Introduction to FEMA

Group Members:
P. Vijay
Rahul
Rupesh
Sameera
Spurti
Vijay Singh
 INTRODUCTION
The Foreign Exchange Management Act, 1999
(FEMA) came into force with effect from June 1,
2000.
With the introduction of the new Act in place of
FERA, certain structural changes were brought in.
The Act consolidates and amends the law relating
to foreign exchange to facilitate external trade and
payments, and to promote the orderly development
and maintenance of foreign exchange in India.
(1) This Act may be called the Foreign Exchange
Management Act, 1999.
(2) It extends to the whole of India.
(3) 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 this Act applies.
(4) It shall come into force on such date as the
Central Government may, by notification in the
Official Gazette, appoint:
 FERA vs. FEMA
 Preamble of FERA:

 An act to consolidate and amend the law regulating certain

payments, dealings in foreign exchanges and securities.
 Transactions affecting foreign exchange and import and export
of currency for the conservation of the foreign exchange
resources of the country.

 In simple terms:

 It is amended to regulate the ebb and flow of foreign exchange

in and out of the country, in the interest of the economic
development of the country.
 Preamble of FEMA:

 An act:
I. To consolidate and amend the law relating to foreign
exchange.
II. With the objective of facilitating external trade and
payments.
III. For promoting the orderly development and maintenance of
foreign exchange market in India.

From the preamble of both the acts the objectives are obviously
different.
 FEMA FERA
I. Amended. in 1999. I. Amended in 1973.
II. Regulates & manages II. It controls foreign
foreign exchange. exchange.
III. All current account III. Almost all foreign
transactions are exchange transactions are
permissible by law. prohibited unless under a
specific or general
permission.
IV. Civil law. IV. Criminal law.
V. It is the duty of V. It is the duty of the accused
enforcement authority to to prove his innocence
prove a that a person has
committed an offense.
 FEMA FERA

VI. Burden of proof is on the VI. Burden of proof is on the

enforcement agency. implicated person.
VII. Offences are compounded VII. Offenses are not
by paying penalty. compounded.
VIII. Elaborate redressal VIII. No elaborate procedure is
procedure is available for available for the implied
the implicated person for person to prove his
fair and total justice while innocence.
settling the question of
contravention. governed by the notifications
IX. Both FEMA & FERA were Reserve Bank of India for
Issued by the Central Govt /
granting general permission.
X. FEMA enumerates all the areas where special permission of the
Reserve Bank of India / Central Government is required.
This is not in of case FERA.

 Applicability of the Law:

 The act extends to the whole of India.

 It applies to all branches, offices and agencies outside India
owned or controlled by a person resident in India.
 The act has come into force with effect from June 1st 2000.
 Definition under Sec 2 of this Act
 Authorized Person:
Authorized dealer, money changer, offshore banking unit or any
other person for the time being authorized under the Act to deal in
foreign exchange or foreign securities.

 Capital Account Transaction:

Transaction that alters the assets or liabilities outside India or

assets or liabilities in India of persons resident outside India.
 Currency:
All currency notes, postal notes, postal orders, money orders,
cheques, letters of credit, bill of exchange and promissory notes or
such other similar instruments are recognized as currency by RBI.
RBI has notified debit cards, ATM cards or any other instrument
that can be used to create a financial liability as “currency”.
 Foreign Exchange: Foreign currency which includes …..

I. Deposits, credits and bills of balances payable in any foreign

currency.
II. Drafts, traveller’s cheques, letters of credit letters of credit of
bills of exchange expressed or drawn in Indian currency but
payable in any foreign currency.
III. Drafts, traveller’s cheques, letters of credit or bills of exchange
drawn by banks, institutions or persons outside India, but
payable in Indian currency.
 Foreign Security:

 Any security in form of shares, stocks, bonds, debentures or any

other instrument denominated of expressed in foreign currency.
 But redemption or any form of return such as interest or
dividend is payable in Indian currency.
 Person resident in India:

I. A person residing in India for more than 182 days during the
course of the preceding Financial year.
II. Any person or corporate registered or incorporated in India.
III. An office, branch or agency in India owned or controlled by a
person resident outside India.

IV. An office, branch or agency outside India owned or controlled

by a person resident in India.
 Repatriate to India:

Bringing into India the realized foreign exchange.

I. The selling of realized foreign exchange to an authorized
person in India in exchange for rupees or
II. Holding the realized amount in an a/c with an authorized
person in India notified by RBI.

This realized foreign exchange can be used for discharge of a debt

or liability denominated in foreign exchange.
 Overseas Corporate Body (OBC):

A company, partnership firm, society and other corporate body

owned directly or indirectly to the extent of at least 60% by non-
resident Indians.
Convertible currency / Hard currency:
Certain currencies are freely convertible i.e. one can exchange
these currencies with any other currencies without any restriction.
Major among these are: Dollars, Pound Sterling, Euro, Yen etc.

This is often called as ‘hard currency’.

 Dealing in foreign exchange:
Except as otherwise provided in this Act, rules or regulations
made there under, 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.
• For the purpose of this clause, where any person in, or resident in,
India receives any payment by order or on behalf of any person
resident outside India through any other person (including an
authorized person) without a corresponding inward remittance from
any place outside India, then, such person shall be deemed to have
received such payment otherwise than through an authorized person;

• (d) 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.

• Explanation.-For the purpose of this clause, "financial transaction"

means making any payment to, or for the credit of any person, or
receiving any payment for, by order or on behalf of any person, or
drawing, issuing or negotiating any bill of exchange or promissory
note, or transferring any security or acknowledging any debt.
 HOLDAINGS OF FEMA
• Holding of foreign exchange, :- except as
otherwise provided in this Act, no person
resident in India shall acquire, hold, own,
possess or transfer any foreign exchange,
foreign security or any immovable property
situated outside India.
 Current account transactions.-
• Any person may sell or draw foreign exchange
to or from an authorized person for a current
account transaction. Provided that the Central
Government may, in public interest and in
consultation with the Reserve Bank, impose
such reasonable restrictions for current
account transactions as may be prescribed.
 Capital account transactions.-
The Reserve Bank may, in consultation with the Central
Government, specify:-

• (a) any class or classes of capital account transactions which are

permissible;

• (b) the limit up to which foreign exchange shall be admissible

for such transactions: Provided that the Reserve Bank shall not
impose any restriction on the drawal of foreign exchange for
payments due on account of amortization of loans or for
depreciation of direct investments in the ordinary courts of
business.
• (3) Without prejudice to the generality of the provisions of sub-section (2),
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;

• (d) any borrowing or lending in rupees in whatever form or by whatever name

called;

• (e) any borrowing or lending in rupees in whatever form or by whatever name

called between a 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 five years, by a person resident in India;

• (i) acquisition or transfer of immovable property in India, other than a

lease not exceeding five years, by a person resident outside India;

• (j) giving of a guarantee or surety in respect of any debt, obligation or

other liability incurred-

• (i) by a person resident in India and owed to a person resident outside

India; or

• (ii) by a person resident outside India.

• (4) A person resident in India may hold, own, transfer or
invest in foreign currency, foreign security or any
immovable property situated outside India if such
currency, security or property was acquired, held or owned
by such person when he was resident outside India or
inherited from a person who was resident outside India.

• (5) A person resident outside India may hold, own, transfer

or invest in Indian currency, security or any immovable
property situated in India if such currency, security or
property was acquired, held or owned by such person
when he was resident in India or inherited from a person
who was resident in India.
• (6) Without prejudice to the provisions of this
section, the Reserve Bank may, by regulation,
prohibit, restrict, or
regulate establishment in India of a branch, office or
other place of business by a person resident outside
India, for carrying on any activity relating to such
branch, office or other place of business.
 EXPORT OF GOODS & SERVICES

• Under section 7 its mandatory for every exporter to furnish a

declaration containing the information about the amount &
export value of exporting goods to RBI or other authority as
prescribed. If export value is not ascertainable then expected
value must be informed.
• Similarly in case of services exporter is required to submit a
declaration to RBI or other prescribed authority containing
the true & correct particulars in relation to payment for such
services.
 REALIZATION & REPATRIATION OF FOREIGN
EXCHANGE
• Under section 8 the person resident in India has to follow all
reasonable steps to realize & repatriation the foreign
exchange within a time period & according the procedure as
per guidelines issued by RBI
EXEMPTION FROM REALIZATION & REPATRIATION
• section 9 provides exemption in some cases where section 4
& 8 shall not apply
1) Possession of foreign currency or foreign coins up to a limit
given by RBI
2) Possession of foreign currency notes, banks note, or
travellers cheques not exceeding US$ 2000 or equivalent.
3) Foreign exchange acquired from employment, business, trade,
vocation, services, honorarium, gifts, inheritance or any other
legitimate means up to limit decided by RBI.
4) Other receipt in foreign exchange as the RBI may specify.
 CONTRAVENTION AND PENALTIES
1. PENALTIES:
• If any person contravenes any provision of this Act, or
contravenes any rule, regulation, notification, direction or
order issued in exercise of the powers under this Act, or
contravenes any condition subject to which an
authorization s issued by the Reserve Bank, he shall, upon
adjudication, be liable to a penalty up to thrice the sum
involved in such contravention where such amount is
quantifiable, or up to RS.2,00,000 where the amount is
not quantifiable, and where such contravention is a
continuing one, further penalty which may extend to five
thousand rupees for every day after the first day during
which the contravention continues.
• Again, Section 13, Any Adjudicating Authority may, if
he thinks fit in addition to any penalty which he may
impose for such contravention direct that any
currency, security or any other money or property in
respect of which the contravention has taken place
shall be confiscated to the Central Government and
further direct that the foreign exchange holdings, if
any, of the persons committing the contraventions or
any part thereof, shall be brought back into India or
shall be retained outside India in accordance with the
directions made in this behalf.
2. ENFORCEMENT OF THE ORDERS OF ADJUDICATING
AUTHORITY:
• section 14, provide that if any 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
under this section.
• No order for the arrest and detention in civil prison of a
defaulter shall be made unless the Adjudication
Authority has issued and served a notice upon the
defaulter calling upon him to appear before him on the
date specified in the notice and to show cause why he
should not be committed to the civil prison.
• A warrant for the arrest of the defaulter may be issued
by the Adjudicating Authority if the Adjudicating
Authority is satisfied, by affidavit or otherwise, that
with the object or effect of dealing the execution of the
certificate the defaulter is likely to abscond or leave the
local limits of the jurisdiction of the Adjudicating
Authority. The arrest warrant may be issued by the
Adjudicating Authority if the defaulter fails to make an
appearance in pursuance of the notice issued by him. A
arrest warrant 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.
• Every person arrested in pursuance of a warrant of arrest under
this section shall be brought before the Adjudicating Authority
issuing the warrant as soon as practicable and in any event
within 24 hours of his arrest (exclusive of the time required for
the journey). However, 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.
• However, pending conclusion of inquiry, the Adjudication
Authority may detain the defaulter or release him on his
furnishing the security to the satisfaction of the
Adjudicating Authority for his presence as and when
required. After the conclusion of the inquiry, the
Adjudicating Authority may make an order of detention in
civil prison and order for arrest if not accounted earlier.
3. POWER TO COMPOUND CONTRAVENTIONS:
• Section 15 empowers the Directorate of Enforcement
or Officers of the Directorate of Enforcement and
Officers of the Reserve Bank as may be authorised by
the Central Government in this behalf to compound
the offences. Any contravention under section 13 may
be compounded on an application made by the person
committing such contravention within 180 days from
the date of receipt of application. Further, any
contravention so compounded, relieves the accused
person from further proceedings for that
contravention.