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Foreign Exchange Management Act, 1999 (FEMA 1999)

An overview

A. Introduction:

The Foreign Exchange Management Act, 1999 has come into force with effect from the 1st June 2000. As from the same date (1.6.2000) the Foreign Exchange Regulation Act 1973 (FERA 1973), which was in operation for about 27 years, stands repealed.

All foreign exchange transactions which take place from the 1st June 2000 onwards will be governed by the provisions of the new law Foreign Exchange Management Act 1999, (FEMA 1999) and the Rules, Regulations, Notifications, Directions and Orders issued/ framed under the new Act.

The objective of the FEMA is “ to facilitate external trade and payments and to promote the orderly development and maintenance of foreign exchange market in India”.

The major differences between the provisions of the new

law FEMA and those of the repealed Act FERA are given below:

FEMA	FERA
1. As already stated above, the objective of the FEMA is to facilitate external trade and payments and to promote the orderly development and maintenance of the foreign exchange market in India.	1.The objective of the FERA is to conserve the foreign exchange resources of the country and to ensure proper utilisation thereof in the interests of the economic development of the country.
2. Capital account and current account transactions have been defined and distinguished in the new Act.	2.The capital account and current account transactions are not defined and distinguished in the FERA. In fact, there was no reference to CAPITAL account or CURRENT account transactions at all anywhere in the old law FERA.
3. Under the FEMA, any violation of the provisions of the Act will be dealt under CIVIL law only.	3. However, Under the FERA, any violation of the provisions of the Act is dealt under CRIMINAL law.
4. Since any violation has to be dealt under civil law, arrest of a person can only be made under specific circumstances.	4.On the other hand, under the FERA, arrest of a person can be made even on a suspicion of violation of the provisions of the FERA. The reason is that violation is dealt under CRIMINAL law. In some quarters, the FERA was considered as a draconian law.
5. Under the FEMA, the prosecution has to prove that the accused has committed violation of the provisions of the law, and the burden of proof lies with the prosecution.	5. But the FERA states otherwise. The burden of proof lies with the accused, and he must prove his innocence.
6. Under the FEMA, the Enforcement Directorate is vested with only investigating powers and not vested with adjudication powers. It may be stated here that the powers of the Enforcement Directorate have been “curtailed” under the new law FEMA.	6. Under the FERA, the Enforcement Directorate is vested with powers of ADJUDICATION also (in addition to investigating powers).
7. Time limits have been specified for compounding, adjudication etc, under the new law.	7. No such time limits have been specified for compounding, adjudication etc. under the old law FERA.
8. Definition of a person resident in India: a new doctrine has been introduced in the FEMA - namely, “ a person residing in India for more than one hundred and eighty two days during the course of preceding financial year”.	8. The FERA, on the other hand, does not make any reference at all to the number of days during which a person should reside in India. (In other words, “for more than 182 days” is a new concept, which has been introduced for the first time in the law relating to Foreign Exchange Management).
9. The FEMA is comparatively more transparent and friendlier towards the user-public.	9. FERA is considered to be a law to enforce “strict discipline” in foreign exchange transactions and the related matters.
10. Credit cards, debit cards, ATM cards or any other similar instruments have also been included in the definition of the term “currency” in the new law. This is a new addition in the FEMA (which was not there in the repealed law FERA)	10. The Instruments like credit cards, debit cards and ATM cards have not been included in the definition of “currency” under the old law FERA.

B. Authorised Person:

Section 2 (C) of the Foreign Exchange Management Act 1999 defines this term as follows: “ authorised person” means an authorised dealer, moneychanger, offshore banking unit, or any other person for the time being authorised under sub-section (1) of section 10 to deal in foreign exchange or in foreign securities. Section 10(1) of the Act mentioned above states that Reserve Bank of India is empowered to grant authorisation to any person to deal in foreign exchange or in foreign securities. RBI may impose conditions in such cases. The persons so authorised by RBI will be known as authorised dealers in foreign exchange or authorised moneychangers. RBI has powers to revoke such authorisations in public interest at any later date.

C. Capital account transactions:

Investments in India by persons resident outside India, investments outside India by persons who are resident in India, lending and borrowing between residents and non-residents (in foreign currency or in Indian rupees), purchase of immovable property situated in India by persons resident outside India, purchase of immovable property situated outside India by persons who are resident in India are some of the important items falling under the category of capital account transactions.

D. Current account transactions:

1. Transactions other than capital account transactions fall under the category of current account transactions. Examples:

a. Those relating to export trade and import trade.

b. Release of exchange for foreign travel undertaken by

- businessmen

- students for higher studies]

-- individuals for medical treatment/checkup abroad

- professionals like scientists, technocrats etc.

for attending conferences abroad

- individuals for private visits/employment/ emigration abroad.

c. Gift / donation remittances:

2. Transactions of a current account in nature are freely allowed. At the same time, in public interest, the Government of India is empowered to place reasonable restrictions on certain current account transactions. Accordingly a few restrictions of a very reasonable nature have been placed on current account transactions in public interest.

Schedule I Eight items have been given. Remittances mentioned in this schedule are prohibited.

Schedule II Remittances mentioned in this schedule are permitted - but they will require the prior permission of the Government of India - Ministry concerned.

Schedule III Monetary limits have been prescribed in this schedule. Authorised dealers up to the monetary limits mentioned in this schedule may allow remittances. In those cases where no monetary limits have been prescribed remittances would require the prior approval of RBI.

E. Responsibilities of authorised dealers:

Reserve Bank of India has delegated wide powers to authorised dealers for allowing outward remittances in foreign exchange. At the same time, authorised dealers are accountable to RBI for each transaction put through by them under the delegated authority. Applications, declarations and other documents obtained from customers at the time of putting through the transactions must be preserved by authorised dealers and should be made available to RBI for verification purposes whenever required. Authorised dealers are free to call for such documents from customers as may be required by them for allowing outward remittances in foreign exchange. If a transaction cannot be allowed for want of adequate documentation or for any other reason such refusal should be conveyed to the applicant in writing by the authorised dealer mentioning the reasons for the refusal.

F. Deposits by non - residents:

Rules and regulations relating to NRE, FCNR (Banks), NRNR, NRO and NRSR account schemes remain unchanged.

G. Conclusion:

To sum up, the rules, regulations and procedures have been simplified. Branch Managers and branch officials of banks should get themselves fully conversant with the provisions of the FEMA and the Notifications, Rules, Regulations, Directions and Orders issued there under by the Government of India and / or by the Reserve Bank of India, and apply them in the day – to – day operations