On June 1, 2000, the Indian government replaced the Foreign Exchange Regulation Act (FERA) with the Foreign Exchange Management Act (FEMA), 1999. FERA, enacted in 1973 during a period of acute foreign exchange scarcity, had been controversial, leading to legal action against several prominent figures in the Indian corporate world and politics.
FEMA brought significant changes to the regulatory framework governing foreign exchange transactions. It explicitly stated that violations of foreign exchange regulations would not lead to criminal prosecutions. Instead, FEMA introduced monetary penalties, capped at three times the amount involved, compared to FERA’s five times penalty provision.
The law also granted authority to the Enforcement Directorate to seek court-issued warrants for non-payment of penalties, potentially leading to imprisonment for defaulters. However, those who paid their penalties would be released.
Chapter II of FEMA deals primarily with the regulation and management of foreign exchange. Section 3 prohibits any person from dealing in or transferring foreign exchange or foreign securities to anyone other than an authorized entity. Section 4 states that Indian residents may not acquire, hold, own, possess, or transfer foreign exchange, foreign securities, or foreign immovable property unless explicitly permitted.
Sections 5 and 6 of FEMA address current and capital account transactions. Section 5 allows the sale or drawing of foreign exchange for current account transactions, while Section 6 permits these transactions for capital accounts under the guidelines set by the Reserve Bank of India (RBI). However, RBI can prohibit, restrict, or regulate certain transactions, such as foreign security transfers, borrowing or lending in foreign exchange, and deposits between residents and non-residents.
Section 7 mandates that every exporter of goods must furnish a declaration to the RBI containing accurate details, including the full export value. It also requires providing other information deemed necessary by the RBI to ensure the realization of export proceeds.
Section 8 stipulates that anyone with foreign exchange due or accrued must take reasonable steps to realize and repatriate it to India within the specified period and manner as directed by the RBI. Section 9 outlines exemptions from the requirement for realization and repatriation of foreign exchange.
Chapter VI of FEMA addresses contravention and penalties. Section 13 imposes penalties on individuals or entities violating FEMA provisions, with penalties based on the nature and extent of the contravention. If the penalty is not paid within 90 days, the defaulter may face civil imprisonment.
Section 16 allows the Central Government to appoint Adjudicating Authorities for inquiries and appeals against penalties. The Appellate Tribunal may hear appeals against these judgments, ultimately subject to review by the High Court.
Chapter VII (Sections 39 to 49) includes miscellaneous provisions related to FEMA. Notably, Section 40 permits the suspension or relaxation of specific provisions by the Central Government, subject to parliamentary approval. Sections 41, 45, 46, 47, and 48 empower the Central Government and RBI to establish rules, regulations, and directions. Section 49 repeals FERA, 1973, and dissolves the Appellate Board constituted under Section 52 of the former Act.
FEMA’s introduction marked a shift from FERA, emphasizing “exchange management” over “exchange regulation.” It reduced the severity of punitive measures by making violations civil offenses instead of criminal offenses, with monetary penalties replacing imprisonment. This change aligned with India’s economic liberalization.
FEMA aimed to facilitate external trade, promote foreign exchange market development, and simplify foreign exchange transactions. It was a significant step toward capital account convertibility and signaled a shift away from regulating foreign capital strictly.
Despite its limitations, FEMA introduced flexibility, efficiency, and satisfaction to the foreign exchange management system, aligning with India’s liberalized economic policies. However, challenges, such as current account deficits and global pressures, may require future adjustments in foreign exchange controls.
In conclusion, FEMA, 1999, represented a pivotal shift in India’s approach to foreign exchange regulation, replacing the more stringent FERA. Its emphasis on liberalization and simplification reflected India’s evolving economic landscape and contributed to greater economic flexibility.
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