Foreign Exchange and Management Act, 1999

Piyali Sengupta

HNLU, Raipur

Editor’s Note: The paper deals with the Foreign Exchange and Management Act, 1999 comprehensively.”


The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.[1] In fact it is the central legislation that deals with inbound investments into India and outbound investments from India and trade and business between India and the other countries.

The FEMA provides:

  • Free transactions on current account subject to reasonable restrictions that may be imposed
  • RBI control over Capital Account Transactions
  • Control over realization of export proceeds
  • Dealings in Foreign Exchange through Authorised Person (e.g Authorised Dealer/ Money Changer/ Off-shore Banking Unit)
  • Adjudication of Offences
  • Appeal provisions including Special Director (Appeals) and Appellate Tribunal
  • Directorate of Enforcement


In the backdrop of acute shortage of Foreign Exchange in the country, the Foreign Exchange Regulation Act of 1973 (FERA) was enacted. This legislation was passed by the Indian Parliament by the government of Indira Gandhi but it came into force with effect from January 1, 1974. FERA had a controversial 27 year stint during which many bosses of the Indian Corporate world found themselves at the mercy of the Enforcement Directorate.

FERA imposed stringent regulations on certain kinds of payments. It dealt in foreign exchange and securities and the transactions which had an indirect impact on the foreign exchange and the import and export of currency. The purpose of the act, inter alia, was to “regulate certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of foreign exchange resources of the country”. It was repealed in 1999 by the government of Atal Bihari Vajpayee and replaced by the Foreign Exchange Management Act, which liberalised foreign exchange controls and restrictions on foreign investment.

FEMA had become the need of the hour since FERA had become incompatible with the pro-liberalisation policies of the Government of India. It brought a new management regime of Foreign Exchange consistent with the emerging framework of the World Trade Organisation (WTO). It is another matter that the enactment of FEMA also brought with it the Prevention of Money Laundering Act 2002, which came into effect from 1 July 2005.


  • Object to conserve and prevent misuse
  • Violation was Criminal Offence and was non compoundable
  • It was a draconian police law


  • To facilitate external trade and payments
  • Violation is a civil offence and is compoundable
  • It is a civil law



FEMA contains 7 Chapters divided into 49 sections of which 12 sections cover operational part and the rest contravention, penalties, adjudication, appeals, enforcement directorate, etc.

As far as transactions on account of trade in goods and services are concerned, FEMA has by and large removed the restrictions except for the enabling provision for the Central Government to impose reasonable restrictions in public interest. The capital account transactions will be regulated by RBI /Central Government for which necessary circulars /notifications will have to be issued under FEMA.

CHAPTER I – Preliminary (Sec 1&2)

CHAPTER II- Regulation and Management of Foreign Exchange (Sec 3 –9)

CHAPTER III – Authorised Person (Sec 10 –12)

CHAPTER IV – Contravention and Penalties (Sec 13-15)

CHAPTER V – Adjudication and Appeal (Sec 16- 35)

CHAPTER VI – Directorate of Enforcement (Sec 36-38)

CHAPTER VII- Miscellaneous (Sec 39 – 49)

Besides the FEMA, there are 5 rules and 23 regulations under the Act which help in implementation of the Act.


FEMA in itself is not an independent and isolated law. The provisions of FEMA are spread at different places and so are there regulatory bodies. Reserve Bank of India (RBI) makes regulations for FEMA and the rules are made by Central Government.

Though RBI is the overall controlling authority in respect of FEMA, enforcement of FEMA has been entrusted to a separate “Directorate of Enforcement” formed for this purpose. (Section 36)

Authorities governing the enforcement of FEMA:

  • Foreign Exchange Department of Reserve Bank of India (RBI) –
  • Directorate of Enforcement, Department of Revenue, Ministry of Finance- http://directorateofenforcement.
  • Capital Markets Division, Department of Economic Affairs, Ministry of Finance – http:// ministry/dept eco affairs/
  • Foreign Trade Division, Department of Economic Affairs, Ministry of Finance – http:// eco affairs/

Machinery responsible for various aspects of FEMA is:

  1. Enforcement Directorate – To investigate provisions of the Act, the Central Government have established the Directorate of Enforcement with Director and other officers as officers of the Enforcement. It is mainly concerned with the enforcement of the provisions of the Foreign Exchange Management Act to prevent leakage of foreign exchange which occurs through malpractices. Directorate has to detect cases of violation and also perform substantial adjudicatory functions to curb malpractices.[2]

The Enforcement Directorate is an attached office of the Ministry of Finance, Department of Revenue. Prior to 1st May, 1956, the responsibility for enforcement of exchange control laws under FERA 1947 was discharged by the Investigation and Enforcement Section in the Exchange Control Department of the R.B.I.

This Directorate is under the administrative control of the Department of Revenue for operational purposes; the policy aspect of the Act and its legislation and its amendments are however within the purview of the Department of Economic Affairs. The background of keeping the policy aspects relating to the Act in the Department of Economic Affairs is that –

(i) the Department of Economic Affairs is more closely involved in the formulation of policy responses at the macro level to the changing economic scenario; and

(ii) the Department of Economic Affairs coordinates with RBI in respect of trade and invisible transactions and banking aspects of the Act.[3]

  1. Adjudicating Authority – The adjudicating authority will issue a notice to the person who has contravened the provisions of the Foreign Exchange Management Act, Rules, Regulations, Notifications or any directions issued by the RBI.[4]
  2. Special Director (Appeals) – Any person aggrieved by an order made by the Adjudicating Authority, being an Assistant Director of Enforcement or a Deputy Director of Enforcement can prefer an appeal to the Special Director (Appeals).
  3. Appellate Tribunal – Any person aggrieved by an order made by the Adjudicating Authority, or the Special Director (Appeals) can prefer an appeal to the Appellate Tribunal
  4. Foreign Exchange Department of RBI (Earlier till 31.1.04, known as Exchange Control Department) – The Foreign Exchange Department of the Reserve Bank administers Foreign Exchange Management Act, 1999, (FEMA) which has replaced the earlier Act , FERA, with effect from June 1, 2000. For purchase of foreign exchange for most of the current account transaction, with exception of those listed in Schedule III to the Government of India Notification G.S.R. No 381(E) dated May 3, 2000; no permission from the Reserve Bank is required. Extensive powers are available to banks authorised to deal in foreign exchange, known as authorised dealers. As a result, foreign exchange can be purchased for practically all transactions which are of current account nature.
  5. Foreign Investment Implementation Authority (FIIA)- Government of India has set up the Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation, to provide a pro-active one stop after care service to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various Government agencies to find solution to their problems.[5]
  6. 7. Foreign Investment Promotion Board- The Foreign Investment Promotion Board (FIPB) is a government body that offers a single window clearance for proposals on Foreign Direct Investment (FDI) in India that are not allowed access through the automatic route. FIPB comprises of Secretaries drawn from different ministries with Secretary, Department of Economic Affairs, MoF in the chair.[6] This inter-ministerial body examines and discusses proposals for foreign investments in the country for sectors with caps, sources and instruments that require approval under the extant FDI Policy (prescribed vide Circular 1 of 2012)on a regular basis. The Minister of Finance, considers the recommendations of the FIPB on proposals for foreign investment up to 1200 crore. Proposals involving foreign investment of more than  1200 crore require the approval of the Cabinet Committee on Economic Affairs (CCEA).[7]

FIPB is mandated to play an important role in the administration and implementation of the Government’s FDI policy. It has a strong record of actively encouraging the flow of FDI into the country through speedy and transparent processing of applications, and providing on-line clarification. In case of ambiguity or a conflict of interpretation, the FIPB has always stepped in with an investor-friendly approach.

  1. The Authority for Advance Rulings (AAR) pronounces rulings on the applications of the non-resident/residents submitted in the prescribed form following prescribed procedure and such rulings are binding both on the applicant and the income-tax department.


Foreign Exchange refers to money denominated in the currency of another nation or group of nations like Euro. Foreign exchange can be cash, funds available on credit cards and debit cards, traveler’s checks, bank deposits, or other short-term claims. Section 2(n) of FEMA states that “foreign exchange” means foreign currency and includes,-

(i) deposits, credits and balances payable in any foreign currency,

(ii) drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency,

(iii) drafts, travelers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency;

FEMA prohibits:

  • Dealing in or transfer of Foreign Exchange or Foreign Security to any person other than Authorised Person
  • Make any payment otherwise through an authorized person to or for the credit of any person resident outside India in any manner
  • receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner.
  • enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person

Manner of receipt in Foreign Exchange

Payment for Export can be received:

  • in form of Draft, cheque, foreign currency notes/travelers cheque etc. provided the foreign currency so received is surrendered within the specified time period
  • by debit to FCNR /NRE Account
  • In rupees from the credit card servicing bank in India where payment is made via credit card
  • From a rupee account held in the name of exchange house with an authorised dealer if the amount does not exceed Rs 2 lacs
  • In the form of precious metals
  • Payment can be received in cash from Foreign Travelers in India if the same foreign exchange is duly surrendered
  • RBI also permits offsetting of export proceeds against import payables etc. after obtaining prescribed certificate from CA/Cost Accountant in this regard
  • Payment shall be made in a currency appropriate to the country of shipment of goods
  • Drawal of Foreign Currency means drawal from an authorised person and includes opening of letter of credit, use of international credit card etc. which has an effect of creating foreign exchange liability

Repatriation of Foreign Exchange

“Repatriate to India” means bringing into India the realized foreign exchange and-

  • the selling of such foreign exchange to an authorized person in India in exchange for rupees, or
  • the holding of realized amount in an account with an authorized person in India to the extent notified by the Reserve Bank,
  • It includes use of the realized amount for discharge of a debt or liability denominated in foreign exchange

Manner of Repatriation -It can be done in the following manner:

  • Sell it to Authorised Person in India in exchange for Rupees
  • Retain in an account with an authorised dealer
  • Use it for discharge of a debt or liability denominated in foreign exchange in the manner specified by RBI

Surrender of Foreign Exchange

  • Any Foreign Exchange earned by a person other than person resident in India not used for permissible purposes should be surrendered within 60 days of such acquisition / purchase
  • However if acquired for Foreign Travel within 90 days if the exchange is in currency and coins and 180 days if it is in traveler’s cheque or if the same is acquired by person resident in India

These provisions are not applicable to Foreign Currencies of Nepal and Bhutan


As stated earlier all transactions between a resident and a non-resident is covered in FEMA, these transaction can be broadly classified in two groups current account transactions and capital account transactions.

  1. Current Account Transactions

As per Sec 2 (e) “Capital account transaction” means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in Sec 6(3). Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a current account transaction.

The Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be required from time to time.

The definition is inclusive and any expenditure which is not a capital account transaction will be current account transaction. It includes:

  • payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business
  • payments due as interest on loans and as net income from investments
  • 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

The following transactions are therefore regarded as Capital Account Transaction[8]

(a) Transfer or issue of any foreign security by a person resident in India;

(b) Transfer or issue of any security by a person resident outside India;

(c) Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;

(d) Any borrowing or lending in foreign exchange in whatever form or by whatever name called;

(e) Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;

(f) Deposits between persons resident in India and persons resident outside India;

(g) Export, import or holding of currency or currency notes;

(h) Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;

(i) Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;

(j) Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred,-

(i) By a person resident in India and owed to a person resident outside India; or

(ii) By a person resident outside India.

Though the norms of Capital Account Transactions have been considerably relaxed, as a general rule all capital account are prohibited unless specifically allowed. Permissible capital account transactions are governed by the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 (Notification FEMA 1/2000-RB).

Release of Exchange for Travel

  The following do not require any approval from RBI:

  • Upto USD 10,000 or equivalent in one financial year for one or more private visits abroad (Nepal and Bhutan being exempted )
  • Upto USD 25,000 for business visits
  • Upto USD 1,00,000 for person going to abroad for employment, education (yearly) and for medical Treatment[9]

Business and Commercial Remittance Abroad

  • Foreign Technology Agreements are permitted except in High Priority Industries
  • Payment can be made on lump sum or Royalty based on sales or by issue of Equity Shares after deducting TDS
  • There are no limitations on royalty payment and payment of Technical Fees
  • No collaboration permitted in Lottery, Gambling etc.[10]

Restrictions on Current Account Transactions

The following requires prior approval of RBI:

  • Gifts and Donations above USD 5000
  • Corporate Donation above 1 % of Foreign Exchange Earning during 3 previous years or USD 5 million, whichever is less
  • Commission to Agents abroad for sale of residential/commercial plots in India above 5 % of Inward Remittance or USD 25000 , whichever is higher
  • Consultancy Charges paid abroad for more than USD 1 million
  • Reimbursement of Pre-incorporation expenses above 5% of FDI or USD 1 lac whichever is higher
  1. Capital Account Transactions

Section 2 (j) of FEMA defines “capital account transaction” as a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions like:

  • Changes in Assets/ Liabilities
  • Transfer/ issue of security
  • Borrowing/ Lending
  • Export, import or holding of currency or currency notes
  • Giving guarantee

As per the provisions laid down in Section 5, a person may sell or draw foreign exchange freely for his current account transactions, except in a few cases where limits have been prescribed The Central Government has the power to regulate current account transactions. Unless the transaction is restricted, Foreign exchange can be drawn for the same. Current Account transactions are governed by the Foreign Exchange Management (Current Account Transactions) Rules, 2000 (Notification No.GSR.381(E), dated 03/05/2000).

Drawal of foreign exchange for the following purposes are prohibited:

  • A transaction specified in Schedule I.
  • Travel to Nepal and/or Bhutan.
  • Transaction with a person resident in Nepal or Bhutan.

Drawal means drawal of foreign exchange from an authorized person and includes opening of Letter of credit or use of International Credit Card or International Debit Card or ATM Card or any other thing by whatever name called which has the effect of creating foreign exchange liability.[11]

Current Account Transactions are covered under the following:

  • Transactions prohibited under Schedule I like Remittance of dividend by any company to which the requirement of dividend balancing is applicable, Remittance out of lottery winnings, Remittance of income from racing/riding, etc., Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes, etc.
  • Transactions that require prior approval of Government of India, mentioned in Schedule II like Cultural Tours – Ministry of Human Resource Development (Department of Education and Culture), Advertisement in foreign print media for the purposes other than promotion of tourism, foreign investments and international bidding (exceeding US$ 10,000) by a State Government and its Public Sector Undertakings-Ministry of Finance, Department of Economic Affairs, Remittance of Freight of vessel chartered by a PSU -Ministry of Surface Transport (Chartering Wing) etc.
  • Transactions that require prior approval of Reserve Bank of India, mentioned in Schedule III like Release of exchange exceeding US $ 10,000 or its equivalent in one financial year, for one or more private visits to any country (except Nepal and Bhutan), Gift remittance exceeding US$ 5,000 per financial year per remitter/donor other than resident individual etc.

Who can make FDI?

  • Person Resident outside India except for Pakistan
  • Entity incorporated outside except Pakistan & Bangladesh
  • Person Resident of Bangladesh & entities incorporated there can make investment in India in form of shares and convertible Debentures with prior approval of RBI

RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors.
The companies are however required to notify the concerned Regional office of the RBI about receipt of inward remittances within 30 days of such receipt and to file the required documents with the concerned Regional offices of the RBI within 30 days after issue of shares to the foreign investors or NRIs.[12]

Industrial Policy towards Foreign Investment

  FDI in shares is permitted 100% in all industries except the following:

  • Proposals requiring Industrial License
  • Investment exceeding 24% inn SSI reserved items
  • Investment in Defense sector upto 26%
  • Foreign collaborator having previous tie up
  • Acquisition in shares of existing Company
  • Prohibited Sectors – Prohibited Sectors include
  • Retail Trading (except single brand retailing)
  • Atomic Energy
  • Lottery Business
  • Gambling Betting etc.
  • Activity /sector not opened for private sector investment
  • Agriculture except few prescribed
  • Plantation except tea plantation
  • Real Estate Business except few prescribed
  • Manufacture of Cigars, cigarettes etc.

Activities requiring Government Approval – Activities that require government approval include Petroleum Sector, Investing Companies in Infrastructure and Service Sector, Defense & Strategic Industries ,Atomic Minerals, Print Media, Broadcasting, Postal Services, Courier Services ,Establishment & operation of Satellite , Development of Integrated Township.

The Reserve Bank of India (RBI) has recently come out with notifications under the FEMA to operationalise foreign direct investment (FDI) policy in multi-brand retailing, telecom and others. It has also widened the definition of the term ‘control’ under the Act which would have repercussions on downstream investment by an entity controlled by foreigners. The government had relaxed norms for 51 per cent multi-brand retail trading and eased the mandatory 30 per cent local sourcing norms for companies.[13] The cap in telecom was increased to 100 per cent from 74 per cent. FDI of up to 49 per cent can come through the automatic route.[14]


The Indian foreign exchange market has operated in a liberalised environment for more than a decade. A cautious and well-calibrated approach was followed while liberalising the foreign exchange market with an emphasis on the need to safeguard against potential financial instability that could arise due to excessive speculation.

Besides, with the Indian economy moving towards further capital account liberalisation, the development of a well-integrated foreign exchange market also becomes important as it is through this market that cross-border financial inflows and outflows are channelled to other markets. Replacing of FERA, 1973 by FEMA, 1999 helped removing the flaws and overcoming the hurdles posed by it.

Edited By Amoolya Khurana

[1] Objectives and Purpose, The Foreign Exchange Management Act, 1999.

[2] Directorate Of Enforcement, available at,last seen 6/10/2014.

[3] Ibid.

[4] Foreign Exchange Market, Report on Currency and Finance available at, last seen 18/10/,2014.

[5] Foreign Investment Implementation Authority, available at, last seen 8/10/2014.

[6] Foreign Investment Promotion Board, INDIA, available at, last seen 7/10/2014.


[8] Rajkumar S Adukia, Fathoming FEMA {Overview of Provisions of Foreign Exchange Management Act, 1999 (FEMA) and Rules and Regulations there under}, ICSI,A-418 November 2011 available at, last seen 14/10/2014.

[9] Ibid.

[10] Ibid.

[11] What is Drawal, available at, last seen 5/02/2014.

[12] Devesh Pandey,  Foreign Direct Investment In India (Policies, Procedure And Legal Framework), Corporate Laws Blog, available at, last seen 7/10/2014.

[13] Ibid.

[14] RBI notifies rules under Fema to operationalise FDI decisions, Business Standard, available at, last seen 14/10/2014.

4 Replies to “Foreign Exchange and Management Act, 1999”

  1. Indian company supply goods to another Indian Company on behalf of a Foreign company. Foreign Company authorised indian company to pay/discharge its liability in INR to the Indian COmpany. Can this arrangement is permisible under FEMA.

  2. The difference what is given in the essay is just opposite, in the place of FEMA it should be FERA and vice versa.

  3. Difference between FERA & FEMA is wrong. Details of difference are mentioned on wrong heads. Pls do the needful corrections.

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