NO.
SIGNATURE
FOREIGN EXCHANGE MANAGEMENT ACT,1999

Introduction

Soon after India’s independence, the government of India enacted the

Foreign Exchange Regulation Act 1947 (FERA) to regulate the operation of
foreign controlled companies in India. The Act was amended
comprehensively in 1973. The major objectives of new FERA, 1973 were:
(a) the conservation of India’s precious foreign exchange resources, and (b)
the issue of guidelines to the foreign investors to invest in India’s core
sectors which employ sophisticated foreign technology.
FERA, 1973 was enacted at a time when India had a less than a billion dollar
in foreign exchange reserves and when almost all the spheres of the
economy were sought to be controlled and regulated by the government.
Under FERA all transactions in foreign exchange and all transactions with
non-residents (whether in foreign exchange or in rupees) were absolutely
prohibited, except where specific relaxations were made. Similarly, non-
residents were also not permitted to have any dealings in India. However,
the practical and day-to-day provisions were contained not in the act, but in
the guidelines issued by the government of India. These guidelines related to
foreign business in India, as for instance, the necessity of all branches and all
subsidiaries of foreign companies( except airlines and shipping companies)
to have minimum Indian equity participation of 26% . These guidelines were
revised substantially in 1976.
FERA 1973 came under serious criticism particularly for the section with
stipulated that whenever a person was prosecuted of proceeded against for
contravention of any provision, rule, regulation, directive or any order under
the act, the onus of proving that he had the requisite permission was on him.
These often led to unnecessary harassment of bona fied persons and
companies with show cause notices and prosecution for alleged violations of
FERA on narrow technical grounds. At the same time, however, thousands
of crooks, both individuals and companies managed to evade and avoid the
draconian provisions of FERA and got away scot free.
The Foreign Exchange Management Act (FEMA) was introduced in July
1999 in the Parliament to repel FERA, 1973 and to consolidate and simplify
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.
The government of India has formulated the Foreign Exchange Management
Act (FEMA), which relates to the foreign direct investment in the country.
Foreign Exchange Management Act (FEMA) has helped the country by
encouraging external payment and trade.

Formulation of Foreign Exchange Management Act (FEMA):

In 1999, the Indian government formulated the Foreign Exchange

Management Act (FEMA).

On the 1st of June, 2000, FEMA came into force replacing the Foreign
Exchange Regulation Act (FERA), which was formulated in 1973. Extensive
economic reforms were undertaken in India in the early 1990s and this led to
the deregulation and liberalization of the country's economy. Foreign
Exchange Management Act (FEMA) was thus formulated in order to be
compatible with the policies of pro- liberalization of the Indian government.

Extent of Foreign Exchange Management Act (FEMA):

Foreign Exchange Management Act (FEMA) is applicable to the entire

country. Agencies, branches, and offices, outside India, that are owned by
Indian residents, also fall under the jurisdiction of this act. Foreign Exchange
Management Act (FEMA) also extends to any dispute that are committed in
offices, agencies and branches outside India that are owned by individuals
covered by this act.

Objectives of Foreign Exchange Management Act (FEMA):

Among the various objectives of the Foreign Exchange Management Act

(FEMA), an important one is to revise and unite all the laws that relate to
foreign exchange. Further FEMA aims to promote foreign payments and
trade in the country. Another important objective of the Foreign Exchange
Management Act (FEMA) is to encourage the orderly maintenance and
development of the foreign exchange market in India.

Implementation of Foreign Exchange Management Act

(FEMA):

Extensive efforts have been undertaken to ensure the effective

implementation of FEMA in India. Proper implementation measures and
efficient supervision are important preconditions for the success of the
Foreign Exchange Management Act (FEMA).

Salient Features of FEMA

According to section 3 of FEMA, 1999 no person shall deal in or transfer

foreign exchange security to any unauthorized person.
Section 4 provides that no person resident in India shall acquire, hold, own,
possess or transfer any foreign exchange, foreign security or any
immovable property situated outside India, save as otherwise
provided in this Act.
Section 5 provides that any person may sell or draw foreign exchange to or
from an unauthorized person if such sale or drawl is a current
account transaction, provided that the Central Government may, in
public interest and in consultation with RBI, impose such
reasonable restrictions for current account transactions as may be
prescribed.
Section 6 states that any person may sell or draw foreign exchange to or
from an unauthorized person for a capital account transaction. RBI,
in consultation with the Government of India may specify the class
of capital account transactions which are permissible, the limit up
to which foreign exchange shall be admissible for such
transactions. RBI may prohibit, restrict or regulate the following:
Transfer or issue any foreign security by a person resident in India; by a
person resident outside India, or by any branch, office or agency in
India of a person resident outside India;
Any borrowing or lending in foreign exchange in whatever form or by
whatever name called;
Any borrowing or lend in rupees 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 5 years by a person resident in India; likewise,
acquisition or transfer of immovable property in India , other than a
lease not exceeding 5 years, by a person resident outside India;
Giving a guarantee or surety in respect of any debt, obligation or other
liability incurred by a person resident in India and owed to a person
resident outside India.
Section 6, sub- section 4 provides that the 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.
Section 6 sub section 5 applies to persons who reside outside India i.e. they
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.
Under sub section 6, RBI may, by regulation, prohibit, restrict or regulate
establishment in India of a branch, office or other place of business
by a person resident outside India, for carrying on any activity
relating to such branch, office or other place of business.
Under FEMA, 1999, every exporter of goods shall furnish to RBI a
declaration containing true and correct material particulars
including the amounts representing the full export value of the
goods exported for the purpose ensuring the realization of the full
export proceeds by such exporter without any delay. Further, every
exporter of services shall furnish to RBI a declaration containing
 the true and correct material particulars in relation to payment for
such services.
Where any amount of foreign exchange is due or has accrued to any person
resident in India, such person shall take all responsible steps to
realize and repatriate the amount to India within a period and
manner specified by RBI.
Section 9 refers to certain exemptions from realization and repatriation of
foreign exchange in certain cases.

Contraventions and penalties

If any person contravenes any provision of FEMA, 1999 or contravenes any

rule, regulation, notification, direction or order issued in exercise of the
powers under this act or contravenes any condition subject to which
authorization is issued by RBI, he shall be liable to penalty up to twice the
sum involved in such contraventions.
The central government shall establish an Appellate Tribunal for Foreign
Exchange to hear appeals against the orders of the adjudicating authorities
under this act. Appeal against the judgment of the Appellate Tribunal lies
with the High Court.
The Central Government shall establish a Directorate of Enforcement to
enforce the provisions of this Act.
Section 40 of the Act gives power to the Central Government to suspend or
relax either indefinitely or for a specific period, the operation of all or any of
the provisions of FEMA. The notification issued by the Central Government
in this regard will have to be placed before the Parliament and got approved
within a specified period.

Evaluation of FEMA

As mentioned at the beginning, FEMA was sought FERA, 1973, because the
conditions under which FERA 1973 was enacted and was implemented do
not exist any more. For instance, India has now huge forex reserves. It is,
however, true that the size of the economy in general and the external
transactions in particular have gone up substantially. Even than, none can
deny the fact that the situation on the external front in recent times is a great
deal more favorable than at any time in the past. Hence, there is no place for
the fear complex that characterizes regulatory efforts in the past. For
another, with the culture of liberalization that has come to be accepted as a
framework of management of the economy, strict exchange control regime
as visualized in FERA, 1973 has to be disbanded.
FEMA, 1999 attempts to simplify the provisions of FERA 1973. In fact,
there are several major changes with immediate effect and relevance,
particularly those relating to certain substantive matters and contraventions
and punishments.
Besides, there is a major shift under FEMA, 1999. Under FERA 1973, all
transactions in foreign exchange and all transactions with non-residents (in
foreign currencies or in rupees) were absolutely prohibited except where
specific relaxations were made. Similarly, non-residents were also not
permitted to have any dealings in India, Under FEMA 1999 however the
major focus is on transactions involving foreign exchanges and foreign
securities. Restrictions over dealings with non-rasidents and by non-
residents in India have been substantially diluted, though not eliminated.
Another major change under FEMA is that only a monetary penalty will be
slapped on the convicted, and there is no punishment by way of
imprisonment for contravention of any of the provision. The only
circumstance under which imprisonment can be made is for non-payment of
such penalty. Under FERA, however, the Enforcement Directorate had
sweeping powers to arrest any one suspected in indulging in fore violations.
Naturally, individuals and particularly employees of companies would
welcome the new provisions of FEMA. Cases under FEMA will also have to
be referred by RBI.