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What Is Foreign Exchange Management Act (FEMA)?

In this article, we will be taking a look at the different aspects of the Foreign Exchange Management Act.


The primary role of the Ministry of Corporate Affairs is to ensure that corporate governance in all matters related to industry and commerce is thorough with all the right checks and balances in place to mitigate malpractice or fraud. Foreign exchange transactions, while encouraged from the perspective of improving the tradability of the Indian Rupee, needs to be monitored and regulated so as to ensure the source of funds and kind of funds entering the circulation of currency in the country.

The Foreign Exchange Management Act (FEMA) is an act which was passed in the winter session of the Parliament in the year of 1999, replacing the Foreign Exchange Regulation Act (FERA). This act seeks to take care of the offences related to the foreign exchange of civil offences. It is applicable to the whole of India.

What Is FEMA?

FEMA (Foreign Exchange Management Act) was passed in 1999 and replaced FERA (Foreign Exchange Regulation Act). It handles the offences pertaining to foreign exchange. It has become very important as it supports the Indian government’s pro-liberalization policies. 

The FERA was passed in 1973 during the time period when there was an acute shortage of foreign exchange in India. However, certain untoward incidents of malpractice and tax evasion exposed the gaps in the act and The Foreign Exchange Regulation Act (FERA), 1973 was replaced in June 2000 in India by the Foreign Exchange Management Act (FEMA), to update the provisions to plug the holes and keep abreast with changing economic environment. 

It had a contentious 27 year stint during which many chiefs of the Indian corporate world found themselves at the pity of the Enforcement Directorate. Furthermore, any offence under the FERA was a criminal offence accountable to imprisonment. But under FEMA the offences are related to foreign civil offences.

FEMA has become very important to support the pro-liberalization policies of the Indian government. The main objective of the Act is to combine and amend the laws related to foreign exchange with the objective of enabling external payments and trade for promoting the orderly maintenance and development of foreign exchange market in India.

FEMA is extended to the whole of India. It is applied to all the branches, offices and the agencies outside India owned by or controlled by an Indian entity, who is an Indian resident and also to any infringement thereunder committed outside India by two individuals to whom this Act applies.

Significant Features Of FEMA-

The following are some of the significant features of the Foreign Exchange Management Act-

  1. It is constant with full current account convertibility and contains provisions for the progressive liberalisation of the capital account transactions.
  2. It is extremely transparent in its application as it lays down the areas necessitating specific permissions of the Reserve Bank and Government of India on acquisition or holding of foreign exchange.
  3. Under FEMA, foreign exchange transactions are divided into two categories, they are capital account and current account transactions.
  4. It gives power to the Reserve Bank of India for specialising in consultation with the Central Government, the classes of the capital account limits and transactions to which the exchange is acceptable for such kind of transactions.
  5. It gives full freedom to an individual who is resident in India, who was previously resident outside India, to hold or own or transfer any foreign security or immovable property situated outside India and attained when she was resident.
  6. This FEMA Act is a civil law and any kind of contraventions of the Act provide for arrest only in the exceptional cases.


The FEMA has become a lot more diluted and liberalised in the past few decades as other more efficient controls have been put in place to allow foreign currency exchange to occur more easily and yet more transparently at the same time. So the law has lost the kind of importance it used to once bear. However, the provisions that mitigate malpractices, market speculation and foul play are still in effect and are still in a position to mete out punitive action against anyone who breaches the regulations set there in. So it is always advisable to consult a legal expert while entering into any type of foreign exchange transaction so as to have a professional perspective from the point of view of FEMA. If you have any other queries or require assistance with regards to regulatory or legal matters, feel free to get in touch with our team of experts and they will assist you with your requirements with the best possible guidance.

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