Foreign Exchange Management Act

Introduction
The Foreign Exchange Management Act, 1999 (FEMA) replaces
the Foreign Exchange Regulation Act (FERA). FERA was
introduced in 1974 to consolidate and amend the then existing
law relating to foreign exchange. FERA was amended in 1993 to
bring about certain changes, as a result of introduction of
economic reforms and liberalization of Indian Economy. But it
was soon realized that FERA had by and large outlived its utility
in the changed economic scenario and therefore replaced by
FEMA in 1999.
Meaning
FEMA was introduced by the Finance Minister in Lok Sabha on
August 4, 1998. The Bill aims 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 India. It was adopted by the parliament in 1999 and is
known as the Foreign Exchange Management Act, 1999. This
Act extends to the whole of India and shall also apply to all
branches, offices and agencies outside India owned or by a
person resident in India.
Objectives and Reasons for enactment of FEMA
FEMA was enacted 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 (Preamble).
The statement of objects and reasons set the tone of the
enactment of new legislation:
i. The Foreign Exchange Regulation Act, 1973, was reviewed in
1993 and severalamendments were enacted as part of the
ongoing process of economic liberalization relating to foreign

investments and foreign trade for closer interaction with the

world economy.
ii. Significant developments have been taking place since 1993
such as substantial increase in foreign exchange reserves,
growth in foreign trade, rationalization of tariffs, current account
convertibility, liberalization of Indian investments abroad,
increased access to external borrowings by Indian corporate and
participation of Foreign investors in the stock markets.
Accordingly, a bill to repeal and replace Foreign Exchange
Regulation Act, 1973 was introduced Lok Sabha on 04.08.1998.
On reference to the standing committee modifications and
suggestions were submitted by the standing committee in its
report. After incorporating modifications and suggestions of the
standing committee, the central government decided to
introduce the new law, the Foreign Exchange Management Bill
and repeal the Foreign Exchange Regulation Act, 1973
Salient Features of FEMA
FEMA extends to whole of India. It shall also apply to all
branches, offices and agencies outside India, owned or
controlled by a person resident in India and also to any
contravention there under committed outside India by any
person to whom the Act applies. Therefore joint ventures or
wholly owned subsidiaries, though outside India, but controlled
from India are intended to be covered by the Act. The new Act is
meant to be user friendly with the object to facilitate external
trade and payments for promoting the orderly development of
foreign exchange in India.
Under the new law, the emphasis for determining the residential
status is on the actual period of stay in India, whereas under
FEMA, the emphasis was on the intention of the person. Under
the new law, it is not necessary that the person should be
continuously and physically present in India. It will be sufficient
the total of stay in India is 182 days or more during the year.
The central government may from time to time give general or
special directions to the Reserve Bank and Reserve Bank shall
2

comply with such directions. The central government may by

notification make rules to carry out the provisions of the Act.
The Reserve Bank may by notification make regulation to carry
out the provisions of the Act and rules there under. Every rule
and regulation made under the Act shall as soon as after it is
made, be laid before each house of parliament. If any difficulty
arises in giving effect ti the provisions of the Act, the central
government may by order, do anything not inconsistent with
the provisions if the Act for the purpose of removing the
difficulty.
Suspension of operation of FEMA
If the central government is satisfied that circumstances have
arisen rendering it necessary that any permission granted or
restriction imposed by the Act should cease to be granted or
imposed or if it considers necessary in public interest, the
central government may by notification, suspend or relax to
such extent either indefinitely or for such period as notified, the
operation of all or any of the provisions of the Act.
Bar of legal proceedings
No suit, prosecution or other legal proceedings shall lie against
the central government or the Reserve Bank or any officer of
the government or of the Reserve Bank or any person exercising
any power or discharging any functions or performing any
duties under the Act for anything done in good faith or extended
to be done under the Act or rule, regulation, notification,
direction or order made there under.
Repeal, Savings and Cognizance of offences
With the enactment of FEMA, FERA stands repealed and
appellate board constituted under FERA shall stand dissolved.
No court and adjudicating officer shall take cognizance or notice
of an offence or any contravention under FEMA after the expiry
of two years period from 1.6.2000. However, while FERA was in
force all offences committed under FERA shall continue to be
governed by FERA as if FERA had not been repealed. Any appeal
preferred to the Appellate Board under FERA but not disposed
off before the commencement of FEMA shall stand transferred
3

and shall be disposed off by the Appellate Tribunal constituted

under FEMA. FEMA is for regulation and management of foreign
exchange through authorized person and provides for penalty
for contravention of the provisions. The object is for promoting
orderly development and maintenance of foreign exchange
market in India.
Scope
Applicability of the Act
The act extends to the whole of India. Also, it applies to all the
branches, offices and agencies outside agencies outside India
owned or controlled by a person resident in India and also to
any contravention there under committed outside India by
person to whom this act appeals. The act has come into force
with effect from June 1, 2000.
Definitions: Section 2 defines certain terms used in the
act.
1. Authorized person: It means an authorized dealer, money
changer, offshore banking unit or any other person for the time
being authorized under the Act to deal in foreign exchange and
foreign securities.
2. Capital account transactions: It means a transaction
which alters the assets or liabilities, including contingent
liabilities, outside India or assets or liabilities in India of persons
resident outside India and includes transactions referred to in
sec 6.(3).
3. Currency: This expression includes all currency notes, postal
notes, postal orders, money orders, cheques, drafts, travelers,
letters of credit, bills of exchange and promissory notes, credit
cards, or such other similar as may be notified by the reserve
bank. Vide Notification No. FEMA15/2000/RB dated May 3,2000 ,
RBI has notified debit card, ATM, cards or any other
instruments by whatever name called that can be used to
create a financial liability, as currency.

4. Currency Notes: It means and includes cash in the form of

coins and bank notes.
5. Currency Account Transactions: it means a transaction,
other than a capital account transaction, and without prejudice
to generality of the foregoing, such transactions include
6. Export: Export with its grammatical variations and cognate
expressions, means
I. The taking out of India to a place outside India any goods,
II. Provision of services from india to any person outside India.
7. Foreign currency: It means any currency other than Indian
currency.
8. Foreign Exchange: It means foreign currency and
includesDrafts, travelers cheques, letters of credit or bills of
exchange expressed or drawn in Indian currency but payable in
any foreign currency.
9. Foreign Security: The expression means any security in the
form of shares, stocks, bonds, debentures or any other
instrument denominated or expressed in foreign currency and
includes securities expressed in foreign currency but where
redemption or any form of return such as interest or dividend is
payable in Indian currency.
REGULATIONS
AND
MANAGEMENT
EXCHANGE (chapter II, Sec 3 to 9)

OF

FOREIGN

Dealings in foreign exchange (Sec 3): Prohibition of

dealings in foreign exchange. Save as otherwise provided in the
act, rules or regulations made thereunder, or with the general
or special permission of the Reserve Bank, no person shall
a) Deal in or transfer any foreign exchange or foreign security to
any person not being an authorized person.
b) Make any payment to or for the credit of any person resident
outside India in any manner

c) Receive otherwise through an authorized person, any

payment by order or on behalf of any person resident outside
India in any manner.
d) Enter into any financial transaction in India as consideration
for or transfer of a right to acquire any assets outside India by
any person.
Holding of foreign exchange (Sec 4)
Save as otherwise provided in this act, no person resident in
india shall acquire, own, hold , possess or transfer any foreign
exchange , foreign exchange or any immovable property
situated outside India.
Current account transaction (Sec 5)
Any person my sell or draw foreign exchange to or from an
authorized person if such sale or drawl is a current account
transaction. However the central government may, in public
interest and in consultation, with the Reserve Bank impose such
reasonable restriction for current account transaction as may be
prescribed.
Capital account transaction (Sec 6)
Foreign exchange transaction through authorized person. Any
person may sell or draw foreign exchange to or from an
authorized person from a capital account transaction.
Prohibition of certain transactions
The reserve bank may by regulations, prohibit, restrict or
regulate the following
a) Transfer or Issue of any foreign security by a person resident
in India
b) Transfer or Issue of any security by a person resident outside
India
c) Transfer or Issue of any security or foreign security by any
branch, office or agency in India of a person resident outside
India.
6

d) Any borrowing or lending in foreign exchange in whatever

form or by whatever name called
e) Any borrowing or lending in Rupees in whatever form or by
whatever name called between person resident in India and a
person resident outside India
f) Deposits between persons resident in India and persons
resident outside India
g) Export , Import or holding of currency or currency notes
h) Transfer of immovable property outside India, other than a
lease not exceeding 5 years by a person resident in India.
i) Acquisition or Transfer of immovable property in India other
than lease not exceeding 5 years by a person resident in India
j) Giving of guarantee or surety in respect of any debt,
obligation or liability incurred::
I) By a person resident in India and owed to a person resident
outside India
II) By a person resident outside India

Penalty for contravention

Where any authorized person contravenes any direction given
by the Reserve Bank under this Act or fails to file any return as
directed by the Reserve Bank, the Reserve Bank may impose on
the authorized person a penalty which may extend to Rs
10,000. In the case of continuing contravention, the Reserve
Bank may impose an additional penalty which may extend to Rs
2000, for every day during which such contravention continues.
However, before imposing the penalty, the Reserve Bank shall
give reasonable opportunity of being heard to the authorized
person.
7

Power of Reserve Bank to inspect authorized person

Inspection
The Reserve bank may, at any time, cause an inspection to be
made, of the business of any authorized person as may appear
to it to be necessary or expedient for the purpose of
a) Verifying the correctness of any statement, information or
particulars furnished to the Reserve bank.
b) Obtaining any information or particulars which such
authorized person has failed to furnish on being called upon to
do so.
c) Securing compliance with the provisions of this Act or of any
rules, regulations, directions or orders made there under.
The inspection shall be made by any officer of the Reserve Bank
specially authorized in writing by the Reserve Bank in this
behalf.
Production of books, accounts and documents
It shall be the duty of every authorized person to produce to any
officer making an inspection, such books, accounts and other
documents in his custody or power and to furnish any statement
or information relating to the affairs of such person, as the said
officer may require within such time and in such manner as the
said officer may direct. Where the authorized person is a
company or a firm, this duty is cast upon every director, partner
or other officer of such company or firms, as the case may be.

CONTRAVENTION AND PENALTIES ( Chapter IV, Secs 13 to

15)
Contravention. The following contraventions by any person
are liable to a penalty, i.e., contravention ofa) Any provision of this act, or
b) Any rule, regulation, notification, direction or order issued in
exercise of the powers under this act, or
8

c) Any condition subject to which an authorization is issued by

the Reserve Bank.
The penalty shall be levied upon adjudication(i.e., after hearing
and determining judicially by the Adjudicating Authority).
Amount of penalty: where the amount is quantifiable, the
penalty can be up to thrice the sum involved in the
contravention. Where the amount is not quantifiable, the
penalty may be upto Rs. 2,00,000. Where contravention is a
continuing one, further penalty which may extend to Rs. 5000
may be levied for every day after the first day during which the
contravention continues.

Enforcement of the orders of Adjudicating Authority

Civil imprisonment: If a person fails to make full payment of the
penalty imposed on him within a period of 90 days from the
date on which the notice for payment of such penalty is served
on him, he shall be liable to civil imprisonment.
Notice, No order for the arrest and detention in civil prison of a
defaulter shall be made unless the adjudicating authority has
issued and served a notice upon the defaulter. The notice shall
call upon him to appear before the Adjudicating Authority on the
date specified in the notice. It shall call upon him to show cause
why he should not be committed to the civil prison, unless the
adjudicating authority, is satisfied.
a) That the defaulter, with the object or effect of obstructing the
recovery of penalty, has after the issue of notice by the
Adjudicating Authority, dishonestly transferred, concealed or
removed any part of his property, or,
b) That the defaulter has, or has had since the issuing of notice
by the Adjudicating Authority, the means to pay the arrears and
refuses or neglects or has refused or neglected to pay the
same.
Warrant for arrest: A warrant for the arrest of the defaulter may
be issued by the Adjudicating Authority if he is satisfied, by
9

affidavit or otherwise that with the object or effect of delaying

the execution of the certificate, the defaulter is likely to abscond
or leave the local limits of its jurisdiction.[sec, 14.(3)].
The Adjudicating Authority may also issue a warrant for the
arrest of the defaulter, where appearance is not made pursuant
to a notice issued and served[sec, 14(4)]. A warrant of arrest
issued by the Adjudicating Authority may also be executed by
any other Adjudicating Authority within whose jurisdiction the
defaulter may for the time being be found[sec, 14(5)].
A person arrested in pursuance of a warrant of arrest shall be
brought before the Adjudicating Authority issuing the warrant as
soon as practicable and in every event within 24hours of his
arrest. If the defaulter pays the amount entered in the warrant
of arrest as due and the costs of the arrest to the officer
arresting him, such officer shall at once release him.

Power to compound contravention (Sec 15)

Any contravention under Sec. 13 may, on an application made
by the person committing such contravention, be compounded
within 180 days from the date of receipt of application by the
Director of Enforcement and officers of the Reserve Bank as
may be authorized in this behalf by the Central
Government[ Sec 15 (1)]. Where a contravention has been
compounded, no proceeding shall be initiated or continued
against the person committing such contravention in respect of
the contravention so compounded [sec 15(2)].
Adjudicating Authority (Sec. 16)
Appointment. For the purpose of adjudication, the Central
Government may appoint officers of the Central Government as
the Adjudicating Authorities. The appointment shall be made by
an order published in the official Gazette, for holding an enquiry
in the manner prescribed after giving the person alleged to
have committed contravention, against whom a complaint has
been made
Appeal to Special Director (Appeals) (Sec. 17)
10

Appointment. The central government shall, by notification,

appoint one or more Special Directors (Appeals) to hear appeals
against the orders of the Adjudicating Authorities. It should also
specify in the said notification the matter and places in relation
to which the Director (Appeals) may exercise jurisdiction [Sec.
17(1)].
Appeal. Any person aggrieved by an order made by the
Adjudicating Authority (being an Assistant Director of
Enforcement or a Deputy Director of Enforcement) may prefer
an appeal to the special Director (Appeals) [Sec. 17(2)]. The
appeal shall be filed within 45 days from the date on which the
copy of the order made by the Adjudicating Authority is
received [Sec. 17(3)].
Establishment of Appellate Tribunal (Sec. 18)
The Central Government shall, by notification, establish an
Appellate Tribunal to be known as the Appellate Tribunal for the
Foreign Exchange to hear appeals against the orders of the
adjudicating authorities and the Special Director (Appeals)
under this Act.
Appeal to Appellate Tribunal (Sec. 19)
The Central Government or any person aggrieved by an order
made by an Adjudicating Authority or the Special Director
(Appeals) may prefer an appeal to the Appellate Tribunal. The
person appealing against the order of the Adjudicating Authority
or the Special Director (Appeals) levying any penalty, shall while
filing the appeal, deposit the amount of such penalty with such
authority as may be notified by the Central Government. Where
in any particular case, the Appellate tribunal is of a opinion that
the deposit of such penalty would cause undue hardship to such
person, it may dispense with such deposit [Sec. 19(1)].
Appeal to b filed within 45 days. Every appeal under Sec. 19(1)
shall be filed within a period of 45 days from the date on which
a copy of the order made by the Adjudicating Authority or the
Special Director (Appeals) is received by the aggrieved person
or by the Central Government.
11

Qualifications for appointment (Sec. 21)

Qualification of Chairperson and member. A person shall not be
qualified for appointment as the Chairperson or a Member
unless hea) In the case of Chairperson, is or has been, or is qualified to
be, a judge of a High Court, and
b) In the case of the Member, is or has been, or is qualified to
be, a District Judge [Sec.21 (1)].
Qualification of Special Director (Appeals). A person shall not be
qualified for appointment as a Special Director (Appeals) unless
hea) Has been a member of the Indian Legal Service and has held
a post in Grade I of that service, or
b) Has been a Member of the Indian Revenue Service and has
held a post equivalent to a Joint Secretary to the Government of
India [Sec. 21(2)].
Term of office, Conditions of service, vacancies, etc. (Sec.
22 to 25)
Term of Office (Sec.22). The Chairperson and every other
Member shall hold office as such for a term of 5 years from the
date on which he enters upon his office. Further the chairperson
or other member shall not hold office as such after he has
attaineda) In the case of the Chairperson, the age of 65 years;
b) In the case of any other Member, the age of 62 years.
Terms and Conditions of Service (Sec.23). The salary and
allowances payable to and the other terms and conditions of
service of Chairpersons, other Member and the Special Director
(Appeals) shall be such as may be prescribed. Further, these
terms and conditions shall not be varied to his disadvantage
after appointment.

12

Vacancies (Sec. 24). If any vacancy occurs in the office of the

Chairperson or a Member, the Central Government shall appoint
another person to fill the vacancy. Thereafter, the proceedings
may be continued before the Appellate tribunal from the stage
at which the vacancy is filled.
Right of appellate to take assistance (Sec.32)
Assistance of a legal practitioner or a chartered accountant. A
person preferring an appeal to the Appellate tribunal or the
special Director (Appeals) may either appear in person or take
the assistance of a legal practitioner or a chartered accountant
of his choice to present his case before the Appellate tribunal or
the Special Director (Appeals), as the case may be [Sec. 32(1)].
Authorization by Central Government. The Central Government
may authorize one or more legal practitioners or chartered
accountants or any of its officers to act as presenting officers.
The person so authorized may present the case with respect to
any appeal before the Appellate Tribunal or the Special Director
(Appeals) [Sec. 32 (2)].
Appeal to High Court (Sec. 35)
Any person aggrieved by any decision or order of the Appellate
tribunal may file an appeal to the High Court within 60 days
from the date of communication of the decision or order of the
Appellate tribunal on any question of law arising out of such
order. The High Court may, if it is satisfied that the appellant
was prevented by sufficient cause from filing the appeal within
60 days, allow it to be filed within a further period not
exceeding 60 days.
DIRECTORATE OF ENFORCEMENT ( Chapter VI, Secs, 36
to 38)
Directorate of Enforcement (Sec.36)
Establishment: The Central Government shall establish a
Directorate of Enforcement with a Director and such other
officers or class of officers as it thinks fit, for the purposes of

13

this Act[ Sec. 36(1)]. These officers shall be called Officers of

Enforcement.
Power of search, seizure, etc. (Sec. 37)
Investigation: The Director of Enforcement and other officers of
Enforcement, not below the rank of an Assistant Director, shall
take up for investigation the contravention referred in
Sec.13[ Sec. 37(1)]. The Central Government may also, by
notification, authorize any officer or class of officers in the
Central Government, State Government or the Reserve Bank,
not below the rank of an Under Secretary to the Government of
India, to investigate any contravention referred to in sec. 13
[Sec. 37 (2)].
Exercise of powers: The officers referred toin Sec. 37(1) shall
exercise the like powers which are continued on income-tax
authorities under the Income Tax Act, 1961 and shall exercise
the like powers, subject to limitations laid down under that
Act[ Sec. 37(3)].

14