The Foreign Exchange Management Act

 The Foreign Exchange or Forex in India are governed by Foreign Exchange Management Act (hereinafter referred to as FEMA), which was passed by the Parliament in its winter session of 1999.  The FEMA is structured by a total of 49 Sections which are divided across 7 chapters, came into force on 1st June, 2000. It was introduced with the view to consolidate and amend the law relating to foreign exchange with the objective of providing a more liberal approach towards the orderly development and maintenance of foreign exchange market in India.

Need For FEMA

Now the reason why the FEMA was introduced was to tackle the shortcomings of the Foreign Exchange Regulation Act of 1973 (hereinafter referred to as the FERA), which was the law that governed the Forex market of India prior to the enactment of FEMA. FERA was introduced in the backdrop of acute shortage of Foreign Exchange in the country. The provisions of FERA  were very stringent and did not allow a liberal approach towards foreign exchange as it was based upon the presumption that all the foreign exchange in India rightfully belonged to the Government of India and thus all the forex had to be collected and subsequently surrendered to the Reserve Bank of India.

Further, unlike other laws where everything apart from the things that are specifically prohibited are assumed to be permitted, under FERA everything was prohibited unless specifically permitted. Also any offence under the FERA was treated as a criminal offence thereby exposing the offenders liable to the punishment of imprisonment. What’s most deplorable is the fact that under FERA an alleged offender was presumed to be guilty until he/she proves his/her innocence, now this stands in the clear contravention of the paramount legal principle related to criminology i.e. ‘ei incumbit probatio qui dicit, non qui negat’, which basically means that the burden of proof lies upon the ones that makes the claim and not on the one that denies it. All these made the tenor and tone of FERA very drastic, thereby rendering the FERA obsolete and abortive in the context of liberalization of the foreign exchange market.

Objective of FEMA

Due to the shortcomings of the FERA, FEMA became the need of the hour and was drafted with the aim to achieve the following objectives: –

  • To amend and integrate all laws related to foreign currency in India,
  • To facilitate foreign trade and payments involving foreign exchange,
  • To serve as a mechanism that simplifies and eases the external trade and payments,
  • To promote the systematized development and maintenance of a healthy foreign exchange market in India,
  • To remove disparity of payments,
  • To utilize the foreign exchange resources effectively for the country.

Difference Between FERA and FEMA

Objective Conserving Foreign Exchange Managing Foreign Exchange
View Forex is a scarce resource and, therefore, must be protected and used with great care. Rigid View Forex is an asset and, therefore, must be managed properly. Flexible View
Authorized Persons Only Authorized resellers and money changers were recognized as authorized persons Apart from Authorized resellers and money changers, offshore banking units were also recognized as authorized persons.
Determination of Residential Status Determined on the basis ofCitizenship Determined on the basis of stay in India in the preceding financial year. A minimum of 6 months.
Transfer of Funds Required authorization from RBI for transfer of funds to external option No pre approval of RBI is required regarding transfer of funds.
Nature of Offence Criminal Civil
Current Account Not defined Defined under section 5 of the Act.
Number of Sections 81 49
Burden of Proof Lies with the accused Lies with the state
Legal Assistance No legal assistance was provided to the accused Section 32 provides the accused with the right to seek help of a legal practitioner.
Punishment for  violation Guilty person was sentenced to imprisonment Guilty person was charged with fine and on the failure to pay such a fine within 90 days then imprisonment

Relevant Legal Provisions


Section 1 of the Act states that, this Act shall apply to the whole of India. Further, it also provides that this Act shall be applicable to all the branches, offices and agencies outside India owned or controlled by a person resident in India. Lastly it provides that if any contravention is committed by a person outside India (to whom this Act applies) then such a person will be held liable as per the provisions of this Act.

Current Account Transactions

Section 5 of the Act provides that any person may indulge in the activities of selling forex from any authorized person or dealer or draw forex from such authorized person provided that such sale or withdrawal is a current account transaction. Now what’s essential to understand here is what actual current account transaction is.

Section 2 (j) defines current account transactions as those transactions which are not capital account transactions and include the payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business. It also includes the payments due as interest on loans and as net income from investments. Further remittances for living expenses of parents, spouse and children residing abroad, and expenses in connection with foreign travel, education and medical care of parents, spouse and children also forms the part of the current account transaction.

 Also the transactions mentioned above are not exhaustive but inclusive in nature and thus, will include any transaction as a part of current account transaction, so far as it does not fall in the category of capital account transactions.

Capital Account Transaction

Section 6 of the Act provides that a resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India provided if such currency, security or property was acquired, held or owned by such person when he was resident outside India or that he inherited these from a person who was resident outside India.

Similarly a resident outside India is also entitled to hold, own, transfer or invest in Indian currency, security or any immovable property situated in India as long as such currency, security or property was acquired, held or owned by such person when he was resident in India or he inherited these from a person who was resident in India.

Also the transactions mentioned Forex Flex EA above are not exhaustive but inclusive in nature and thus, will include any transaction as a part of current account transaction, so far as it does not fall in the category of capital account transactions.

Export of Goods & Services

As per section 7 of the Act every exporter shall furnish to RBI full particulars of the exports including the export value of goods and services, and further ensure the realization and repatriation of exports proceeds within a period of time and manner as and when prescribed by the RBI.

Authorized Persons

An “Authorized Person” as per section 2(c) of the Act, is a person who is authorized by the Reserve Bank to deal in Forex. It includes an authorized dealer, money changer, off-shore banking unit or any other person for the time being authorized by the RBI by the virtue of its power under section 10(1) of the Act.

Further under section 10(3) of the Act, the RBI can also revoke any authorization granted by it, provided if the RBI is satisfied that the authorized person has failed to comply with the condition subject to which the authorization was granted or has contravened any of the provisions of the Act. The RBI can also revoke the authorization if it is satisfied that such revocation is in the public interest.

The authorized persons are under a legal obligation to take declarations from the individuals on behalf of whom the authorized person is going to undertake a foreign exchange transaction, that such transactions are not designed to contravene any provisions of this Act. If the individual denies to undertake the said declaration then the authorized person shall refuse to carry out such a transaction.

Contravention and Penalties

Chapter IV of the Act deals with contravention and penalties wherein as per section 13 whoever contravenes any provision would be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable. Furthermore, in cases where the amount is not quantifiable the penalty can exceed upto a maximum of rupees two lakhs.

Now the provisions of FEMA does not directly attracts the prosecution of an offender, however in cases where the offender has failed to pay the penalty which was imposed on him under section 13 within a period of ninety dates of such imposition of penalty, then in such cases the provisions of section 14 of the Act will be attracted as per which the said person shall be liable to civil imprisonment.

Order of Appeal

Chapter V of this Act deals with the aspect of adjudication and appeals. The order of appeals goes from the adjudicating authority to special directors appeal and then finally to the appellate tribunal. If the party still feels that the order does not serve justice then any party who is aggrieved by the order passed by the appellate tribunal can file an appeal to the High Court within sixty days of the order passed by the appellate tribunal as per section 35 of the Act. Lastly as per section 34 of the Act, no civil court shall have jurisdiction in matters that are governed by this Act.


Therefore, from the understanding of this Act it becomes very evident that this piece of legislation has majorly relaxed the conditions that were required for the dealing in forex. In truth this Act had become the need of the hour as the prior Act in this regard (FERA) was not adequate enough to deal with an economic environment that resulted with the advent of globalization. FEMA has turned out to be a very successful alteration as it not only eliminated the shortcomings of FERA but further accomplished the purpose for which it was drafted i.e. for the expansion of foreign trade and investment in India. FEMA facilitated the growth of India’s export and further made the procurement of important raw materials and capital goods that’s required for rapid industrial growth.


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