Foreign Exchange Management Act [FEMA Act] 1999

By Shivank Goel|Updated : September 21st, 2022

The Foreign Exchange Management Act [FEMA Act] is one of the most significant acts in the Indian Parliament. It was introduced in 1999 as a substitute to the existing Foreign Exchange Regulation Act [FERA] to facilitate external trade and promote the development and maintenance of the Indian foreign exchange market. The act is applicable throughout the country and introduces a new regime for foreign exchange management that complies with the World Trade Organisation framework.

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This article briefly explores the history and development of the FEMA act, along with its salient features, punishments under it and its significance of the FEMA act.

Table of Content

History of FEMA Act

While the Foreign Exchange Regulation Act was enacted during times of severe foreign exchange shortages, the Foreign Exchange Management Act provides for a more liberalised approach, facilitating global trade and transactions.

The enactment of this law signifies the complete integration of Indian trade and commerce with the global economy. The liberalised approach to foreign exchange management helped further improve the country's position in Ease of Doing Business, along with other leading indexes and parameters.

Foreign Exchange Management Act In India (FEMA)

Under other laws that permit everything unless prohibited, the Foreign Exchange Regulation Act seemed to prohibit everything unless permitted, resulting in an enormous drain on the private sector.

  • This made its tone and tenor quite impractical and involved punishment even for minor offences. Under this law, a person remains guilty unless proven innocent.
  • Also, it could not successfully restrict activities like the expansion of multinational corporations. An amendment was suggested to the act to prevent it from getting redundant. It was decided after the 1993 amendment that FERA could become FEMA.

Importance of FEMA Act

The Foreign Exchange Management Act was brought into action in 2000 to put into practice a regime for foreign exchange management that works consistently with the World Trade Organisation framework.

  • It also served as the basis for the 2002 Money Laundering Act which came into force in 2005. FEMA sought to ease the external trade transactions as they no longer relied on RBI consent.
  • The act applies to India and equally applies to offices and agencies situated outside India that are owned and operated by Indians. Foreign Exchange Management Act has its head office located in New Delhi and is called the Enforcement Directorate.

Foreign Exchange Management Act - Violations, Penalties and Enforcement

Primary details briefing the violations, penalties and enforcement under the FEMA act have been enlisted below;

  • It contains seven chapters divided into forty-nine sections of which twelve cover the operational aspects while others are related to contravention, appeals, penalties, and more.
  • Any violation of the law can entitle you to a penalty of 2 lakh rupees or three times that of the involved contravention if the sum can be quantified.
  • The Foreign Exchange Management Act gives the government the power to restrict activities like payments to individuals outside India. All the deals in foreign exchange under the current account can be done only through authorised entities.
  • The new FEMA Act was a significant improvement over the Foreign Exchange Regulation Act, which stifled the ease of doing business.
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FAQs on FEMA Act 1999

  • The Foreign Exchange Management Act (FEMA), 1999 is a law passed by the Indian Parliament to update and consolidate the existing foreign exchange laws in order to facilitate international trade and payments as well as to support the orderly growth and upkeep of the Indian foreign exchange market.

  • FEMA's primary goal was to aid in the facilitation of Indian payments and trade abroad. Additionally, it was intended to support the orderly growth and upkeep of India's foreign exchange market. It outlines the processes, dealings, and formalities for all currency exchanges in India.

  • The Foreign Exchange Management Act [FEMA Act] was introduced in 1973 to regulate the transactions in foreign exchange and restrict certain types of payments and dealings involving foreign exchange and import/export of currency.

  • The Foreign Exchange Regulation Act (FERA) and Foreign Exchange Management Act (FEMA) are different as the former is an act that regulates foreign exchange payments and transactions while the latter promotes orderly foreign exchange management in India.

  • The foreign exchange under the FEMA act is an act that amends and codifies the law governing foreign exchange with the goal of fostering orderly and facilitating payments and trade abroad. It also facilitates the creation and upkeep of India's foreign exchange market.

  • Foreign Exchange Management Act [FEMA Act] replaced FERA as it failed to comply with the post-liberalisation policies introduced by the Indian government.

  • The Foreign Exchange Management Act [FEMA Act] made all criminal offences civil offences.

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