HISTORY OF FEMA

 Earlier there was Defence of India Act

 Foreign Exchange Regulation Act was introduced in 1947. This was

later replaced with ‘the Foreign Exchange Regulation Act, 1973’

(FERA), which came into effect on 1st Jan, 1974.

 Government initiated the process of liberalization of Indian economy

in 1991.

 Foreign Investment in various sectors was permitted. This increased

flow of foreign exchange to India and foreign exchange reserves have

increased substantially.

 It was repealed in 1999 by the government of Atal Bihari Vajpayee

and replaced by the Foreign Exchange Management Act, which

liberalised foreign exchange controls and restrictions on foreign

investment.

 In view of this, FERA has been repealed and FEMA has been passed.

The act has been made effective from 1st June, 2000.

 As per Statement of Objects to the FEMA Bill, the object of FEMA is

to consolidate and amend the law relating to foreign exchange with

the object of facilitating external trade and payments and for

promoting the orderly development and maintenance of foreign

exchange markets in India.

 On account of LPG policy

FEMA1999
FERA 1973

FERA 1947

Defence of
India Act

Objectives

To reinforce and amend the law relating to foreign exchange.

To simplify and ease the external trade and payments.

To promote the systematized development and maintenance of a

healthy foreign exchange market in India.

To remove disparity of payments.

To control and direct the employment business and investment of the

non-residents.

To utilise the foreign exchange resources effectively for the country.

Features of FEMA

 This criteria is checked by the number of days a person stays in India

for more than 182 days in the preceding financial year.

 Central Government has the authority given by FEMA to impose

restrictions on and supervise three things which are- payments made

to any person outside India or receipts from them, forex and foreign

security deals.

 It specified the areas for holding of forex that required specific

permission of the Reserve Bank of India (RBI) or the government.

 FEMA classified the transaction into a current and capital account.

It gives powers to the Central Government to regulate the flow of

payments to and from a person situated outside the country.

 All financial transactions concerning foreign securities or exchange

cannot be carried out without the approval of FEMA.

 All transactions must be carried out through “Authorised Persons.”

 Empowers RBI to place restrictions on transactions from capital

Account even if it is carried out via an authorized individual.

To whom it is applicable?

 It is applicable to the whole of India.

 Any branch, office, and agency, which is situated outside India,

but it is owned or controlled by a person resident in India.

 Any violation by these entities committed outside India will be

covered under this Act.

 Comparison Chart

Grounds FERA FEMA

Meaning An act promulgated, to regulate FEMA an act initiated to facilitate

payments and foreign exchange external trade and payments and to
in India, is FERA. promote orderly management of the forex
market in the country.

Enactment Old New

Number of sections 81 49

Introduced when Foreign exchange reserves were Foreign exchange position was
low. satisfactory.

Approach towards Rigid Flexible

forex transactions

Basis for Citizenship More than 6 months stay in India

determining
residential status

Violation Criminal offence Civil offence

Punishment for Imprisonment Fine or imprisonment (if fine not paid in

contravention the stipulated time)
 Transactions Under FEMA

Capital Account Transaction Current Account Transaction

Always Prohibited Unless Permitted Always Permitted Unless Prohibitted

Debt Instrument Non Debt Instrument CG

RBI CG

CG may delegate its power.

(c) “authorised person” means an authorised dealer, money changer, off-shore banking

unit or any other person for the time being authorised under sub-section (1) of section

10 to deal in foreign exchange or foreign securities

S.2( c ).Authorised person

Unit or
any other
person u/s
10

Off-shore Authorise Authorise

banking d person d dealer

Money
changer

S.2.(u) “person” includes—

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) every artificial juridical person, not falling within any of the preceding subclauses,

and

(vii) any agency, office or branch owned or controlled by such person;

 S.(v).“Person resident in India” means—

(i) a person residing in India for more than one hundred and eighty-two days

during the course of the preceding financial year but does not include—

(A) a person who has gone out of India or who stays outside India, in either case

(a) for or on taking up employment outside India, or

(b) for carrying on outside India a business or vocation outside India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay
outside India for an uncertain period

Residing in India for more than 182

days in preceding financial year

Employment Business or Vocation any Other purpose

uncertain period

PRI PROI
 (B).a person who has come to or stays in India, in either case, otherwise than— (a) for or on taking up

employment in India, or (b) for carrying on in India a business or vocation in India, or (c) for any

other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain

period;

Employment Business or Vocation any Other purpose

uncertain period

PRI

(ii) any person or body corporate registered or incorporated in India,

Registered
Person Body/ Corporate /Incorporated In PRI
India
 (ii) an office, branch or agency in India owned or controlled by a person
resident outside India,

An office, branch or agency in India Owned or controlled by A Person Resident

Outside India

PRI

(iii) an office, branch or agency outside India owned or controlled by a person

resident in India;

Owned or controlled by A Person Resident Outside An office, branch or agency outside India

PRI