What is the full form of FEMA ?

What is FEMA?

Foreign Exchange Management Act (FEMA) is an act which aims to liberalize the foreign exchange market in India and provide a framework for the management of foreign exchange transactions for trade, payments, and other business activities.

The act also defines certain offenses, such as contraventions of foreign exchange regulations, and provides for penalties and fines. The act also provides for the creation of an appellate tribunal to hear appeals against the decisions of the enforcement directorate.

History

The Foreign Exchange Management Act (FEMA) was enacted in India in 1999, replacing the Foreign Exchange Regulation Act (FERA) which was in effect from 1973.

FERA was enacted during a time of severe foreign exchange shortage in India. FERA imposed strict regulations on various foreign exchange transactions, and also imposed penalties for non-compliance.

However, as India's economy began to liberalize in the 1990s, the government recognized that FERA's strict regulations were hindering economic growth and investment. In 1998, the government set up a committee to review FERA and recommended changes to the law and the enactment of a new law, which became the Foreign Exchange Management Act (FEMA).

Fundamental Principle

The Foreign Exchange Management Act (FEMA) aims to regulate the foreign trade in the country and promote economic growth. Some of the fundamental principles of the act include

• Simplification of regulations − The act simplifies the regulations governing foreign exchange transactions in India, making them more conducive to the country's economic development.

• Liberalized regime − The act provides a liberalized regime for foreign exchange transactions, allowing for greater flexibility in the use of foreign exchange resources.

• Promotion of external trade and payments − The act aims to facilitate external trade and payments and promote the proper growth of the foreign exchange market.

• Encouragement of foreign investment − The act aims to encourage foreign investment in India by providing a more predictable and transparent regulatory framework.

• Compliance and enforcement − The act provides for compliance and enforcement mechanisms to ensure that foreign exchange regulations are followed, including penalties for non-compliance.

Appellate Tribunal The act provides for the creation of an appellate tribunal to hear appeals against the decisions of the enforcement directorate.

Rules and Regulations Under FEMA

The Foreign Exchange Management Act (FEMA) lays down the regulations and rules for various foreign exchange transactions and activities in India. As per FEMA there are two types of foreign transactions. These are

• Current Account Transactions − These transactions include trade-related transactions, invisibles such as software services and remittances, and other transactions that do not result in a change in foreign exchange assets.

• Capital Account Transactions − These transactions include foreign investments, external commercial borrowings and foreign currency loans, and other transactions that result in a change in foreign exchange assets.

Some of the key regulations and rules under the act that guides the foreign transactiona include

• Foreign Exchange Management (Current Account Transactions) Rule, 2000 − These rules provide the procedures for various current account transactions including imports, exports, and foreign remittances.

• Foreign Exchange Management (Capital Account Transactions) Regulations, 2000 − These regulations provide the procedures for various capital account transactions including foreign investments and external commercial borrowings.

• Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 − These regulations provide the procedures for transfer or issue of securities by a person resident outside India.

• Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 − These regulations provide the procedures for acquisition and transfer of immovable property in India by a person resident outside India.

Related Legislation

There are several other laws and regulations that are related to or complement FEMA in regulating foreign exchange in India. Some of the related legislation include

• The Reserve Bank of India Act, 1934

• The Foreign Trade (Development & Regulation) Act, 1992

• The Customs Act, 1962

• The Foreign Contribution (Regulation) Act, 2010 (FCRA)

• The Prevention of Money Laundering Act, 2002 (PMLA)

• The Income Tax Act, 1961.

Conclusion

In conclusion, the Foreign Exchange Management Act (FEMA) is a crucial legislation in India that regulates foreign exchange transactions and provides a framework in order to prpomote development and maintenance of the foreign exchange market in the country. It provides a liberalized regime for foreign exchange. This act was designed to replace the FERA and make international trading simple.

FAQs

Q1. Is FEMA applicable agencies outside India?

Ans. FEMA is equally applicable to Indian offices and agencies or offices located outside India but owned or managed by a citizen of India.

Q2. Who administers the Foreign Exchange Management Act (FEMA)?

Ans. FEMA is administered by the Reserve Bank of India (RBI) and the Ministry of Finance of India.

Q3. What is the punishment if any rule under FEMA is violated?

Ans. Violation of any rules stated under FEMA can lead to a penalty of rupees 2 lakhs or more. If the penalty is not cleared within a stipulated time it can lead to imprisonment or additional penalty.