Study Notes

FOREIGN EXCHANGE
MANAGEMENT ACT, 1999
(FEMA)
FEMA

Introduction

 Foreign Exchange Regulation Act, 1973 (FERA) was replaced by the Foreign
Management Act, 1999 (FEMA). It was replaced because it did not comply with the post-
liberalization policies of the Government.
 FEMA consists of 49 Sections divided into 7 chapters.
 FEMA was enacted by Parliament of India and it came into force on 1st June, 2000.
 Objectives: -
 Consolidation and amendment of the laws relating to the foreign exchange
 Facilitation of external trade and payments
 For the promoting the orderly development and maintenance of foreign exchange
market in India
 To control and direct the employment business and investment of the non-
residents.
 To utilise the foreign exchange resources effectively for the country.

 RBI & Central Government are the controlling authority under FEMA. The RBI has
been empowered by this Act to pass regulations and enable the Government of India to
pass rules relating to foreign exchange in tune with the foreign trade policy of India.
 The head office of FEMA is situated in New Delhi known as Enforcement
Directorate, which is the administrative and managing authority, and is headed by a
Director.
 There are 5 zonal offices in Delhi, Mumbai, Kolkata, Chennai, and Jalandhar, each
office is headed by Deputy Director. Further, every 5 zones are further divided into 7
sub-zonal offices headed by Assistant Directors and 5 field units headed by Chief
Enforcement Officers.

Some of the Important Terms

 Authorized Person S. 2(c) - means an authorised dealer, money changer, off-shore

banking unit or any other person for the time being authorised under sub-section (1) of
section 10 to deal in foreign exchange or foreign securities.
 Capital Account Transaction S 2(e) - means a transaction which alters the assets
or liabilities, including contingent liabilities, outside India of persons resident in India or
assets or liabilities in India of persons resident outside India, and includes transactions
referred to in sub-section (3) of section 6.
 Currency S. 2(h) - includes all currency notes, postal notes, postal orders, money
orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and
promissory notes, credit cards or such other similar instruments, as may be notified
by the Reserve Bank.
 Currency notes S. 2(i) - means and includes cash in the form of coins and bank
notes;
 Current Account Transaction S. 2(j) - means a transaction other than a capital
account transaction and without prejudice to the generality of the foregoing such

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transaction includes,— (i) payments due in connection with foreign trade, other current
business, services, and short-term banking and credit facilities in the ordinary course of
business, (ii) payments due as interest on loans and as net income from investments,
(iii) remittances for living expenses of parents, spouse and children residing abroad, and
(iv) expenses in connection with foreign travel, education and medical care of parents,
spouse and children.
 Indian currency S. 2(q) - means currency which is expressed or drawn in Indian
rupees but does not include special bank notes and special one-rupee notes issued
under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934).
 Export S. 2(l) - 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.
 Foreign Currency S. 2(m) - means any currency other than Indian currency.
 Foreign Exchange S. 2(n) - means foreign currency and includes— (i) deposits,
credits and balances payable in any foreign currency, (ii) drafts, travellers cheques,
letters of credit or bills of exchange, expressed or drawn in Indian currency but payable
in any foreign currency, (iii) drafts, travellers cheques, letters of credit or bills of
exchange drawn by banks, institutions or persons outside India, but payable in Indian
currency.
 Foreign Security S. 2(o) - 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 dividends is payable in Indian currency.
 Import S. 2(p), with its grammatical variations and cognate expressions, means
bringing into India any goods or services.
 Security S.2(za) - means shares, stocks, bonds and debentures, Government
securities as defined in the Public Debt Act, 1944 (18 of 1944), savings certificates to
which the Government Savings Certificates Act, 1959 (46 of 1959) applies, deposit
receipts in respect of deposits of securities and units of the Unit Trust of India
established under sub-section (1) of section 3 of the Unit Trust of India Act, 1963 (52 of
1963) or of any mutual fund and includes certificates of title to securities, but does not
include bills of exchange or promissory notes other than Government promissory notes
or any other instruments which may be notified by the Reserve Bank as security for the
purposes of this Act.
 Repatriate to India S. 2(y) - means bringing into India the realised foreign exchange
and— (i) the selling of such foreign exchange to an authorised person in India in
exchange for rupees, or (ii) the holding of realised amount in an account with an
authorised person in India to the extent notified by the Reserve Bank, and includes use
of the realised amount for discharge of a debt or liability denominated in foreign
exchange and the expression “repatriation” shall be construed accordingly.
 Service S. 2(zb) - means service of any description which is made available to potential
users and includes the provision of facilities in connection with banking, financing,
insurance, medical assistance, legal assistance, chit fund, real estate, transport,
processing, supply of electrical or other energy, boarding or lodging or both,

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entertainment, amusement or the purveying of news or other information, but does not
include the rendering of any service free of charge or under a contract of personal
service.
 Transfer S. 2(ze) - includes sale, purchase, exchange, mortgage, pledge, gift, loan or
any other form of transfer of right, title, possession or lien.

To Whom is the Act Applicable

 It is applicable to the whole of India.

 Any branch, office, and agency, which is situated outside India, but it is owned or
controlled by a person resident in India. Any violation by these entities committed
outside India will be covered under this Act.
 In general, FEMA includes three different types of categories which are:
 Person - includes the following: -
 An individual,
 A Hindu undivided family,
 A company,
 A firm,
 An association of persons or a body of individuals whether incorporated or not,
 Any artificial judicial person not falling any of the preceding sub-clauses and,
 Any agency office or branch owned or controlled by such person.

 A person resident in India –

 Person residing in India for more than 182 days during the course of a
preceding financial year
 Any person or body corporate registered or incorporated in India.
 An office, branch or agency in India owned or controlled by a person resident
outside India.
 An office, branch or agency outside India owned or controlled by a person
resident in India

 Person resident outside India - It means a person who is not an Indian resident
or not a resident in Indian.

Section 3 Dealing in foreign exchange, etc

 Dealing in foreign exchange, etc.—

 Prohibits dealing in foreign exchange or foreign security to any person except
through an authorised person;
 Make any payment to or for the credit of any person resident outside India in any
manner;
 Receive otherwise through an authorised person, any payment by order or on
behalf of any person resident outside India in any manner.

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FEMA

 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.

Section 4 Holding of foreign exchange, etc.—

 Holding of foreign exchange, etc.— Restrains any person resident in India from
acquiring, holding, owning, possessing or transferring any foreign exchange, foreign
security or any immovable property situated outside India except as specifically provided
in the Act.

Section 5 Current account transactions

 Any person may sell or draw foreign exchange to or from an authorised person if such
sale or drawal is a current account transaction. 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.

Section 6 Capital account transactions

 Any person may sell or draw foreign exchange to or from an authorised person for a
capital account transaction.

Section 7 Export of goods and services

 Every exporter of goods shall furnish to the Reserve Bank or such other authority a
declaration containing true and correct material particulars, including the amount
representing the full export value or, if the full export value of the goods is not
ascertainable at the time of export, the value which the exporter expects to receive on
the sale of the goods in a market outside India; based on the prevailing market
conditions;
 Such other information as may be required for the purpose of ensuring the realisation of
the export proceeds.

Section 8 & 9 Realisation and repatriation of foreign exchange; Exemptions

 It shall be the responsibility of any person resident in India who have any amount of
foreign exchange due or has accrued in their favour, such person shall take all
reasonable steps to realise and repatriate to India such foreign exchange within such
period and in such manner as may be specified by the Reserve Bank

Section 10 & 12 Authorized Person, Power of Reserve Bank to inspect authorised person

 These sections provide the duties and liabilities of the Authorized Persons, Authorized
Dealer, Money Changer, Off shore Banking Unit or any other person for the time being
authorized to deal foreign exchange or foreign securities.

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FEMA

 On application made to the RBI it may authorise any person to be known as

authorised person to deal in foreign exchange or in foreign securities, as an
authorised dealer, money changer or off-shore banking unit
 Authorization must be in writing
 It may be revoked by RBI if:
 it is in public interest so to do;
 authorised person has failed to comply with the condition subject to which the
 authorisation was granted or s contravened any of the provisions of the Act
 Authorised person to comply with such general or special directions or orders as
the Reserve Bank may give
 Thus, the duties of an authorized person are to comply with RBI directions, not to
engage in unauthorized transactions, compliance with FEMA provisions etc.
 Duties of an authorized person are:
 To deal in or transfer any foreign exchange
 Receive payments by order
 To sell or purchase foreign exchange for current account transaction and for
permissible capital account transaction
 Powers of RBI are:
 To verify the correctness of any statement, information etc.
 To obtain such information which the authorized person has failed to furnish
 To secure compliance with the provisions of the Act

Section 13 Penalties

 Contravention under FEMA involves the following kinds of penalties:

 be liable to a penalty up to thrice the sum involved in such contravention where
such amount is quantifiable; or
 up to 2 lakh rupees where the amount is not quantifiable, and where such
contravention is a continuing one,
 further penalty which may extend to 5 thousand rupees for every day after the
first day during which the contravention continues.
 In addition to the penalty, any currency, security or other money or property involved in
the contravention may also be confiscated

Section 14 Enforcement of the orders of Adjudicating Authority

 If a person fails to make full payment of the penalty imposed within a period of 90 days,
he shall be liable to civil imprisonment

Section 15 Power to compound contravention

 This section empowers the Directorate of Enforcement and officers of the RBI as may be
authorized by the Central Government in this behalf to compound the offences within
one hundred and eighty days from the date of receipt of application

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FEMA

Section 16 Appointment of Adjudicating Authority

 This section empowers the Central Government to appoint as many adjudicating

authorities as it may think fit for holding inquires
 If in the opinion of the Adjudicating Authority the person who has committed any
contravention is likely to abscond or is likely to evade in any manner, the payment of
penalty, if levied, it may direct the said person to furnish a bond or guarantee for such
amount
 Adjudicating Authority shall have the same powers of a civil court which are conferred
on the Appellate Tribunal
 Adjudicating Authority shall deal with the complaint as expeditiously as possible and
shall dispose of the complaint finally within one year from the date of receipt of the
complaint

Section 17 Appeal to Special Director (Appeals)

 Under this section the Central Government is empowered to appoint one or more
special Directors to hear the appeals against the orders of the Adjudicating Authority
 Every appeal shall be filed within forty-five days from the date on which the copy of
the order made by the Adjudicating Authority is received by the aggrieved person
 The Special Director (Appeals) may entertain on an appeal after the expiry of the period
of forty-five days, is satisfied that there was sufficient cause for not filing it within that
period.
 The Special Director (Appeals) shall have the same powers of a civil court which are
conferred on the Appellate Tribunal.

Section 18 & 19 Appellate Tribunal & Appeals

 The Central Government is empowered to establish Appellate Tribunal to hear appeals

against the orders of the Adjudicating Authorities and Special Director.
 Appellate Tribunal constituted under section 12 of the Smugglers and Foreign
Exchange Manipulators (Forfeiture of Property) Act, 1976 shall, on and from the
commencement of Part XIV of Chapter VI of the Finance Act, 2017, be the Appellate
Tribunal for the purposes of this Act.
 Appeal shall be filed within a period of forty-five 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.
 Appellate Tribunal may entertain an appeal after the expiry of forty-five days if it is
satisfied that there was sufficient cause for not filing it within that period.
 The appeal filed before the Appellate Tribunal shall be disposed of within one hundred
and eighty days from the date of receipt of the appeal.

Section 35 Appeal to High Court

 Any person aggrieved by any decision or order of the Appellate Tribunal may file
an appeal to the High Court within sixty days from the date of communication of the

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decision or order of the Appellate Tribunal to him 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 the said period, allow it to be filed within a
further period not exceeding sixty days.

Section 36 to 38 Directorate of Enforcement, Powers etc.

 Central Government shall establish a Directorate of Enforcement with a Director

and such other officers or class of officers as it thinks fit, who shall be called officers of
Enforcement.
 Further, the Central Government may authorise the Director of Enforcement or an
Additional Director of Enforcement or a Special Director of Enforcement or a Deputy
Director of Enforcement to appoint officers of Enforcement below the rank of an
Assistant Director of Enforcement.
 The Director of Enforcement and other officers of Enforcement shall take up for
investigation the contravention referred to in section 13.
 The officers shall exercise the like powers which are conferred on income-tax authorities
under the Income-tax Act, 1961, subject to such limitations as laid down under that Act.
 The Central Government may, by order authorise any officer of customs or any central
excise officer or any police officer or any other officer of the Central Government or a
State Government to exercise such of the powers and discharge such of the duties of
the Director of Enforcement or any other officer of Enforcement under this Act as may be
stated in the order.