INTRODUCTION TO FOREIGN EXCHANGE MANAGEMENT ACT, 1999

BASIC QUESTIONS

1.What is FEMA?

Foreign Exchange Management Act

Explanation

 “Foreign”- any country other than India

“Exchange”- something comes in, something goes out

“Management”- handling of the above mentioned exchange.

Simply stating when there is any exchange between India and any other country such actions are governed by the provisions of FEMA.

2. What is exchanged?

There is an exchange of goods or services and money.

Either as import or export.  The act governs such an exchange of goods/services and money.

3.How the exchange is managed?

The transactions are managed by the governing act FEMA 1999 and its rules and regulations.

4.When does FEMA and its Regulations applicable?

Whenever an exchange takes place as mentioned above, it is  necessary to check the provisions of FEMA.

HISTORY OF THE ACT

India faced trade deficit during the tenure of Indira Gandhi in 1973.

To conserve India’s FOREX resources the Foreign Exchange Regulation Act was passed in 1974.

The purpose of the act was to "regulate certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of foreign exchange resources of the country".

FERA proceeded on the presumption that all foreign exchange earned by Indian residents rightfully belonged to the Government of India and had to be collected and surrendered to the Reserve bank of India (RBI). FERA primarily prohibited all transactions, except one’s permitted by RBI.

Introduction of FEMA

FERA was repealed in 1999 and replaced by the Foreign Exchange Management Act, which liberalized foreign exchange controls and restrictions on foreign investment.

FEMA Objective:

FEMA aims at boosting foreign trade and investment more in tune with country's new economic environment of globalization of Indian economy.

To facilitate external trade and payment and promote the orderly development and maintenance of foreign exchange market in India.

Applicability:

This act is applicable to all branches, offices and agencies outside India owned or controlled by a person who is a resident of India.

Difference between FERA and FEMA

Particulars	FERA Act 1974	FEMA Act 1999
PUNISHMENT	It was a criminal offence , punishable with imprisonment as per code of criminal procedure, 1973	Here, the offence is considered to be a civil offence only punishable with some amount of money as a penalty. Imprisonment is prescribed only when one fails to pay the penalty.
QUANTUM OF PENALTY	The monetary penalty payable under FERA, was nearly the five times the amount involved.	Under FEMA the quantum of penalty has been considerably decreased to three times the amount involved
MEANING OF "RESIDENT"	There was a big difference in the definition of "Resident", under FERA, and Income Tax Act	The provision of FEMA, are in consistent with income Tax Act, but a person who is considered to be non-resident under FEMA may not necessarily be a non-resident under the Income Tax Act.

Under FEMA  investments can be classified as:

INBOUND INVESTMENT –investment in India

OUTBOUND INVESTMENT-investment out of India.

With this clarification let’s look into the various regulations and rules applicable.

The Act consists of 49 sections.

currently there are 22 regulations and 5 rules.

Rules in FEMA

• FEM(Adjudication proceedings and appeals)Rules 2000
• FEM(Encashment of Draft, Cheque, Instrument and Payment of Interest ) Rules 2000
• FEM(Authentication of Documents)Rules 2000
• FEM(Compounding Proceedings)Rules 2000
• FEM(Current Account Transaction)Rules 2000

Regulations          

The regulations under FEMA can be classified into

• INBOUND INVESTMENT
• OUTBOUND INVESTMENT
• MISCELLANEOUS

INBOUND INVESTMENT

• FEM(Transfer or Issue of Any Foreign Security) Regulations 2000
• FEM(Acquisition and Transfer of Immovable Property in India) Regulations 2000
• FEM (Establishment in India of Branch Office or Other Place of Business) Regulations. 2000
• FEM (Investment in firm of proprietary concern in India) Regulations, 2000
• FEM (Issue of Security in India by a Branch office or Agency of A Person Resident Outside India) Regulations.2000

 

OUTBOUND INVESTMENT

• FEM(Transfer or Issue of Security by Person Resident Outside India) Regulations 2000
• FEM(Acquisition and Transfer of Immovable Property outside India)Regulations 2000
• FEM(Guarantees)Regulations 2000
• FEM(Foreign Exchange Derivative Contracts)Regulations 2000
• FEM(Insurance)Regulations 2000

MISCELLANEOUS

• FEM(Borrowing or Lending in Foreign Exchange) Regulations 2000
• FEM(Deposit)Regulations 2000
• FEM(Export& Import of Currency) Regulations 2000
• FEM (Realization, repatriation and surrender of foreign exchange) Regulations, 2000
• Foreign Exchange Management (Possession and retention of foreign currency) Regulations, 2000
• FEM(Permissible Capital Account Transaction)Regulations 2000
• Foreign Exchange Management (Remittance of Assets) Regulations, 2000
• FEM(Borrowing and Lending in Rupees)Regulations 2000
• FEM (Foreign Currency Accounts by a person resident in India)regulations 2000
• FEM (Manner of Receipt & Payment)Regulations 2000