The Ministry of Corporate Affairs has the main job of making sure how companies are run in industry and that businesses follow all the right rules to stop any bad actions or cheating. Monitoring and regulating transactions with foreign funds, which facilitate smoother trading of Indian currency, necessitates ensuring transparency regarding incoming money and its intended purpose. This is where the answer to what is Foreign Exchange Management Act (FEMA) is vital to understand.
In 1999, the Foreign Exchange Management Act was introduced to replace the Foreign Exchange Regulation Act. This legislation serves to oversee potential misuse of foreign funds by individuals. Its jurisdiction extends across the entirety of India.
What is Foreign Exchange Management Act (FEMA) under Indian Law?
As stated, it is essential to understand what is Foreign Exchange Management Act (FEMA), as it is a law that focuses mainly on rules for trading and paying across countries. It sets out the steps, rules and ways to handle all the transactions that involve money from other countries in India. FEMA came into existence because the old law called the Foreign Exchange Regulation Act (FERA) didn’t match the new ways of doing things after the country opened up its economy.
Objectives of Foreign Exchange Management Act (FEMA)
The Foreign Exchange Management Act (FEMA) was introduced in India with specific goals in mind. By understanding what is Foreign Exchange Management Act (FEMA), its primary objective could be understood, which is to simplify external trade and payments, while also playing a vital role in helping the orderly development and maintenance of the Indian forex market.
It is important to understand what is Foreign Exchange Management Act (FEMA) as it fulfils the following objectives:
Framework and Transaction Categories under Foreign Exchange Management Act (FEMA)
FEMA serves as a comprehensive framework that defines the necessary formalities and procedures governing foreign exchange transactions within India. These transactions are categorised into two distinct groups: Capital Account Transactions and Current Account Transactions.
Balance of Payment and its Categories under Foreign Exchange Management Act (FEMA)
Within the framework of the Foreign Exchange Management Act (FEMA), the concept of balance of payment takes centre stage. It serves as a comprehensive record of interactions involving goods, services and assets between individuals of different countries.
Capital Account and Current Account Transactions
The Capital Account category includes a spectrum of capital transactions, whereas the Current Account category centres around the trade of merchandise. Current Account transactions hold a vital role in the financial landscape as they represent the inflow and outflow of funds to and from a nation, over the course of a year. These transactions are a result of trading or providing commodities, services and income.
Economic Indicators and Capital Account
The current account serves as a significant indicator of an economy’s overall status. The residual component of the Balance of Payment, known as the Capital Account, is responsible for capturing the movement of capital within the economy, driven by capital receipts and expenditures. This account includes both domestic investments in foreign assets and foreign investments within the domestic realm.
Scope and Applicability of Foreign Exchange Management Act (FEMA)
In understanding what is Foreign Exchange Management Act (FEMA), it should be understood that the Act holds jurisdiction over the entire area of India, extending its reach equally to agencies and offices situated beyond Indian borders, yet owned or overseen by an Indian citizen. The apex body overseeing FEMA, known as the Enforcement Directorate, is headquartered in New Delhi. This comprehensive legislation has application in various areas, including:
1. Foreign Exchange and Securities:
FEMA’s purview includes matters related to foreign exchange and foreign securities.
The act governs the exportation of commodities and services from India to foreign nations, as well as the importation of commodities and services from abroad.
3. Securities under Public Debt Act 1994:
FEMA includes securities as defined under the Public Debt Act of 1994.
4. Purchase, Sale as well as Exchange:
It regulates the purchase and sale of a diverse range of assets and commodities.
5. Banking, Financial, as well as Insurance Services:
The Act extends to cover matters concerning financial and insurance services.
6. Overseas Companies and NRIs:
FEMA’s ambit includes overseas companies owned by Non-Resident Indians (NRIs) where the NRI ownership is 60% or more, as well as citizens of India whether residing within the country or abroad.
Significant Features of Foreign Exchange Management Act (FEMA)
Some important characteristics which follow when answering what is Foreign Exchange Management Act (FEMA) are necessary to be understood in order to fully grasp the Act. These features are:
1. Compatible with Convertibility:
FEMA is designed to match the ability for smooth movement of money across borders for current account transactions. It also plans for a gradual opening up of capital account transactions.
2. Transparency:
The law is clear about when permission is required from the Reserve Bank and the Indian Government for foreign exchange-related activities.
3. Transaction Categories:
FEMA classifies foreign exchange dealings into two groups – capital account transactions and current account transactions.
4. Reserve Bank’s Authority:
FEMA empowers the Reserve Bank of India to define, in consultation with the Central Government, the limits and types of transactions permitted under the capital account.
5. Individual Freedom:
People who live in India but used to live elsewhere are given the freedom to possess, own or transfer foreign securities or property located outside India, which they acquired when they lived abroad.
6. Civil Nature:
This law is primarily civil in nature. In case of violations, arrest is only a possibility in rare circumstances.
Foreign Exchange Withdrawal Guidelines under Foreign Exchange Management Act (FEMA)
In accordance with the directives from the Reserve Bank of India (RBI), individuals can access foreign exchange through either the Prior Approval Route or the General Permission Route as mentioned below:
| S.No. | Purpose | Limitations |
| 1 | Personal Travel to any country (except Bhutan and Nepal) | Up to 10,000 US dollars or equivalent for one or multiple private visits within a year. |
| 2 | Donations/Gifts from a single donor | Remittance must not exceed 1,25,000 US dollars during a Financial Year. |
| 3 | Corporate Donations | 1% of the forex earnings of the previous three Financial Years or 5 million US dollars, whichever is lower, for specific purposes. |
| 4 | Overseas Employment | One-time remittance of 1,00,000 US dollars. |
| 5 | Emigration-related Remittance | One-time remittance of 1,00,000 US dollars or the prescribed emigration country limit. |
| 6 | Maintenance of Close Relatives Abroad | For individuals not permanently residing in India and citizens of foreign states (excluding Pakistan):-Salary after tax, Provident Fund and other deductions.-1,00,000 US dollars per year for other cases. |
| 7 | Business Travel Abroad | 25,000 US dollars per trip, regardless of stay duration. |
| 8 | Specialised Training or Conference Abroad | 25,000 US dollars per event. |
| 9 | Medical Treatment Abroad | Up to 1,00,000 US dollars. |
| 10 | Accompanying Medical Check-up/Treatment Abroad | 25,000 US dollars. |
| 11 | Studying Abroad | 1,00,000 US dollars per academic year or the institution’s estimate, whichever is higher. |
| 12 | Accompanying Patient for Medical Reasons Abroad | 25,000 US dollars. |
| 13 | Agent’s Commission for Sale of Property in India | 25,000 US dollars or 5% of inward remittance, whichever is higher. |
| 14 | Consultancy Services from Abroad | -Infrastructure projects: 1 million to 10 million US dollars per project.-Other cases: 1 million US dollars. |
| 15 | Pre-incorporation Expenses Reimbursement | 100,000 US dollars or 5% of the investment brought into India, whichever is higher. |
| 16 | Trade Mark Purchase/Use Remittance | Allowed without RBI approval. |
| 17 | Health Insurance Premium Payment from Foreign Company | No restrictions. |
| 18 | Royalty and Lump Sum Fees for Technical Collaboration | Allowed without prior RBI approval. |
| 19 | Medical Treatment Abroad in Case of Sickness Abroad | Up to USD 1,00,000 based on self-declaration. |
| 20 | Small Value Remittance | Up to USD 25,000 (via Form A2). |
Foreign Exchange Transactions Requiring Central Government Approval under Foreign Exchange Management Act (FEMA)
Certain transactions require prior approval from the Central Government for the withdrawal of foreign exchange. These transactions include:
- Cultural Tours
- Advertisement in foreign print media, excluding promotions for tourism, international bidding and foreign investments (amount exceeding 10,000 US Dollars) by State Governments and their Public Sector Units.
- Payment of import costs through ocean transport on a c.i.f. basis by a Public Sector Unit or government department.
- Remittance of vessel charter freight.
- Remittance of container detention charges surpassing the prescribed rate by the Director General of Shipping (DGS).
- Prize money or sponsorship exceeding 1,00,000 US Dollars for sports activities abroad by individuals or entities other than national/international/street level sports bodies.
- Remittance of transponder hiring charges.
- Internet Service Providers.
- TV channels.
- Remittance for P&I (Protection and Indemnity) Club membership.
- Remittance from Multi-modal Transport Operators to their agents abroad.
Prohibited Foreign Exchange Transactions under Foreign Exchange Management Act (FEMA)
The list of prohibited foreign exchange transactions under Foreign Exchange Management Act (FEMA) are:
1. Sending money from winning a lottery is not allowed.
2. Money from activities like racing or riding can’t be sent abroad.
3. You can’t send money for buying lottery tickets, football pools or banned magazines.
4. Payments of commission for exports towards investing in foreign joint ventures or wholly owned subsidiaries of Indian companies are prohibited.
5. Sending dividends by a company is not allowed, unless dividend balancing is needed.
6. Commission payments for exports through certain credit routes are prohibited, except for up to 10% commission on tea and tobacco exports.
7. Payments for “Call back Services” of telephones cannot be remitted.
8. Sending money for travel to Bhutan and/or Nepal is prohibited.
9. Interest income from funds held in NRSR Account (Non-resident Special Rupees Scheme account) cannot be sent abroad.
10. Transactions with residents of Bhutan or Nepal are not allowed.
Penalties Under Foreign Exchange Management Act (FEMA)
If someone goes against the rules of FEMA or disobeys any rules, instructions, regulations orders or notices made under FEMA, they could be fined. The penalty might be three times the amount associated with the regulation violation or up to Rs.2 lakh. If it continues, an additional penalty of up to Rs.5,000 per day may be imposed.
Final Thoughts
Thus, understanding what is Foreign Exchange Management Act (FEMA) is important as the Act serves as a regulatory framework to oversee foreign exchange transactions in India. It aims to ensure transparent and controlled cross-border monetary activities. FEMA’s evolution from the Foreign Exchange Regulation Act (FERA) shows its adaptability to changing economic dynamics. The act categorises transactions into Capital and Current Accounts, promoting economic stability.
While allowing individual freedom, the Foreign Exchange Management Act (FEMA) empowers the Central Government and RBI to maintain financial integrity. Violations of FEMA result in penalties, emphasising its importance. In essence, Foreign Exchange Management Act (FEMA) plays a vital role in facilitating international trade while safeguarding India’s economic interests.
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