FEMA – Full Form, Objectives, Features of FEMA Act 1999 | FEMA UPSC Notes

FEMA Full Form

FEMA Full Form is the “Foreign Exchange Management Act”. It was passed in parliament on December 29, 1999, to substitute the Foreign Exchange Regulation Act (FERA). It is a law approved by the Government of India in 1999 to consolidate and amend the law relating to foreign exchange transactions in India. The act is administered by the Reserve Bank of India and it regulates all foreign exchange transactions in the country, including investments, remittances, and payments.

FEMA UPSC Notes

The principal goals of the FEMA Act are to enable international commerce and payments, support the orderly growth and upkeep of the Indian foreign exchange market, and protect the foreign exchange reserves of the country.

What is FEMA?

The FEMA Act is an act of the Indian Parliament that was introduced to consolidate and amend the law relating to foreign exchange transactions in India. The FEMA Act came into effect on June 1, 2000, and replaced the Foreign Exchange Regulation Act (FERA) 1973. The primary objectives of the FEMA Act 1999 are to encourage an orderly expansion and ongoing operation of the foreign exchange market of India, promote external trade and payments, and protect the foreign exchange reserves of the country.

The act provides a legal framework for foreign exchange transactions, including investments, remittances, and payments, and regulates them through the Reserve Bank of India. FEMA is different from other laws as it allows everything unless it is strictly forbidden. It is a supervisory system that allows the Reserve Bank of India to issue regulatory requirements and the Central Government to issue rules concerning foreign exchange per the Foreign Trade Policy of India.

Objectives of FEMA

The main objectives of FEMA in India are to regulate foreign exchange transactions in a manner that promotes economic growth, maintains the stability of the foreign exchange market, ensures compliance with regulatory requirements, and prevents illegal activities. Following are some of the objectives of the Foreign Exchange Management Act (FEMA 1999):

• To facilitate external trade and payments: FEMA aims to promote external trade and payments by regulating foreign exchange transactions and simplifying the process of conducting foreign exchange transactions.
• To conserve foreign exchange reserves: FEMA seeks to conserve foreign exchange reserves by regulating the inflow and outflow of foreign exchange, promoting foreign investment, and ensuring the optimal utilization of foreign exchange reserves.
• To promote orderly development and maintenance of the foreign exchange market: FEMA aims to promote an orderly and stable foreign exchange market in India by regulating foreign exchange transactions and ensuring transparency, and efficiency in such transactions.
• To comply with international obligations: FEMA aims to ensure that India’s foreign exchange transactions are consistent with its international obligations and comply with international laws and regulations.
• Current Account Transactions: Current account transactions include trade in goods and services, remittances, and payments, and are mostly allowed without any restrictions.
• Capital Account Transactions: Capital account transactions include investments in securities and immovable property and are subject to certain restrictions and regulations.
• To prevent illegal activities: FEMA aims to prevent illegal activities such as money laundering, financing of terrorism, and other unauthorized foreign exchange transactions by providing a legal framework for the monitoring, investigation, and enforcement of foreign exchange transactions.

FEMA Act (Foreign Exchange Management Act) – Classification

The Foreign Exchange Management Act (FEMA Act 1999) is a law introduced by the Indian government to regulate all foreign exchange transactions in India, including investments, remittances, and payments. FEMA classifies all foreign exchange transactions into two categories:

• Current account transactions and;
• Capital account transactions.

Current account transactions are related to trade in goods and services, remittances, and payments, while capital account transactions include investments in securities and immovable property.

• FEMA is a more liberal and investor-friendly law compared to its predecessor FERA, as it provides greater freedom to individuals and businesses to engage in foreign exchange transactions.
• The act has been amended several times to reflect changes in the foreign exchange market and to address emerging issues.

Any violation of the provisions of FEMA can result in penalties or even imprisonment, depending on the severity of the offense. The act also lays down rules and regulations for authorized dealers, money changers, and foreign exchange dealers. Overall, FEMA is an important law in India that helps to regulate foreign exchange transactions and promote economic growth in the country.

Features of FEMA

The features of FEMA in India aim to regulate foreign exchange transactions in a way that promotes economic growth and ensures compliance with regulatory requirements. FEMA is the agency that grants the central government the authority to enforce the limitations. The FEMA Act has several features, some of which are:

• Comprehensive regulation: FEMA provides a comprehensive regulatory framework for all foreign exchange transactions in India, including those involving currency, securities, and commodities.
• Authorized persons: The law requires that all transactions involving a foreign exchange or foreign securities must be made through an authorized person.
• Restrictions on certain transactions: FEMA imposes restrictions on certain activities, such as payments made to or received from persons outside India, as well as deals in foreign exchange and foreign securities.
• Enforcement mechanisms: The law establishes various enforcement mechanisms, including penalties and fines for violations of its provisions.
• Liberalization of regulations: FEMA reflects the Indian government’s efforts to liberalize foreign exchange regulations and promote economic growth by simplifying the process of conducting foreign exchange transactions.
• Power of the Central Government: The law grants the central government the power to impose restrictions on certain foreign exchange transactions in the interest of the public.
• Establishment of authorities: FEMA establishes authorities such as the Directorate of Enforcement and the Reserve Bank of India to regulate and oversee foreign exchange transactions.
• Ownership of foreign assets: FEMA permits residents of India to transact in foreign exchange, foreign securities, or own immovable property abroad if the currency, security, or property was owned or acquired when they were living outside India or inherited from someone living outside India.

Primary Goal of FEMA

The primary goal of the FEMA 1999 (Foreign Exchange Management Act) in India is to regulate foreign exchange transactions in a way that promotes economic growth and stability while ensuring compliance with regulatory requirements. To achieve this goal, FEMA aims to:

• Regulate and manage foreign exchange transactions in a way that promotes economic growth and development in India.
• To ensure the orderly development and maintenance of the foreign exchange market in India.
• Ensure that all foreign exchange transactions are conducted in a transparent and efficient manner.
• To conserve foreign exchange reserves and ensure their optimal utilization.
• To provide a legal framework for the monitoring, investigation, and enforcement of foreign exchange transactions to prevent violations and ensure compliance with regulatory requirements.
• FEMA was formulated to catalyze the orderly growth and operation of the forex market of India.
• FEMA was essentially introduced to de-regularize and liberalize the Indian economy.
• According to the FEMA Act, the payment balance accounts for transactions amongst citizens of different countries in terms of goods, services, and assets.

Provisions of FEMA Act 1999

The provisions of FEMA Act 1999 aim to regulate foreign exchange transactions, restrict certain activities, and promote economic growth. FEMA is applied to the following situations:

• Foreign exchange;
• Foreign security;
• Any kind of Acquisition, Disposition, or Trade;
• Banking, insurance, and finance are all examples of financial services;
• Any overseas company in which an NRI (Non-Resident Indian) owns 60% or more;
• For every citizen of India, whether they live in India or anywhere else (NRI);
• Any product or service that India exports to a country outside of India;
• The importation of any good or service from a nation besides India;
• Securities under the Public Debt Act of 1994.

FEMA Regulation – Foreign Exchange Drawal Route

The Foreign Exchange Management Act regulations in India provide guidelines and regulations for foreign exchange transactions in the country. The FEMA regulations outline the various methods for individuals and businesses to access foreign currency.

Under the FEMA Act, foreign exchange can be obtained from any authorized dealer via the Prior Approval Route or the General Permission Route, as per the guidelines of the Reserve Bank of India.

Particulars	Limitations under FEMA 1999
Private visit to any country (except Bhutan and Nepal)	10,000 US dollars or its equivalents for one or more private visits in one year.
Donations/Gift per donor	Remittance should not exceed 1,25,000 US dollars during a Financial Year
Corporate Donations	1 percent of the forex earnings during the preceding three Financial Years or 5 million US dollars, whichever is less, for a specified purpose
Migrating from India for employment	1,00,000 US dollars one time only
Remittance facility for emigration	1,00,000 US dollars or the prescribed amount by the emigration country does not exceed 1,00,000 US dollars one time
Remittance for supporting relatives (only close relatives) outside India	Salary of a person who is not a permanent resident of India and who is a citizen of a foreign country other than Pakistan (after subtracting income tax, PF, and other deductions) Or 1,00,000 US dollars a year per recipient in all other cases
Business Travel Abroad	25000 US dollars per trip respective of stay
To attend specialized training or conference	25000 US Dollar
For Medical treatment	1,00,000 US Dollar
Medical treatment abroad	25000 US Dollar
To Study Abroad	1,00,000 US Dollars per academic Year or the Institution’s estimation, whichever is higher.
To meet the expenses of a person accompanying as attendance to a patient visiting abroad for a medical check-up or for medical treatment	25000 US Dollar
Commission payment to an agent outside of India for selling commercial or residential plots or flats in India	25000 US Dollars or 5 % of inward remittance per transaction whichever is higher
For consultancy services from abroad	1 million US Dollars per project to 10 million US Dollars per project (for infrastructure project) 1,000,000 US Dollars for all other situations.
Reimbursement of pre-incorporation expenses	100,000 US Dollars or 5 percent of the investment brought into India, whichever is higher
Remittance for purchase and/or use of Trademark	Allowed without any approval of the Reserve Bank of India
Remittance from a foreign company for secure Health Insurance	Freely allow
Payment of a lump sum fee and remittance of royalties under the technical collaboration agreement	Freely allowed without any prior approval from RBI
Release of exchange for medical treatment outside of India when a person becomes ill after traveling abroad	The extent of USD 1,00,000 without any hassles and any loss of time based on self-declarations
Remittance of Small Value	Up to USD 25000 (form A2)

Which Transactions Require Prior Consent?

The FEMA Act lays down rules and regulations for the conduct of transactions, and any violation of the provisions of the act can result in penalties or even imprisonment. Transactions requiring prior approval from the Central Government for the drawl of foreign exchange are as follows:

• Cultural excursions
• Advertisement in an overseas country’s print media for any intention other than tourism promotion, international auctioning, and foreign investments (over $10,000 USD) by a state government and its public sector units
• Remuneration of importation on a c.i.f. basis by a Public Sector Unit or a Department of Government for importation via ocean transport
• Freight remittance from chartered vessels
• Detention charges for containers that are higher than those set by the Director General of Shipping (DGS)
• Remittance of award money/sponsorship of any sports activity outside India by a person other than national/international/street level sports bodies if the prize money/sponsorship exceeds $1,000,000 USD
• Remission of transponder rental fees
• Internet Service Providers
• Channels on television
• Reimbursement for P&I Club ministry membership
• Multimodal transport operators remit funds to their overseas agents

When is Foreign Exchange Drawal Prohibited?

Foreign Exchange Drawal can be prohibited or restricted by the Reserve Bank of India (RBI) in certain circumstances under the Foreign Exchange Management Act (FEMA) regulations. Some of the reasons for such restrictions include:

• The electronic or physical transfer of monetary funds stems from any successful participation in a lottery.
• To prevent unauthorized foreign exchange transactions that may lead to money laundering, terrorism financing, or other illegal activities.
• Any financial transaction involving the transmission of earned income resulting from participation in racing, riding, or other similar activities.
• Any payment made to acquire a football pool, sweepstakes, or any other form of a prohibited magazine.
• The payment of export commissions to Indian companies in exchange for equity investments in foreign joint ventures or wholly-owned subsidiaries.
• It should be noted that while any company has the ability to distribute dividends, this provision only applies if the dividend balancing requirement has been met.
• With the exception of commissions not exceeding 10% of the total payable amount for the export of tobacco and tea, which are transacted in Rupees.
• The financial transaction associated with a trip to Bhutan or Nepal.
• The transfer of funds from a Non-resident Special Rupees Scheme account that earns interest.
• Any monetary transaction conducted with a resident of Bhutan or Nepal.

Penalty Under FEMA Act

The Foreign Exchange Management Act is a law that regulates foreign exchange transactions in India. The Act provides for penalties for contraventions of its provisions. Some of the penalties under the FEMA Act 1999 are:

• Monetary Penalty: The FEMA Act empowers the Adjudicating Authority to impose a monetary penalty for contraventions of its provisions. The penalty can range from INR 5,000 to INR 2 lakh or three times the amount of the contravention, whichever is higher.
• Confiscation: The Adjudicating Authority may order the confiscation of any property, including currency, that has been used in contravention of the FEMA provisions.
• Compounding of Contraventions: The Reserve Bank of India (RBI) may allow the compounding of contraventions under certain circumstances. The compounding fee is generally lower than the penalty that would be imposed if the contravention was adjudicated.
• Prosecution: The RBI may initiate prosecution proceedings against persons who have committed contraventions under the FEMA Act. If convicted, the person can face imprisonment for a term of up to two years, along with a fine.
• Imprisonment: In certain cases, the FEMA Act 1999 provides for imprisonment of up to seven years for offenses such as money laundering, smuggling, or carrying on a business without authorization.

Categories of Authorized Persons under FEMA

Under the FEMA Act 1999, the Reserve Bank of India (RBI) authorizes certain categories of persons to deal in foreign exchange transactions. These authorized persons are classified into three categories:

Authorized Dealer Category – I

It includes banks that are authorized by the RBI to deal in all types of foreign exchange transactions, such as buying and selling foreign currency notes, traveler’s cheques, and remittances.

Authorized Dealer Category – II

It includes banks that are authorized by the RBI to deal in foreign exchange transactions other than those covered under AD Category – I. It can also include entities such as full-fledged money changers, non-banking financial companies, and airports.

Full-Fledged Money Changers

FFMCs are authorized by the RBI to deal in foreign exchange for specified purposes such as travel, education, and medical treatment. They are not allowed to deal in foreign exchange for speculative purposes.

Importance of FEMA in India

The Foreign Exchange Management Act (FEMA Act 1999) is a crucial act in India that regulates foreign exchange transactions in the country. The importance of the FEMA Act 1999 can be summarized as follows:

• Facilitates Foreign Exchange Transactions: The FEMA Act 1999 provides a legal framework for foreign exchange transactions in India. It enables Indian residents and entities to acquire, hold, and transfer foreign exchange in accordance with the provisions of the act.
• Regulates Foreign Exchange Transactions: The act empowers the Reserve Bank of India (RBI) to regulate foreign exchange transactions in India. The RBI monitors and controls the flow of foreign exchange into and out of the country to maintain stability in the forex market.
• Protects National Interest: The FEMA Act 1999 ensures that foreign exchange transactions in India are carried out in a manner that protects the national interest. It prohibits certain transactions that may be detrimental to the country’s economic and financial stability.
• Provides Penalties for Non-Compliance: The act provides penalties for non-compliance with its provisions. This acts as a deterrent to those who may attempt to engage in illegal foreign exchange transactions.
• Promotes Ease of Doing Business: The FEMA Act 1999 simplifies the rules and regulations for foreign exchange transactions in India. This promotes ease of doing business and encourages foreign investment in the country.

FEMA UPSC

FEMA UPSC receives an active spot in the Indian polity and therefore is an important topic of the UPSC Syllabus. FEMA full form is the “Foreign Exchange Management Act”, which was an act enacted to replace the Foreign Exchange Regulation Act and amend the law relating to foreign exchange transactions in India. Candidates preparing for UPSC must go through the Polity Books for UPSC and keep a close lookout for Current Affairs as well.

Experts advise prospects to take the help of UPSC Study Material and to not skip out on any updates or latest news regarding this topic as several questions can be asked from this section.

FEMA Sample Questions

Question: FEMA (Foreign Exchange Management Act) was finally implemented in the year – 2007, 2002, 1997, 1991
Answer: 2002

Question: Which one of the following groups of items is included in India’s foreign-exchange reserves? – (A) Foreign-currency assets, Special Drawing Rights (SDRs), and loans from foreign countries, (B) Foreign-currency assets, gold holdings of the RBI, and SDRs, (C) Foreign-currency assets, loans from the World Bank, and SDRs, (D) Foreign-currency assets, gold holdings of the RBI, and loans from the World Bank
Answer: Foreign-currency assets, gold holdings of the RBI, and SDRs

Question: Which one of the following groups of items is included in India’s foreign-exchange reserves? (2013) (a) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank, (b) Foreign-currency assets, loans from the World Bank and SDRs, (c) Foreign-currency assets, gold holdings of the RBI and SDRs, (d) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
Answer: Foreign-currency assets, gold holdings of the RBI and SDRs

Mains Questions:

2018: India’s proximity to the two of the world’s biggest illicit opium-growing states has enhanced her internal security concerns. Explain the linkages between drug trafficking and other illicit activities such as gunrunning, money laundering and human trafficking. What counter-measures should be taken to prevent the same?
2021: Discuss how emerging technologies and globalisation contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels.

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