Study Material : Foreign Exchange Management Act (FEMA)


Foreign Exchange Management Act (FEMA)

FEMA is a set of regulations that empowers the Reserve Bank of India to pass regulations and enables the Government of India to pass rules relating to foreign exchange in tune with the foreign trade policy of India.

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India “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”.

This act seeks to make offenses related to foreign exchange civil offenses. It enables a new foreign exchange management regime consistent with the emerging framework of the World Trade Organisation (WTO

FEMA replaced an act called Foreign Exchange Regulation Act (FERA)


FERA (Foreign Exchange Regulation Act) legislation was passed in 1973. It came into effect from January 1, 1974. FERA was passed to regulate the financial transactions concerning foreign exchange and securities. FERA was introduced when the FOREX reserves of the country were very low. FERA did not comply with the post-liberalization policies of the Government.


  • With the growing dynamism, globalization and growth of foreign trade, FEMA also paved the way for the introduction of Prevention of Money Laundering Act, 2002

Structure of FEMA

  • The Head Office of FEMA, also known as Enforcement Directorate, headed by the Director is located in New Delhi.
  • There are 5 zonal offices in Delhi, Mumbai, Kolkata, Chennai, and Jalandhar, each office is headed by Deputy Director.
  • Every 5 zones are further divided into 7 sub-zonal offices headed by Assistant Directors and 5 field units headed by Chief Enforcement Officers.

FEMA is applicable to:

  • Foreign exchange
  • Foreign security
  • Exportation of any commodity and/or service from India to a country outside India
  • Importation of any commodity and/or services from outside India
  • Purchase, sale and exchange of any kind (i.e. Transfer)
  • Securities as defined under Public Debt Act 1994
  • Banking, financial and insurance services
  • Any overseas company owned by an NRI (Non-Resident Indian) and the owner is 60% or more
  • Any citizen of India, residing in the country or outside (NRI)

Features of Foreign Exchange Management Act, 1999

  • FEMA gives power to the central government for imposing restriction on activities like making payments to a person situated outside of the country or receiving money through them.
  • FEMA restricts Foreign Exchange as well as Foreign Security deals
  • Transactions revolving around foreign security or foreign exchange as well as payments made from any foreign country to India cannot be made without specific or general permission of FEMA. All transactions must be carried out via an individual who has received authorization for the same.
  • Even though drawing or selling of foreign exchange is carried out via an authorized individual, the FEMA act empowers the Reserve Bank of India to place a number of restrictions on the transactions of the capital account
  • The central government can restrict an authorized individual to carry out foreign exchange deals within the current account, on the basis of general interest of the public
  • The Indian residents have the permission to conduct foreign exchange and foreign security transactions or the right to hold or own immovable property in a foreign country in case the security, property or currency was acquired or owned when the individual was based outside of the country, or when they inherit the property from another individual staying outside the country
  • FEMA is not applicable on the resident (of an Indian citizen) based outside the country

Major Provisions of FEMA Act 1999:

  • Free transactions on current account subject to reasonable restrictions that may be imposed
  • RBI controls over capital account transactions
  • Control over realization of export proceeds
  • Dealing in foreign exchange through authorized persons like authorized dealer or money changer
  • Appeal provision including Special Director (Appeals)
  • Any person can sell or withdraw foreign exchange, without any prior permission from RBI and then can inform RBI later
  • Enforcement Directorate will be more investigative in nature
  • FEMA recognized the possibility of Capital Account convertibility
  • The violation of FEMA is a civil offence
  • FEMA is more concerned with the management rather than regulations or control
  • FEMA is regulatory mechanism that enables RBI and Central Government to pass regulations and rules relating to foreign exchange in tune with foreign trade policy of India

Sample Question

According to FEMA, foreign exchange does NOT include

(A) Deposits payable in any foreign currency

(B) Bills of exchange drawn in Indian currency but payable in any foreign currency

(C) Travellers cheques drawn by institutions outside India but payable in Indian currency

(D) Drafts drawn by banks outside India and payable in foreign currency

2012 December UGC NET

Match the items of List – I with the items of List – II.

List – I                                                List – II

a. FEMA                                             1. 1986

b. Indian Factories Act                       2. 1999

c. Industrial Dispute Act                    3. 1948

d. Consumer Protection Act               4. 1947


       a b c d

(A) 4 2 3 1

(B) 3 1 2 4

(C) 2 3 4 1

(D) 1 4 3 2

2012 June UGC NET

Match the items of List – I with items of List – II:

List – I                                                                   List – II

1. Measures towards globalization           I. Globalisation

2. Off-shoring                                                    II. FEMA

3. FERA                                                                 III. Liberalise the inflow of

4. Mr. AruthurDunkel                                     IV. Uruguay Round


         1 2 3 4