Foreign Exchange Management Act 1999

Last updated: December 2020 | 5 min read

Introduction of the Act

The Foreign Exchange Management Act, 1999 (FEMA) has been in force from 2000, thus replacing the old Foreign Exchange Regulation Act (FERA) 1973.

Objective of the Act

The main objective of FERA was conservation and proper utilization of the foreign exchange resources of the country. It also sought to control certain aspects of the conduct of business outside the country by Indian companies and in India by foreign companies.When a business enterprise imports goods from other countries, exports its products to them or makes investments abroad, it deals in foreign exchange. Foreign exchange means 'foreign currency' and includes deposits, credits and balances payable in any foreign currency and secondly drafts, travelers, cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency.

Purpose of the Act

The preamble to FEMA lays down the purpose of the Act is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.Rationale for strict regulations under FERA 1973. After Independence India was left with little forex reserves and during the oil Crisis of seventies ballooning oil import bills further drained foreign exchange reserves.

Broadly, the objectives of FEMA are to facilitate external trade and payments and to promote the orderly development and maintenance of foreign exchange market. The Act has assigned an important role to the Reserve Bank of India (RBI) in the administration of FEMA. The rules, regulations and norms pertaining to several sections of the Act are laid down by the Reserve Bank of India, in consultation with the Central Government. The Act requires the Central Government to appoint as many officers of the Central Government as Adjudicating Authorities for holding inquiries pertaining to contravention of the Act. There is also a provision for appointing one or more Special Directors (Appeals) to hear appeals against the order of the Adjudicating authorities. The Central Government also establishes an Appellate Tribunal for Foreign Exchange to hear appeals against the orders of the Adjudicating Authorities and the Special Director (Appeals). The FEMA provides for the establishment, by the Central Government, of a Director of Enforcement with a Director and such other officers or class of officers as it thinks fit for taking up for investigation of the contraventions under this Act.

Benefits of the Act

FERA was to control everything that was specified, relating to foreign exchange whereas FEMA lay down that ‘everything other than what is expressly covered is not controlled'. The overriding objective of FERA was to regulate and minimize dealings in foreign exchange and foreign securities while FEMA on the other hand aims to aid in creation of a liberal foreign exchange market in India.

This difference in terminology reflects seriousness of government towards deregulation of foreign exchange and promotion of free flow of international trade. To facilitate external trade is concerned; section 5 of the Act removes restrictions on withdrawal of foreign exchange for the purpose of current account transactions. As external trade i.e. imports / export of goods & services involve transactions on current account, there is no need for seeking RBI permissions in connection with remittances involving external trade.

The difference between the title, FERA AND FEMA of legislation

In view of this change, the title of the legislation has rightly been changed from ‘Foreign Exchange Regulation Act' to ‘Foreign Exchange Management Act'.The main change that has been brought is that FEMA is a civil law, whereas the FERA was a criminal law. In simple word, for contravention of provisions under the FEMA arrest and imprisonment would not be resorted whereas it was the norm under the previous act. Drastic tenor of FERA can be gauged from the fact that it provided for imprisonment for violation of even very minor offenses.

FEMA is applicable to all parts of India. The act is also applicable to all branches, offices and agencies outside India owned or controlled by a person who is a resident of India. The FEMA head-office, also known as Enforcement Directorate is situated in New Delhi and is headed by a Director. Foreign Exchange Act is very important for India for it to be a proper trading and keeps a healthy relation with the outside world as well.


FEMA permits only authorized person to deal in foreign exchange or foreign security. Such an authorized person, under the Act, means authorizeddealer, money changer, off-shore banking unit or any other person for the time being authorized by Reserve Bank. The Act thus prohibits any person who deal in or transfer any foreign exchange or foreign security to any person not being an authorized person. Make any payment to or for the credit of any person resident outside India in any manner. Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner.

Enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person is resident in India which acquires, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

Full text of "Foreign Exchange Management Act 1999" available here

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