FEMA an Improvement over FERA:A Legal Study

An Introduction to Indian Foreign Exchange Laws

Foreign Exchange Management Act, 1999 (FEMA) has completed a decade of
its existence. It replaced Foreign Exchange Regulation Act, 1973 (FERA) with
effect from 1st June, 2000. The replacement was a great sigh of relief for the
people as FERA was unduly stringent in its criminal provisions. FEMA is a civil
law and proactive in its outlook compared to FERA. The thrust of FEMA is to
manage the scarce foreign exchange resources of the country rather than
to control them as was prevalent under FERA.

Objectives of FEMA Act

(i)
(ii)
(iii)

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.

SCOPE
Post liberalization (i.e. New Industrial policy of 1991) there was need to remove
shackles of regulatory and legal provisions.
Need to consolidate and amend the law relating to foreign exchange with the
objectives of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India.
Need to take various steps to make New Industrial Policy- workable and
meaningful. Industrial licensing was made pragmatic and objective oriented. It
was decided to review provisions of Foreign Exchange Regulation Act, 1973 (FERA)

Improvement over FERA:

It will facilitate trade rather than prevent misuse of foreign exchange.
Definitions of capital account transaction and current account transaction
have been introduced keeping in mind the possibility of introduction of
capital account convertibility in the near future.
All current account transactions shall be allowed (subject to reasonable
restrictions).Reserve Bank to classify those capital account transactions that
are to be permitted and to regulate transfer and issue of foreign securities by

a resident in/outside India as well as setting up of branches/offices by foreign

companies in India.
All key sections relating to dealings, holding and payments in foreign
exchange and exports have been simplified.
Liberalization in enforcement provisions reflects that the attitude is of
putting trust in the persons covered

OVERALL STRUCTURE
The overall structure of Foreign Exchange Management Act, 1999 is covered
by legislations, rules and regulations. These legislations, rules and
regulations relating to Foreign Exchange Management Act, 1999, can be
divided in to the followings:
1. FEMA contains 7 chapters divided into 49 sections (Supreme Legislation)
2. 5 sets of Rules made by Ministry under section 46 of FEMA. (Delegated
legislations)
3. 23 sets of Regulations made by RBI under section 47 of FEMA.
(Subordinate Legislations)
4. Master Circular issued by Reserve Bank of India every year.
5. Foreign Direct Investment (FDI) policy issued by Department of Industrial
Policy and Promotion (DIPP) time to time.
6. Notifications and Circulars issued by Reserve Bank of India.
7. Enforcement Directorate.

Some of the important definitions

Authorized Person
Capital Account Transaction
Current Account Transaction
Export
Foreign Exchange
Person
Person Resident in India
Person resident outside India
Repatriate to India
Security

Transfer

INVESTIGATING METHODS

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.
FEMA permits only authorized person to deal in foreign exchange or
foreign security. Such an authorized person, under the Act, means
authorized dealer, 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.
The Directorate of Enforcement was established in the year 1956 with its
Headquarters at New Delhi. It is responsible for enforcement of the Foreign
Exchange Management Act, 1999 (FEMA) and certain provisions under the
Prevention of Money Laundering Act. Work relating to investigation and
prosecution of cases under the PML has been entrusted to Enforcement
Directorate. The Directorate is under the administrative control of
Department of Revenue for operational purposes; the policy aspects of the
FEMA, its legislation and its amendments are within the purview of the
Department of Economic Affairs. Policy issues pertaining to PML Act,
however, are the responsibility of the Department of Revenue. Before
FEMA became effective (1 June 2000), the Directorate enforced
regulations under the Foreign Exchange Regulation Act, 1973.

Section 37 of the Act empowers the Central Government to establish a

Directorate and other officers below the rank of Assistant Director to take up
for investigation the contravention referred to in Section 13 of the Act. In
Addition the Central Government may also authorize any officer or class of
officers in the Central and State Government.
CONCLUSIONS
FEMA is a civil law and proactive in its outlook compared to FERA. The thrust
of FEMA is to manage the scarce foreign exchange resources of the country
rather than to control them as was prevalent under FERA.
Approval of RBI needed for:1.
For infrastructure projects if the consultancy is taken from outside
India and the remittance for such exceeds USD 1,00,00,000 per project.
2.
For any other projects if the consultancy is taken from outside India
and the remittance for such exceeds USD 10,00,000.
3.
Approval of RBI needed to release forex in excess of USD 10,000 in one
financial year.
4.
Approval of RBI needed for gift/ donation remittances in excess of USD
5,000 in one financial year, per remitter or donor (the receiver of the gift
remittance)
5.
Exceeding USD 1,00,000 for persons going abroad for employment/
emigration.
6.
Exceeding USD 25,000 for business travel, attending conference etc.
7.
Medical treatment abroad based on doctors estimate of expenses if
doctors estimate exceeds USD 1,00,000 then no approval is required.
The Directorate of Enforcement was established in the year 1956 with its
Headquarters at New Delhi. It is responsible for enforcement of the Foreign
Exchange Management Act, 1999 (FEMA) and certain provisions under the
Prevention of Money Laundering Act. Work relating to investigation and
prosecution of cases under the PML has been entrusted to Enforcement
Directorate.