FEMA - Foreign Exchange Management Act | Know Objectives & Salient Features of FEMA Act 1999!

FEMA full form is Foreign Exchange Management Act. It is an act to consolidate and amend the law relating to foreign exchange. The objective of the FEMA Act is to facilitate external trade and payments and promote the orderly development and maintenance of the foreign exchange market in India.

Foreign Exchange Management Act (FEMA) is one of the most important topics for the UPSC IAS exam. It covers a significant part of the Economy subject in the General Studies Paper-3 syllabus and current events of national importance in UPSC prelims.

In this article, we shall study in detail the objectives, salient features, structure, penalties, and amendments of FERA.

FEMA – Foreign Exchange Management Act | Know Objectives & Salient Features of FEMA Act 1999:Download PDF here!

Foreign Exchange Management Act

FEMA, or the Foreign Exchange Management Act, is responsible for managing and regulating foreign exchange. Let’s discuss the history, establishment, and controlling authority/ministry related to FEMA.

History

• FEMA (Foreign Exchange Management Act) was introduced in 1999 and replaced an earlier act FERA (Foreign Exchange Regulation Act).
• The Foreign Exchange Management Bill, first proposed in 1998 and eventually passed on June 1, 2000, was created to facilitate foreign trade in India.
• This Act was passed by the government to promote overseas trade and external payments in India.
• It complies with the World Trade Organization’s guidelines (WTO). This Act took the role of the Foreign Exchange Regulation Act (FERA) in 1999 because of its restricted nature, which made it incompatible with post-liberalization policies. Instead of regulating the foreign exchange market, it managed it.
• In the context of the liberalization of foreign commerce, foreign investment, and foreign exchange markets in the early 1990s, the provisions of FERA had become obsolete.
• The FERA rules were very stringent and it made it more difficult for the Indian economy to become more globally integrated.
• FEMA was created largely to make efficient use of resources related to foreign exchange. It also had a significant impact on the Indian economy.

Study in detail about WTO and India for UPSC preparation!

Foreign Exchange Management Act: Objectives

FEMA was established in India to facilitate external trade and payments. Some of the other important objectives of FEMA are listed below.

• FEMA was also formulated in order to support the orderly growth and maintain the Indian Forex market.
• The processes and procedures for all foreign exchange transactions in India are outlined by FEMA.
  • Both capital account transactions and current account transactions have been included in the classification of these foreign exchange transactions.
• According to the FEMA Act, the balance of payment is a record of transactions involving goods, services, and assets between citizens of various nations. The balance of payment is divided into two main categories: Capital Account and Current Account.

Foreign Exchange Management Act: Salient Feature

Some of the important salient features of the Foreign Exchange Management Act are listed below.

• Division of foreign exchange dealings into two groups: capital account and current account dealings.
• It gives the Reserve Bank the authority to define the categories of capital account transactions and the exchange restrictions that apply to such transactions, in consultation with the central government.
• It offers provisions for the gradual liberalization of capital account transactions and is consistent with full current account convertibility.
• As it specifies the regions requiring certain authorization from the Reserve Bank/Government of India on the acquisition/holding of foreign exchange, it is more clear in its application.
• A person living in India who had previously resided outside the country is given complete freedom to own, possess, and transfer any foreign securities or real estate obtained while residing outside of India.
• Citizens of India who live outside of India are not covered by FEMA.
• Since this is a civil statute, only extreme circumstances allow for arrest for violations of the Act.

Foreign Exchange Management Act: Applicability

The Foreign Exchange Management Act (FEMA) is applicable to all of India as well as to organizations and offices abroad (which are owned or managed by an Indian Citizen). The head office of FEMA known as the Enforcement Directorate is located in New Delhi.

The applicability of FEMA includes

• Foreign exchange.
• Foreign security.
• Exportation of any commodity and/or service from India to a country outside India.
• Importation of any commodity and/or services from outside India.
• Securities as defined under the Public Debt Act 1994.
• Purchase, sale, and exchange of any kind (i.e. Transfer).
• Banking, financial, and insurance services.
• Any overseas company owned by an NRI (Non-Resident Indian) and the owner is 60% or more.
• Any citizen of India, residing in the country or outside (NRI).

The Current Account transactions under the FEMA Act have been categorized into three parts:

1. Transactions that are prohibited by FEMA.
2. The transaction requires the permission of the Central Government.
3. The transaction requires the permission of RBI.

Categories of Authorised Persons under FEMA

The authorized individuals have been divided into four different categories by FEMA. Each category includes a certain group of people who have been granted authorization by FEMA regulations. The categories of authorized persons under FEMA are listed in the table below.

Foreign Exchange Management Act: Structure

• It has five zonal offices, each of which is led by a Deputy Director, and they are situated in Delhi, Chennai, Kolkata, Mumbai, and Jalandhar.
• Each of the five zones is further divided into five field units, each of which is led by a Chief Enforcement Officer, and seven sub-zonal offices, each of which is headed by an Assistant Director.

Foreign Exchange Management Act: Penalties

• If anybody violates any of the provisions of the FEMA, rules, orders, regulations, or directions.
  • The fine for such violation plus three times the amount specified in the Act, if the violation is quantifiable, or up to two lakh rupees, if it cannot be quantified or ascertained, shall be due by the offender. Additionally, if such a breach is persistent, the penalty will be increased to 5,000 rupees daily.
• Any adjudicating authority that adjudicates a violation may, in addition to imposing a penalty, order the party responsible for the violation to turn over any currency, property, securities, or money in relation to which the violation occurred to the Central Government.
  • He may also order this if the person violating the law has any foreign currency holdings.
• Any individual who does not pay the entire amount of the penalty they have been given within ninety days of receiving the notice that they must do so will be subject to civil imprisonment.

FEMA Amendment Rules, 2021

• The Foreign Exchange Management (FEMA) rules were amended by the Finance Ministry in October 2021, increasing the cap on foreign direct investment (FDI) in the insurance sector to 74 percent.
• Government notification of the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021 was made in May 2021.
• According to the Foreign Exchange Management (non-debt instruments) (second amendment) Rules, insurers with foreign ownership above 51% and those who distribute profits to shareholders but fall short of the 180% margin requirement must set away 50% of their net profits in a general reserve.
• The Parliament approved increasing the FDI limit in insurance from the current 49 percent to 74 percent in the Budget 2021–22.
• Companies would need to have a minimum of 50% independent directors on the board, unless the chairwoman of the board is the company’s own self, in order to increase FDI to a level of 74%.
• The majority of directors and other key management personnel for foreign-owned insurance companies must also be Indian residents.

Functions of RBI under FEMA

The Reserve Bank of India is expected to have a significant role in the management of foreign exchange in India, according to the FEMA act. These are some of its key functions:

• Monitoring and regulation of foreign exchange transactions by granting firms either broad or specialised authority.
• The RBI is not allowed to place limitations on current account transactions. Only the Central Government, in consultation with the RBI, has the authority to impose these limitations legally.
• RBI’s prior clearance must be obtained before carrying out a transaction from their current account. When it comes to capital accounts, the RBI is also in charge of defining the terms of payment.
• Special authorities by RBI to transfer of immovable securities, the issuance of foreign securities, import/export, borrowing or lending of foreign securities,

Foreign Exchange Management Act: Amendments from FERA

• Under the Foreign Exchange Management Act, the focus is on “exchange management,” as opposed to the Foreign Exchange Regulation Act’s emphasis on “exchange regulation” or “exchange control.”
• In order to comply with many of the provisions of the Foreign Exchange Regulation Act, clearance from the Reserve Bank of India was required.
  • With the exception of Section 3, which deals with trading in foreign exchange, etc., no regulation of the Foreign Exchange Management Act requires obtaining the Reserve Bank’s authorization.
  • This is a substantial change. Additionally, all criminal offences became civil offences under the Foreign Exchange Management Act.

• In contrast to the Foreign Exchange Management Act, which aims to make foreign exchange-related offences civil in nature, the Foreign Exchange Regulation Act primarily dealt with criminal offences punishable by imprisonment.

To study in detail visit the article on the Difference between FERA and FEMA with this link!

Foreign Exchange Management Act & Prevention of Money Laundering Act

Prevention of Money Laundering Act was passed by the NDA government in 2002 to prevent money laundering and confiscate property derived from the laundered money and any other matters connected with it.

Conclusion

FEMA oversees business ventures and operations. FEMA is also in charge of overseeing the norms and regulations set forth by RBI. For the free flow of foreign exchange in India, it regulates these services. Therefore, if it belongs to a person who is an Indian resident, FEMA’s applicability can be extended to branches of other nations. Unauthorized individuals cannot deal with foreign exchange, which is FEMA’s expertise and key feature.

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