Foreign Exchange Management Act

1. FEMA full form is Foreign Exchange Management Act. It is an act to consolidate and
amend the law relating to foreign exchange. The objective of the FEMA Act is to
facilitate external trade and payments and promote the orderly development and
maintenance of the foreign exchange market in India. FEMA, or the Foreign
Exchange Management Act, is responsible for managing and regulating foreign
exchange. FEMA (Foreign Exchange Management Act) was introduced in 1999 and
replaced an earlier act FERA (Foreign Exchange Regulation Act). It extends to the
whole of India.

 This Act was passed by the government to promote overseas trade and external
payments in India.
 It complies with the World Trade Organization’s guidelines (WTO). This Act took the
role of the Foreign Exchange Regulation Act (FERA) in 1999 because of its restricted
nature, which made it incompatible with post-liberalization policies.
 The FERA rules were very stringent and it made it more difficult for the Indian
economy to become more globally integrated.
 FEMA was created largely to make efficient use of resources related to foreign
exchange. It also had a significant impact on the Indian economy.

Objectives of FEMA

 Facilitating External Trade and Payments:

FEMA simplifies and streamlines the process of sending and receiving money from other
countries, whether for trade, investments, or other international transactions.
 Promoting the Orderly Development of the Foreign Exchange Market:
It establishes clear rules and regulations for buying and selling foreign currencies,
preventing illegal activities and ensuring fair competition.
 Managing Foreign Exchange Transactions:
FEMA tracks all foreign exchange inflows and outflows, helping the government maintain
the rupee's stability and ensuring responsible use of foreign currency reserves.
 Supporting Foreign Investment:
FEMA encourages foreign investment in India and helps Indian businesses expand globally
while ensuring compliance with regulations.
 Maintaining Global Alignment:
It ensures that India adheres to international rules and regulations related to foreign
exchange and trade, fostering trust with other countries and global organizations.

Features of the Foreign Exchange Management Act

Some of the important salient features of the Foreign Exchange Management Act are listed
below.

o Division of foreign exchange dealings into two groups: capital account and current
account dealings.
o It gives the Reserve Bank the authority to define the categories of capital account
transactions and the exchange restrictions that apply to such transactions, in
consultation with the central government.
o It offers provisions for the gradual liberalization of capital account transactions and is
consistent with full current account convertibility.
o As it specifies the regions requiring certain authorization from the Reserve
Bank/Government of India on the acquisition/holding of foreign exchange, it is more
clear in its application.
o A person living in India who had previously resided outside the country is given
complete freedom to own, possess, and transfer any foreign securities or real estate
obtained while residing outside of India.
o Citizens of India who live outside of India are not covered by FEMA.
o Since this is a civil statute, only extreme circumstances allow for arrest for violations
of the Act.

Structure of FEMA

1. The Head Office of FEMA, also known as the Enforcement Directorate, headed by
the Director is located in New Delhi.
2. There are 5 zonal offices in Delhi, Mumbai, Kolkata, Chennai, and Jalandhar, each
office is headed by a Deputy Director.
3. Every 5 zones are further divided into 7 sub-zonal offices headed by Assistant
Directors and 5 field units headed by Chief Enforcement Officers.
Definitions
(a) Adjudicating Authority means an officer authorised under sub-section (1) of
section 16
(b) Appellate Tribunal means the Appellate Tribunal referred to in section 18
(c) authorised person 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
(cc) Authorised Officer means an officer of the Directorate of Enforcement authorised
by the Central Government under section 37A
(d) Bench means a Bench of the Appellate Tribunal
(e) capital account transaction 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
(f) Chairperson means the Chairperson of the Appellate Tribunal
(g) chartered accountant shall have the meaning assigned to it in clause (b) of sub-
section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949)
[(gg) Competent Authority means the Authority appointed by the Central Government
under sub-section (2) of section 37A
(h) currency 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
(i) currency notes means and includes cash in the form of coins and bank notes
(j) current account transaction means a transaction other than a capital account
transaction and without prejudice to the generality of the foregoing such transaction (k)
Director of Enforcement means the Director of Enforcement appointed under sub-
section (1) of section 36
(m) foreign currency means any currency other than Indian currency
(n) foreign exchange means foreign currency
(o) foreign security 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
(p) import, with its grammatical variations and cognate expressions, means bringing
into India any goods or services
(q) Indian currency 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)
(r) legal practitioner shall have the meaning assigned to it in clause (i) of sub-section
(1) of section 2 of the Advocates Act, 1961 (25 of 1961)
(s) Member means a Member of the Appellate Tribunal and includes the Chairperson
thereof
(t) notify means to notify in the Official Gazette and the expression “notification” shall
be construed accordingly
(u) person includes—
(i) an individual
 (ii) a Hindu undivided family
(iii) a company
(iv) a firm
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the preceding sub-clauses,
and
(vii) any agency, office or branch owned or controlled by such person;
(v) “person resident in India” means—
(i) a person residing in India for more than one hundred and eighty-two days
during the course of the preceding financial year but does not include—
(A) a person who has gone out of India or who stays outside India, in either
case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his
intention to stay outside India for an uncertain period;
(B) a person who has come to or stays in India, in either case, otherwise than
—
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his
intention to stay in India for an uncertain period;
(ii) any person or body 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;
(w) “person resident outside India” means a person who is not resident in India;
(x) “prescribed” means prescribed by rules made under this Act;
(y) “repatriate to India” 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;
(z) “Reserve Bank” means the Reserve Bank of India constituted under sub-
section (1) of section 3 of the Reserve Bank of India Act, 1934 (2 of 1934);
(za) “security” 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;
(zb) “service” 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, 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 ;
(zc) “Special Director (Appeals)” means an officer appointed under 1[section 17];
(zd) “specify” means to specify by regulations made under this Act and the expression
“specified” shall be construed accordingly;
(ze) “transfer” includes sale, purchase, exchange, mortgage, pledge, gift, loan or any
other form of transfer of right, title, possession or lien.

Penalties Under FEMA

FEMA establishes a clear framework for dealing with contraventions, which means violations
or breaches of its provisions, rules, or regulations. The penalties imposed under FEMA are
primarily monetary, but can also involve confiscation of property and, in severe cases or for
non-payment, even imprisonment.
1. General Monetary Penalties:
 Quantifiable Contravention: If the amount involved in the contravention can be
determined, the penalty may be up to three times the sum involved.
 Non-Quantifiable Contravention: If the amount cannot be ascertained, a fixed penalty
of up to ₹2,00,000 can be imposed.
 Continuing Contravention: For ongoing violations, an additional penalty of up to
₹5,000 per day may be levied for each day the contravention continues beyond the
first day.
2. Penalties for Illegal Acquisition of Foreign Assets:
If a person acquires foreign exchange, foreign security, or immovable property outside India
exceeding ₹1 crore in contravention of FEMA, they are liable to:

 A penalty of up to three times the sum involved.

 Confiscation of the equivalent value of property situated in India.
 Imprisonment for a term extending up to five years, along with a fine.
3. Confiscation of Property Involved in Contravention:
The Adjudicating Authority has the power to confiscate any currency, security, or other
property directly linked to the contravention.
4. Civil Imprisonment for Non-Payment of Penalty:
If a person fails to pay the penalty within 90 days of receiving the payment notice, they may
be subjected to civil imprisonment. The duration depends on the penalty amount:

 For penalties exceeding ₹1 crore: Up to three years.

 In all other cases: Up to six months.
It's important to note that civil imprisonment does not relieve a person from liability to pay
the original penalty.
5. Right to Appeal:
 An appeal against an order passed by the Adjudicating Authority can be made to the
Special Director (Appeals) within 45 days of receiving the order.
 Further appeals can be made to the Appellate Tribunal for Foreign Exchange, and
subsequently, on questions of law, to the High Court.
 Throughout this appeal process, a person can seek assistance from a Chartered
Accountant or a Legal Practitioner.
Compliances under FEMA
The mandatory compliances under the provisions of FEMA are as follows:
 Annual Return on Foreign Liabilities and Assets
Every Indian Resident company that has Foreign Direct Investment (FDI) in the
preceding year, including the current year, must submit the Foreign Liabilities and
Assets (FLA) Return. If no such investment is made, then the company is not under
any obligation to submit the FLA. Such a return must be submitted every year.
 Annual Performance Report
This report is to be submitted by a Resident individual who has made an Overseas
Direct Investment (ODI). It is to be provided in Form ODI Part II to the AD
(Authorised Dealer) bank regarding Joint Venture or Wholly Owned Subsidiaries
outside India on or before 31st December every year.
 External Commercial Borrowings (ECB)
 All borrowers must report all ECB transactions to the RBI through an AD Category –
I Bank every month in the Form ‘ECB 2 Return’.
 Single Master Form (w.e.f.30.06.2018)
Under the Single Master Form, the following forms are to be filled and submitted.
FC- GPR (Foreign Currency-Gross Provisional Return)
FC-TRS (Foreign Currency Transfer of Shares)
LLP-I (Limited Liability Partnership)
CN (Convertible Notes)
ESOP (Employee Stock Options Plan)
DI (Downstream Investment)
DRR (Depository Receipts)
InVi (Investment Vehicle that has issued its units to a person resident outside India)
The RBI has made efforts to integrate the existing reporting norms and set out a
procedure for filing a single master form.
 Advance Remittance Form
An Indian company that receives investment outside India for the issue of shares or
other eligible securities under the FDI scheme must report all the details of the
amount of consideration to the concerned Regional Office of the Reserve Bank of
India through its AD category I bank within 30 days from the date of issue of shares.
 Form FC- GPR
The Indian company that receives foreign investment and allots shares against such
investment should file such allotment with the RBI. The company must provide
details of allotment in the Form FC - GPR (Foreign Currency – Gross Provisional
Return) within 30 days of allotment to the RBI.
 Form FC- TRS
This form must be filed by the shareholder resident outside India or resident Indian
when they transfer the shares of the Indian company from a resident to non-resident
Indian or vice versa. The form FC - TRS (Foreign Currency Transfer) is submitted
along with the Form FC- GPR to the authorised dealer bank, who in turn submits to
the RBI.
 Form ODI
A resident Indian individual who makes an overseas investment is required to submit
Form ODI. Share certificates or any other documentary evidence received for
investment in a foreign Joint Venture or Wholly owned subsidiary must be submitted
to the designated AD within 30 days.
Important FEMA Guidelines and Features
Under FEMA, all forex-related offences are civil offences instead of FERA (Foreign
Exchange Regulation Act), where all of the offences were considered criminal
offences. The other features are as follows:
 FEMA applies only to Indian residents in India. It does not apply to Indian citizens
residing outside India. The application criteria are that the person or entity must be
resident in India during the previous financial year for 182 days or more.
 FEMA authorised the Central Government to impose restrictions and supervise three
things related to foreign exchange- payments or receipts made to any person outside
India.
 FEMA also specifies the areas that require specific permissions of the Reserve Bank
of India (RBI) or the government, like dealing in foreign exchange.
 FEMA has classified the foreign exchange transactions into two categories – Capital
Account and Current Account.
 Capital Account and Current Account– The purpose of the capital account is to adjust
the assets and liabilities of individuals outside India to persons residing in India. Thus
any transaction that results in a change of the overseas assets and liabilities in India of
an Indian residing outside India or transactions overseas of a person residing in India
will be considered under the capital account. All other transactions fall under the
category of the current account.
 The penalty for non-compliances to be charged is up to thrice the sum involved in
such contravention or up to Rs 2 lakh. The penalty may extend up to Rs 5,000 for
each day post the first day during which the contravention proceeds. Hence, all
companies and Indian residents who transact overseas must ensure adherence to the
laws under FEMA.