The Foreign Exchange Management Act (FEMA) in India, enacted in 1999, is a crucial piece of legislation that governs foreign exchange transactions in the country. FEMA replaced the Foreign Exchange Regulation Act (FERA) and represents a more liberalized and modern approach to managing foreign exchange.
Salient Features of FEMA
Here are some salient features of FEMA:
Liberalization and Rationalization
FEMA reflects India’s move towards a more liberalized and rationalized regime for foreign exchange transactions.
It emphasizes the promotion of external trade and payments and the orderly development and maintenance of the foreign exchange market in India.
The primary objective of FEMA is to facilitate external trade and payments, promote the orderly development and maintenance of the foreign exchange market in India, and conserve foreign exchange reserves.
FEMA applies to the whole of India and to all branches, offices, and agencies outside India owned or controlled by a person resident in India.
The Reserve Bank of India (RBI) is the primary regulatory authority responsible for administering FEMA. It formulates regulations governing foreign exchange transactions and authorizes dealers, money changers, and others involved in foreign exchange activities.
Current and Capital Account Transactions
FEMA distinguishes between current account transactions and capital account transactions. Current account transactions are generally freely permitted, while capital account transactions may be subject to certain restrictions.
FEMA grants the RBI the authority to authorize persons (banks and financial institutions) to deal in foreign exchange. These authorized persons play a key role in facilitating foreign exchange transactions.
Current Account Transactions
Current account transactions, such as those related to trade, remittances, and travel, are generally permitted without restrictions. FEMA encourages the smooth flow of funds for routine transactions.
Capital Account Transactions
Capital account transactions, involving the transfer of capital assets and liabilities, may be subject to certain restrictions. FEMA provides the RBI with the power to regulate and control capital account transactions to maintain stability in the foreign exchange market.
FEMA Violations and Penalties
FEMA includes provisions for penalties and prosecution for contravention of its provisions. Penalties may be imposed for violations such as dealing in foreign exchange without authorization, holding assets or property outside India without permission, and non-compliance with regulations.
Adjudication and Appeals
FEMA establishes a mechanism for adjudication of contraventions and appeals against adjudication orders. The Adjudicating Authority and the Appellate Tribunal for Foreign Exchange (ATFE) are designated bodies to handle these matters.
Liberalized Remittance Scheme (LRS)
FEMA allows residents to make certain permissible current account and capital account transactions under the Liberalized Remittance Scheme (LRS). Individuals can remit funds abroad for purposes such as travel, education, and investment within the prescribed limits.
Foreign Direct Investment (FDI) and External Commercial Borrowings (ECB)
FEMA plays a crucial role in regulating foreign direct investment (FDI) and external commercial borrowings (ECB). It outlines the conditions and procedures for these transactions to ensure compliance with the law.
Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)
FEMA incorporates provisions to prevent money laundering and the financing of terrorism. It aligns with international standards and commitments in these areas.
Regulation of Non-Resident Accounts
FEMA provides for the regulation of non-resident accounts, specifying the types of accounts that non-residents can maintain in India.
Cross-Border Mergers and Acquisitions
FEMA has provisions governing cross-border mergers and acquisitions involving Indian companies and foreign companies. It lays down the conditions and procedures for such transactions.
It’s important to note that the salient features of FEMA provide an overview, and the actual provisions and regulations are detailed and subject to periodic amendments. As with any legal framework, individuals and businesses engaging in foreign exchange transactions should seek professional advice and stay updated on the latest regulatory developments.