Historical Background to

Foreign Exchange Regulation Act and

Foreign Exchange Management Act
Module 3 – Chapter 2.1
 Foreign Exchange Regulation Act, 1947 and
Foreign Exchange Regulation Act, 1973

• Scarcity of Foreign Exchange in India led to its

control since the beginning of World War II.
Exchange control was introduced in India under the
Defense of India Rules on September 3, 1939 on a
temporary basis. The statutory power for exchange
control was provided by the Foreign Exchange
Regulation Act (FERA) of 1947.
Foreign Exchange Regulation Act, 1947 was enacted initially for a
period of ten years in temporary basis.

However, 10 years of economic development did not ease the foreign

exchange constraint, FERA permanently entered the statue book in the
year 1957.

Subsequently, Foreign Exchange Regulation Act, 1947 was replaced by

the Foreign Exchange Regulation Act, 1973 (FERA, 1973),which came
into force with effect from January 1, 1974.

FERA, 1973 came into force, for regulating certain payments, dealings in
foreign exchange and securities, transactions indirectly affecting foreign
exchange and the import and export of currency, for the conservation of
the foreign exchange resources of the country and the proper utilization
thereof in the interests of the economic development of the country.
 Foreign Exchange Regulation Act, 1973, ‘The Major Constraints’

a. In the year 1974, FERA was completely overhauled with all violations being considered as
criminal offences with mens rea. The Enforcement Directorate was empowered to arrest any
person without even an arrest warrant.

b. In 1991 government of India initiated the policy of Economic Liberalization, Privatization and
Globalization. Foreign investments in many sectors were permitted. This resulted in increased flow
of foreign exchange in India and foreign exchange reserves increased substantially, hence the
government engaged itself in framing a law containing a comprehensive framework for dealing and
regulating the foreign exchange inflow and outflow in India.

c. In 1997, the Tarapore Committee on Capital Account Convertibility (CAC) constituted by the
Reserve Bank, which recommended change in the legislative framework governing foreign
exchange transactions.

d. Keeping in view the changed environment, the Foreign Exchange Management Act (FEMA) was
enacted in 1999 to replace FERA. FEMA became effective from June 1, 2000. The philosophical
approach was shifted from that of conservation of foreign exchange to the management of foreign
exchange, facilitating trade and payments as well as developing orderly foreign exchange market.
 Authorities governing the enforcement of FEMA

a. Foreign Exchange Department of Reserve Bank of India (RBI) –

fema.rbi.org.in

b. Directorate of Enforcement, Department of Revenue, Ministry of

Financehttp://directorateofenforcement. gov.in
Capital Markets Division, Department of Economic Affairs, Ministry
of Finance – http:// finmin.nic.in/the ministry/dept eco affairs/

d. Investment Division, Department of Economic Affairs, Ministry of

Finance – https://dea.gov.in/divisionbranch/investment-division#IT

e. Foreign Trade Division, Department of Economic Affairs, Ministry

of Finance – http://finmin.nic.in/theministry/dept eco affairs/
 Machinery responsible for various aspects of FEMA

a. Enforcement Directorate
b. Adjudicating Authority
c. Special Director (Appeals)
d. Appellate Tribunal
e. Foreign Exchange Department of RBI
f. Foreign Investment Promotion Board (FIPB)
g. Department for Promotion of Industry and Internal
Trade (DIPP)
 Type of transactions under FEMA

Capital account transaction (CAT)

These transactions are of capital nature. It alters assets or liabilities
including contingent liabilities, outside India of persons resident in
India or assets or liabilities in India of persons resident outside India,.
CAT are regulated by Foreign Exchange Management (Permissible
Capital Account Transactions) regulations, 2000 and covers, among
others, the following transactions:

a. Foreign Direct Investment (FDI);

b. Overseas Direct Investment (ODI);
c. External Commercial Borrowings (ECBs);
d. Sale and purchase of Immovable property either in or Outside India;
e. Investment in firms or proprietary concerns in India.
Current account transaction (CuAT)-

These transactions other than capital account transactions. CuAT

are regulated by Foreign Exchange Management (Current
Account Transaction) rules, 2000. Most of the current account
transactions do not require the Reserve Bank’s prior approval.
Approval of the Reserve Bank is required for those transactions
listed in Schedule–III to the Foreign Exchange Management
(Current Account Transactions) Rules, 2000, where the
remittance to be made is beyond the stipulated limit.
Important change under FEMA regulating governing CAT

The Finance Act, amended Section 6 (Capital Account Transaction), Section 46 (Power
of Central Government to make rules) and section 47 (Power of RBI to make rules) of
the Foreign Exchange Management Act, 1999 (FEMA, 1999). These amendments has
the effect of altering the powers of the Central Government and Reserve Bank of India
(RBI).

In terms of amended prosions of FEMA, the Central Government has made Foreign
Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) on
October 17, 2019 superseding the erstwhile Foreign Exchange Management (Transfer
of Issue of Security by a Person Resident outside India) Regulations, 2017 (“TISPRO”)
and the Foreign Exchange Management (Acquisition and Transfer of Immovable
Property in India) Regulations, 2018, whereas RBI has notified Foreign Exchange
Management (Debt Instruments) Regulations, 2019 superseding TISPRO, and the 
Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt In
struments) Regulations, 2019
, which provides for reporting requirements in relation to any investment made under
the NDI Rules.
Non-Debt Instruments:

• All investments in equity in incorporated entities (public, private, listed,

unlisted)
• Capital participation in LLPs
• Instruments of investment as in FDI policy
• Investment in units of Alternative Investment Funds, Real Estate Investment
Trust and Infrastructure
• Investment Trusts;
• Investment in units of mutual funds and Exchange-Traded Fund which
invest more than fifty per cent in equity;
• Junior most layer (e.g. equity tranche) of securitization structure
• Acquisition, sale or dealing directly in immovable property
• Contribution to trusts
• Depository receipts issued against equity instruments
 Debt Instruments
• Debt Instruments means all instruments other than non-debt instruments
enumerated above.

Hybrid Securities: A definition of “hybrid securities ” has been included

in the Non-Debt Rules.

• Hybrid securities means s instruments such as optionally or partially

convertible preference shares or debentures and other such instruments
as specified by the Central Government from time to time, which can be
issued by an Indian company or trust to a person resident outside India.

• However, the Non Debt Rules, as notified by the Central Government

do not contain any provision regarding FDI in the hybrid securities. For
the reason not apparently clear Reserve Bank of India have yet frame
directions regarding the Non Debt incorporated Rules and Debt
Regulations
 Key Changes in Reporting Machanism of Foreign Direct
Investment in India since 1973 till March 2020

Physical Form
• From the time of introduction of the FERA and FEMA, 1999 and
till 2016, reporting was to be made in physical form.

e-Biz platform
• Later, with a view to promote the ease of reporting of
transactions related to Foreign Direct Investment (FDI), RBI has
enabled online filing of the returns through the e-Biz portal. On
1st February 2016, RBI vide AP (DIR) Series Circular No. 40
 (Ref Notification No. RBI/2015-16/303) introduced the concept
of online filing/ reporting through e-Biz platform
(http://www.ebiz.gov.in). which was made effective from 8th
February 2016.
FIRMS (Foreign Investment Reporting and Management
System)

• With the objective of integrating the extant reporting

structures of various types of foreign investment in India,
RBI vide A.P (DIR) Circular No. 30 dated 7th June 2018
 (Ref Notification No. RBI/2017-18/194) introduced Single
Master Form (SMF), which shall be filed online. This form
provides facility for reporting of total foreign investment in
an Indian entity as per FEMA FDI Regulations, 2017. SMF
is a master form containing 9 reports. They are FC-GPR,
FC-TRS, LLP-I, LLP-II, CN, ESOP, DRR, DI and InVi.
which was made effective from 1st September 2018.