FEMA stands for ‘Foreign Exchange Management Act’. This is an official act amends and implements laws regulating foreign exchange in India. FEMA was established with the objective of “facilitating external trade and payments and promoting the orderly development and maintenance of foreign exchange market in India”. This act was a replacement of the Foreign Exchange Regulation Act (FERA) of 1973. FEMA was enacted in the winter session of the parliament in 1999.
The Foreign Exchange Management Act was officially enacted on 1st June 2000. This act gave impetus to the forex market in India. Furthermore, it paved the way for the introduction of the Prevention of Money Laundering Act (PMLA) in 2002.
Guidelines and Regulations for outward remittances
While the FERA regarded all the forex-related offences as criminal offences, the FEMA considers them as civil offences. Additionally, there were other important facts such as:
- It was not applicable to the people residing outside India. The eligibility was checked by calculating the number of days a person resided in India during the previous financial year (182 days or more to be a resident). For the purpose of checking the residency, it was observed that an office, a branch, or an agency could be a ‘person’. Therefore, these were considered to be standard norms to recognize a person’s authorized entity under FEMA.
- FEMA authorized the central government to impose restrictions on and supervise three things – payments made to any person outside India or receipts from them, forex, and foreign security deals.
- It made the areas vivid with regard to the acquisition/holding of forex that required specific permission of the Reserve Bank of India (RBI) or the government.
- The two categories of the foreign exchange transactions are capital account and current account. The capital account transaction not only altered the assets and liabilities outside India or inside India but also of a person resident outside India. As a result, all types of transaction that changed overseas assets and liabilities for an Indian resident in a foreign country, or vice versa, was classified as a capital account transaction. The rest of the transactions came under the current account category.
Capital Account Transactions under FEMA
With the virtue of FEMA, the RBI got the authority to regulate capital account transactions. The Foreign Exchange Management (Permissible Capital Account Transactions) Regulations of 2000 has made it clear that a person must not undertake or sell or draw foreign exchange to or from a person who is authorized for any capital account transaction. The regulation enforces prohibition on resident outside India from investing in Indian firms or organisations in the business of chit funds, agricultural or plantation activities. The act is also applicable for all sorts of real estate (excluding development of townships, construction of residential/commercial premises, roads or bridges), or construction of farm houses, and/or in trading in Transferable Development Rights (TDRs).
But it did allow for transactions carried out by Indian residents that included investments in foreign securities, foreign currency loans rose in and out of India, and transfer of immovable property which is not in the Indian Territory. FEMA has also issued the guarantees in favour of anybody living outside India, and the export/import and holding of currency/currency notes.
Current Account Transaction under FEMA
Under The Foreign Exchange Management Act, the central government issued the Foreign Exchange Management (Current Account Transaction) Rules of 2000 which restricted forex deals made by authorised persons under their current account. Under the FEMA rules and regulations, current account transactions which face prohibition, are not prohibited, permitted and required the prior approval of the central government and/or RBI.
The prohibited transactions were remittance of lottery winnings, income from racing/riding, purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, commission on exports made towards equity investment in JVs/wholly owned subsidiaries of Indian companies abroad, amongst others. Additionally, the act made an important Nepal and Bhutan allowed the use of Indian currency for local transactions, and the citizens of these countries were considered at par with Indian citizens from a legal standpoint. Because of these provisions, the use of common currency in the markets in India, Nepal and Bhutan, use of forex for transactions were prohibited.
Moreover, FEMA recognized the growing international presence of Indians as well as the rising contribution of Non Resident Indians (NRIs) to the Indian economy. So under the LSR limit scheme of FEMA, one can send money to India – up to a limit of US $250,000 in one financial year.
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