GK Chronicle GK Chronicle

Indian Economy / External Sector

Salient Features of Foreign Exchange Management Act

The Foreign Exchange Management Act (FEMA), 1999 is an Act which came into force on 1st June, 2000 replacing the earlier Foreign Exchange Regulation Act (FERA). As FERA had provisions which resulted in constricting the growth of foreign exchange (forex) and in turn was affecting the economy as a whole, to support the pro-liberalization policies, FEMA became the need of the hour for Government of India.

The main objectives of FEMA are to solidify the law relating to foreign exchange with an intention to facilitate exports, imports and payments and to promote the development and maintenance of the foreign exchange market in an orderly manner in India.

Important Features of FEMA

  • One of the important features of FEMA Act, 1999 is that FEMA is applicable to any person, who is 'Resident' in India. Even if that person is not an Indian citizen, he will be covered under FEMA for any foreign exchange transaction.

    But, FEMA is not applicable to Indian citizens who are resident outside India. Under this Act, a person will be Resident if he has been residing for more than 182 days inside India.

  • The offences committed under FEMA are considered as civil offences unlike FERA, which treated the offences as criminal. Only in exceptional cases, FEMA provides for arrest of the offender.

  • It is very lucid in its application as it clearly mentions the areas requiring special permissions of the Reserve Bank of India or Government of India for acquiring or holding the forex.

    Only 'Authorized Entities' can deal with foreign exchange and all the transactions should have to be routed through these authorized entities. Authorized entities have to strictly follow RBI guidelines to keep their licenses intact.

  • It segregates the foreign exchange transactions into two types, namely capital account and current account transactions.

    FEMA contains provisions for the progressive liberalization in case of capital account transactions and in case of current account transactions, it is fully consistent with current account convertibility.

    RBI has the power in specifying the classes of transactions related to capital account and limits that are admissible for such transactions.

  • Capital Account transactions are those which can alter the liabilities and assets of a person like lending or borrowing of loans, buying or selling of foreign securities, sale or purchase of the immovable properties, etc. and all happening across national boundaries.

  • Current Account transactions are mostly personal in nature like foreign travel, expenses related to medical treatment abroad, remittances, expenses for foreign studies, etc.

  • The Foreign Exchange Management Act gives full freedom to a person who is currently resident in India but who was earlier a resident outside India, to own or transfer any immovable property or foreign security that is situated outside India but acquired when he was resident outside.