Foreign Exchange Management Act – FEMA

The Central Government of India formulated an act to encourage external payments and across the border trades in India known as the Foreign Exchange Management Act. FEMA (Foreign Exchange Management Act) was introduced in the year 1999 to replace an earlier act FERA (Foreign Exchange Regulation Act). FEMA was formulated to fill all the loopholes and drawback of FERA (Foreign Exchange Regulation Act) and hence several economic reforms (major reforms) were introduced under the FEMA act. FEMA was basically introduced to de-regularize and have a liberal economy in India.

Objectives of FEMA

The main objective for which FEMA was introduced in India was to facilitate external trade and payments. In addition to this, FEMA was also formulated to assist orderly development and maintenance of the Indian forex market.

FEMA outlines the formalities and procedures for the dealings of all foreign exchange transactions in India. These foreign exchange transactions have been classified into two categories — Capital Account Transactions and Current Account Transactions.

Under the FEMA Act, the balance of payment is the record of dealings between the citizen of different countries in goods, services and assets. It is mainly divided into two categories, i.e. Capital Account and Current Account.

Capital Account comprises all capital transactions whereas Current Account comprises trade of merchandise. Current Account transactions are those transactions that involve inflow and outflow of money to and from the country/countries during a year, due to the trading/rendering of commodity, service, and income.

The current account is an indicator of an economy’s status. As mentioned above the balance of payment comprises current and capital accounts, the remainder of the Balance of Payment is Capital Account, which consists the movement of capital in the economy due to capital receipts and expenditure. Capital account recognises domestic investment in foreign assets and foreign investment in domestic.

Applicability of FEMA Act

FEMA (Foreign Exchange Management Act) is applicable to the whole of India and equally applicable to the agencies and offices located outside India (which are owned or managed by an Indian Citizen). The head office of FEMA is situated in New Delhi and known as Enforcement Directorate. FEMA is applicable to:

• Foreign exchange.
• Foreign security.
• Exportation of any commodity and/or service from India to a country outside India.
• Importation of any commodity and/or services from outside India.
• Securities as defined under Public Debt Act 1994.
• Purchase, sale and exchange of any kind (i.e. Transfer).
• Banking, financial and insurance services.
• Any overseas company owned by an NRI (Non-Resident Indian) and the owner is 60% or more.
• Any citizen of India, residing in the country or outside (NRI).

The Current Account transactions under the FEMA Act has been categorized into three parts which, namely-

• Transactions prohibited by FEMA,
• The transaction requires Central Government’s permission,
• The transaction requires RBI’s permission.

Prohibition on Drawal of Foreign Exchange

• Any kind of remittance out of winning the lottery.
• Any kind of remittance from the income on racing/riding etc,
• Any remittance for buying of a lottery ticket, football pools, sweepstakes, banned/prescribed magazines etc.,
• Commission payment on exports towards equity investment of Indian Companies in Joint ventures/wholly owned subsidiaries abroad.
• Remittance of dividend by any company. However, this clause is applicable only if the requirement of dividend balancing is applicable.
• Commission payment on exportation under Rupees State Credit Routes except commission up to 10% of invoice value of export of tea and tobacco.
• Payment regarding “ Call back Services” of telephones.
• A travel to Bhutan and/or Nepal.
• Remittance of interest income on funds held in NRSR Account i.e. Non-resident Special Rupees Scheme account.
• A transaction with a resident of Bhutan or Nepal.

Route for Drawal of Foreign Exchange

According to the Reserve Bank of India, Foreign Exchange can be drawn from any authorized dealer by the Prior Approval Route or General Permission Route.

Transactions for which Central Government prior approval is required for Drawl of foreign exchange –

• Cultural tours.
• Advertisement in print media of a foreign country for any purpose other than promoting tourism, international bidding and foreign investments (exceeding 10000 US Dollar) by a State Government and its Public Sector Units.
• Payment of importation by a Public Sector Unit or a department of government on c.i.f. basis only for importation through ocean transport.
• Remittance of freight of vessels chartered.
• Remittance of detention charges of container exceeding the DGS’s (Director General of Shipping) prescribed rate.
• Remittance of Prize money/sponsorship of any activity of sport outside India by a person other than national/ international/street level sports bodies, if the amount of the prize money/sponsorship exceeds 1,00,000 US Dollars.
• Remittance of hiring charges of transponders.
• Internet Service Providers.
• TV channels.
• Remittance for P&I Club ministry’s membership.
• Remittance by Multi-model transport operators to their agents in abroad.

Penalties Under FEMA

If any person contravenes the provisions of FEMA or any rule, direction, regulation, order or notification issued under FEMA, he shall be liable to pay a penalty up to thrice the sum involved in such contravention or up to Rs.2 lakh. Where such contravention is a continuing one, he shall be liable to pay a further penalty which may extend to Rs.5,000 for every day during which the contravention continues.

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