Context:
Indian residents who ask friends, associates, or agents abroad to make initial payments (10–20%) for overseas purchases—such as artwork, luxury watches, or real estate—risk violating the Foreign Exchange Management Act (FEMA), even if the transactions are genuine. The Enforcement Directorate (ED) has recently issued notices highlighting this issue, invoking Section 3(a) of FEMA.
Foreign Exchange Management Act (FEMA), 1999
The Foreign Exchange Management Act (FEMA), 1999 is India’s primary law governing foreign exchange transactions, external trade, and cross-border capital flows. It replaced the more restrictive Foreign Exchange Regulation Act (FERA), 1973.
In Force Since
- 1 June 2000
Administered By
- Ministry of Finance
- Enforced by: Reserve Bank of India (RBI) and Directorate of Enforcement (ED)
Objectives of FEMA
- Facilitate external trade and payments
- Promote orderly development and maintenance of the foreign exchange market in India
- Shift from a control-based regime (FERA) to a management-based regime
- Encourage foreign investment and capital inflows while ensuring macroeconomic stability
Key Features of FEMA
1. Civil Law Framework
- Violations are treated as civil offences, not criminal (unlike FERA)
- Focus on penalties and compliance, not imprisonment (except in extreme non-payment cases)
2. Classification of Transactions
FEMA divides forex transactions into two categories:
a) Current Account Transactions
- Related to trade, services, income and remittances
- Generally permitted, unless specifically restricted
Examples: - Import/export payments
- Travel, education and medical expenses abroad
- Interest and dividend payments
b) Capital Account Transactions
- Involve capital flows and asset/liability creation
- Regulated and controlled by RBI and Government
Examples: - Foreign Direct Investment (FDI)
- External Commercial Borrowings (ECBs)
- Acquisition of immovable property abroad
- Issue or transfer of securities to non-residents
Regulatory Powers under FEMA
Reserve Bank of India (RBI)
- Regulates capital account transactions
- Frames rules, regulations, and directions
- Authorises dealers (banks, money changers)
Central Government
- Prescribes rules for current account transactions
- Coordinates with RBI on capital controls
Directorate of Enforcement (ED)
- Investigates FEMA contraventions
- Conducts adjudication and enforcement actions
Key Concepts under FEMA
- Authorised Person (AP): Banks or entities licensed by RBI to deal in foreign exchange
- Person Resident in India: Defined based on duration and purpose of stay
- Foreign Exchange & Foreign Security: Broadly defined to cover modern financial instruments
Difference Between FEMA and FERA
| Aspect | FERA (1973) | FEMA (1999) |
|---|---|---|
| Approach | Restrictive | Facilitative |
| Nature of law | Criminal | Civil |
| Focus | Conservation of forex | Management of forex |
| Presumption | Guilty unless proven innocent | Innocent unless proven guilty |
| Economic context | Closed economy | Liberalised economy |
