FEMA (Foreign Exchange Management Act)

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    FEMA (Foreign Exchange Management Act) was introduced in the year 1999 to replace an earlier act FERA (Foreign Exchange Regulation Act). FEMA was formulated to fill all the loopholes and drawback of FERA and hence several economic reforms were introduced under the FEMA act. FEMA was basically introduced to de-regularize and have a liberal economy in India. The main objective for which FEMA was to facilitate external trade and payments. FEMA was also formulated to assist orderly development and maintenance of the Indian forex market.

      • Under the FEMA, the balance of payment is the record of dealings between the citizen of different countries in goods, services and assets. It is divided into Capital Account and Current Account.

    Capital Account comprises all capital transactions whereas Current Account comprises trade of merchandise. Current

    • Account transactions involve inflow and outflow of money to and from the country/countries during a year, due to the trading/rendering of commodity, service, and income.
    • The current account is an indicator of an economy’s status. As mentioned aforesaid the balance of payment comprises current and capital accounts, the remainder of the Balance of Payment is Capital Account, which consists the movement of capital in the economy due to capital receipts and expenditure. Capital account recognises domestic investment in foreign assets and foreign investment in domestic.

    Features of FEMA

    1. It gives powers to the Central Government to regulate the flow of payments to and from a person situated outside the country.
    2. All financial transactions concerning foreign securities or exchange cannot be carried out without the approval of FEMA.
    3. The Government of India can restrict an authorized individual from carrying out foreign exchange deals within the current account in public interest.
    4. It also empowers RBI to place restrictions on transactions from capital Account even if it is carried out via an authorized individual.
    5. As per this act, Indians residing in India, have the permission to conduct a foreign exchange, foreign security transactions or the right to hold or own immovable property in a foreign country in case security, property, or currency was acquired, or owned when the individual was based outside of the country, or when they inherit the property from individual staying outside the country.

    Applicability of FEMA Act

    FEMA is applicable to the whole of India and equally applicable to the agencies and offices located outside India. FEMA is applicable to:

    • Foreign exchange.
    • Foreign security.
    • Exportation of any commodity or service from India to a country outside India.
    • Importation of any commodity or services from outside India.
    • Securities as per Public Debt Act 1994.
    • Purchase, sale and exchange of any kind
    • Banking, financial and insurance services.
    • Any overseas company owned by an NRI and the owner is 60% or more.
    • Any citizen of India, residing in the country or outside.

    The Current Account transactions under the FEMA Act includes –

    • Transactions prohibited by FEMA,
    • The transaction requires Central Government’s permission,
    • The transaction requires RBI’s permission

    Penalties under FEMA

    If any person contravenes the provisions of FEMA or any rule, direction, regulation, order or notification issued under FEMA, he shall be liable to pay a penalty up to thrice the sum involved in such contravention or up to Rs.2 lakh. Where such contravention is a continuing one, he shall be liable to pay a further penalty which may extend to Rs.5,000 for every day during which the contravention continues.

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