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This article is written by Pooja Arora from ILS Law College, Pune and modified by Gitika Jain. This article deals with the regulations of the Foreign Exchange Management Act, 1999. 


Most of us have been subjected to the Foreign Exchange Management Act (FEMA) guidelines in some way or the other. Be it when our NRI relatives send us money, when we transfer money abroad or when we get foreign currency for a foreign trip. With the advent of the globalization, foreign exchange has become a common part of a country’s economy. The trade of one country’s currency for another is called foreign exchange. Each country has its own regulations and guidelines that control its foreign exchange market and certain cap limit for the maximum amount for transactions. In India, the Foreign Exchange Management Act (FEMA) governs foreign exchange transactions and remittance payments, and the Reserve Bank overlooks the management of the foreign market. FEMA provides a framework for the smooth functioning of border trades and developing the Indian foreign exchange market. This was an important step taken by the government to improve the competitiveness of India’s trade at the global level.
In India, forex trading is also called currency trading. It is basically a market where one currency is exchanged for another. Such a market is called the currency market. According to Indian Law, forex trading is legal but within a regulated framework and through specific governing bodies. This regulation is applied in order to safeguard its people from possible losses. 


The concept

The Foreign Exchange Management Act deals with the regulation and management of foreign exchange. The Foreign Exchange Management Bill was introduced in the year 1998 and passed on June 1, 2000, with the objective of enabling foreign trade in India. The government enacted this Act to encourage external payments and foreign trade in India.  It is in consonance with the frameworks of the World Trade Organisation (WTO). In 1999, this Act replaced the Foreign Exchange Regulation Act (FERA) as the latter did not fit in with the post-liberalisation policies because of its restrictive nature. It managed the foreign exchange market rather than regulating it. The provisions of FERA had become obsolete in the context of liberalisation of foreign trade, foreign investment, and foreign exchange markets in the early 1990s. The stringent provisions of FERA hindered the growing globalization of the Indian economy. FEMA was primarily formulated to utilize foreign exchange resources in an efficient manner. It also brought major changes to the Indian economy. 

Objectives of FEMA

With the global spread of liberalisation, FEMA was enacted to enable smooth foreign trade and payments in India. It aims to oversee the functioning of stipulating guidelines for the foreign exchange market of India. 

Applicability of FEMA 

Section 1 of the Foreign Exchange Management Act deals with the applicability of the Act. FEMA applies to the whole of India. It also covers the offices and agencies outside India that are owned or controlled by persons resident in India. The term “resident” is defined under Section 2(v)(i) of the Act. The words ‘owned and controlled’ reflect the wide scope of applicability of this Act. It also applies to any violation of FEMA committed outside India by a person to whom this Act applies. It applies to any foreign exchange, foreign security, exports, imports, and securities as defined under Public Debt Act 1994, purchase, sale and exchange of any kind (i.e. Transfer), Banking, financial and insurance services, any overseas company owned by an NRI (Non-Resident Indian), and any citizen of India, residing in the country or abroad. 

Important FEMA Guidelines

  1. Any person may sell foreign exchange to any authorised person or dealer or draw foreign exchange from an authorised dealer or person if the sale or withdrawal is a current account transaction.
  2. FEMA empowers the Reserve Bank of India to place restrictions on transactions from the capital account even if it is carried out via an authorized individual.
  3. A  former resident of India is permitted to hold shares, security, and properties acquired by him or her, while he or she was resident in India. It also permits an NRI to hold a property which he or she inherits from a resident of India.
  4. Under FEMA, every exporter of goods and services should furnish to RBI the full particulars including the export value of goods and services exported, and ensure the realization and repartition of export proceeds within the time and manner as prescribed by RBI.

FEMA and Capital Account Transactions

Under FEMA, the regulations are based on whether the transactions are capital account or current account transactions. 

Capital account transactions are defined, under Section (2) (e) of the FEMA, as the transactions that affect the assets or liabilities, including contingent liabilities, outside India of persons resident in India, or assets or liabilities in India of persons resident outside India. It can also be said that capital transactions are the ones that affect the balance sheet of an entity. 

The capital account transactions are divided into the following categories:

Permissible transactions

The RBI has issued Foreign Exchange Management (Permissible capital account transactions) Regulations, 2000 under Section (6) (2) of the FEMA. The Schedule I lists the transactions permissible for Indian residents. These include transactions like the investment in foreign securities, transfer of immovable property, foreign currency loans, undertaking derivative contracts, etc. Schedule II of the Regulations lists the capital transactions permissible for residents outside India. 

Transactions with no restrictions 

There are no restrictions with regard to amortisation of loans and depreciation of direct investment in the ordinary course of business. Also, no restrictions can be imposed if the withdrawal is made for the purpose of repayment of loans. 

Prohibited transactions 

The prohibition on transactions is imposed by the RBI. As per the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations of 2000, no person shall undertake or sell or draw foreign exchange to or from an authorised person for any capital account transaction. The regulations prohibit persons residing outside India to invest in Chit funds, Indian organisations or firms, real estate, or plantation activities.

FEMA and Current Account Transactions

Under Section (2) (j) of FEMA, the current account transactions are defined as transactions other than the capital account transactions. Payments due as interest on loans, remittances for living expenses of family members, and payments in connection with foreign trade are some of the examples. Section 5 of the FEMA allows the sale or drawal of foreign exchange if it is a current account transaction. However, the government, in consultation with the RBI, may provide reasonable restrictions as prescribed under Foreign Exchange Management (Current Account Transactions Rules), 2000. The current account transactions are divided into 3 categories under the regulation:

Transactions for which drawal is prohibited

These transactions are given in Schedule I. Some of the examples are the income from racing or buying lottery tickets, banned magazines, football pools, etc. 

Transactions that require the approval of the Government of India for drawal of foreign exchange

These transactions are listed in Schedule II and include cultural tours, remittances of freight vessels chartered by a Public Sector Undertaking, etc. 

Transactions that require the approval of RBI for drawal of foreign exchange

These are listed under the Schedule III. According to this, individuals can avail themselves of foreign exchange facilities such as emigration, gift, donation, or studies abroad etc. up to the limit of $2,50,000 only. 

Prohibition on drawal of foreign exchange

The FEMA prohibits the drawal of foreign exchange in the following certain situations:

  1. Proceeds out of winning a lottery.
  2. Remittances from the income of racing or riding etc. 
  3. A transaction with a resident of Bhutan or Nepal is also prohibited.
  4. Payment regarding “Call back Services” of telephones.
  5. Travel to Bhutan and/ or Nepal.
  6. Any remittance for buying of a lottery ticket, football pools, sweepstakes, banned/prescribed magazines, etc.
  7. The commission payment on exports towards equity investment of Indian Companies in Joint ventures or wholly-owned subsidiaries abroad.
  8. Remittance of dividends by any company provided the requirement of dividend balancing is applicable.
  9. The commission payment on exportation under Rupees State Credit Routes except commission up to 10% of the invoice value of export of tea and tobacco.
  10. Remittance of interest income on funds held in Non-resident Special Rupees Scheme account (NRSR account).

FEMA guidelines and regulations for remittances

Outward remittances

Outward remittances are defined as the money sent by any individual, business, or company from their country to abroad. The outward remittances guidelines and regulations have been liberal as compared to the previous regulations. Earlier it was almost impossible to remit money outside India and the amount of money allowed to be transferred was lower. But under FEMA, the outward remittances can be easily sent upon with the approval of the RBI or the central government, depending upon its nature. The part of FEMA that deals with outward remittances is the Liberalised Remittance Scheme (LRS). The following are the guidelines and regulations for outward remittances:

  1. Under LRS, the Indian citizens can transfer money abroad up to $2,50,000 in a year for specific purposes. No special permission is needed for the same. However, if the remittance exceeds this amount, RBI’s permission is needed. 
  2. One cannot transfer the money to the countries and organizations considered “noncooperative by the Indian government or having links to terrorism”.
  3. Under LRS, money can be transferred for the following purposes- living abroad, studying abroad, travel, gifts, donations, medical treatment abroad, money transfer to family members living abroad, and purchase of shares or property abroad. 

Inward remittances

Foreign Inward remittance is the transfer of funds to a person’s bank account from a person from abroad. Foreign inward remittances are governed by FEMA and the Reserve Bank of India (RBI). When there is a transfer of money from foreign accounts to that of India, a Foreign Inward Remittance Certificate (FIRC) is issued by the bank, ensuring that the funds do not come from illegitimate sources.

The RBI suggests 2 different routes for inward remittances:

  1. Rupee Drawing Arrangement (RDA): Under this route, there is no cap for individual transactions. However, for business transactions, there is a limit of  Rs15 lakh for transactions with regard to trade.
  2. Money Transfer Service Scheme (MTSS): under this, the remittances can go up to $2500 per transaction. There can be only 30 transfers to a single recipient in a year. 

Process of FEMA empowering authorities and citizens

FEMA has, indeed, empowered both authorities and citizens by managing the country’s foreign exchange market rather than regulating it. Earlier, the Foreign Exchange Regulation Act (FERA) allowed very limited transactions of small amounts for foreign exchange. Additionally, the RBI’s permission was necessary for most of the transactions. But FEMA empowers people by allowing them to own property or securities overseas. With time, the FEMA regulations also increase the cap on the maximum amount for remittances. It opened individual foreign exchange transactions to the free market. The RBI is the authority managing the regulation of FERA. Although the individuals can draw or sell foreign exchange, the RBI puts several restrictions on capital account transactions. There are certain transactions for which the RBI’s approval is needed. 

FERA v. FEMA: the difference

Difference between FERA and FEMA:

  1. The main difference between the two Acts can be deduced from their names. While FERA emphasizes on foreign “exchange regulation”, FEMA aims at managing foreign exchange rather than regulating it.
  2. According to FERA, the RBI’s permission was necessary for most of the regulations, whereas, in FEMA, RBI’s approval was only necessary for transactions provided under Section (3) of the Act.
  3. FERA was introduced when the foreign exchange position of India was not satisfactory and, therefore, stringent controls were required on the use of the foreign exchange. But with globalisation and improvement in India’s foreign exchange position, FEMA was introduced which brought more liberal provisions to manage foreign exchange.
  4. The scope of FEMA is wider as it deals with all the transactions related to foreign exchange while the scope of FERA was narrower, as it only dealt with specific transactions mentioned in the Act.
  5. FEMA imposes less severe punishment as compared to FERA for violating the law. Any contravention now is treated as a civil offence unlike before where, under FERA, it was treated as a criminal offence.


With the liberal aim and objectives of the Foreign Exchange Management Act 1999, India is likely to be an active participant in international trade. This Act reflects the government’s seriousness towards deregulation of foreign exchange and promotion of free flow of international trade. The approval of the RBI is not necessary for connection with remittances involving external trade, provided that the import and export of goods involve transactions on the current account. There is greater flexibility in trading between the Indian and the foreign market.

It has helped in boosting foreign institutional investments and capital inflows in equity and debt securities in the Indian capital market. The FEMA is relatively more relaxed and less stringent in the regulation of foreign exchange. This was a result of the opening up of the Indian economy. This Act made it possible to easily acquire raw materials and capital goods required for industrial development. It shows the shift of the Indian economy from a conservative and restrictive realm to an open and liberal one in terms of international trade. FEMA has brought about a lot of changes that have transformed the Indian economy in many aspects.


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