FEMA | Foreign Exchange Management Act

FEMA- Foreign Exchange Management Act

The Central Government of India has formulated the Foreign Exchange Management Act (FEMA) to uplift outward payments and the border trades. In the year 1999, this act, FEMA was introduced, and it replaced the previous one Foreign Exchange Regulation Act (FERA). 

There were certain drawbacks and loopholes in FERA which got filled with the FEMA. Moreover, different economic reforms got introduced under this act. Basically, this act came with the purpose of deregulation and to have a wide-ranging economy in India. 

1. What are the objectives of the Foreign Exchange Management Act (FEMA)?

The basic objective to introduce the FEMA in India was for providing facilities for external payments and trades. Additionally, this act was meant to assist the maintenance and orderly development of the Forex market of India. 

FEMA streamlines the procedures and formalities for dealing with all the foreign exchange transactions within India. However, foreign exchange transactions are classified into two categories-

  1. Current Account Transactions 
  2. Capital Account Transactions

As per to the act, the actual payment balance keeps the record of the business of assets, goods, and services. Moreover, these dealings take place between the citizens of various countries and India. It is also divided into two types- 

  1. Current Account, which comprises trade of merchandise
  2. Capital Account, which includes all capital transactions

2. Current Account Transactions

The Current Account transactions include inflow and outflow of the money during a year, to and from the different countries. These transactions happen because of trading or rendering service, commodity, and income between the countries. Moreover, the Current Account is a parameter to see the economy’s status of a nation. 

Accordingly, FEMA defines current account transactions under section 2(gg) of the FEMA Act, as a transaction other than a capital account transaction and includes:

  1. Payments related to foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business or
  2. Payments for interest on loans or
  3. Remittances for living expenses of parents, spouse, and children residing abroad or
  4. Expenses in connection with foreign travel, education and medical care of parents, spouse and children

Current Account transactions are further categorized into three parts according to the FEMA, namely-

  1. The transaction requires Central Government’s permission
  2. Transactions prohibited by FEMA
  3. The transaction requires RBI’s approval.

3. Capital Account Transactions

As we’ve mentioned, the payment balance incorporates the Current Account and Capital Account. Hence, the balance of payment reminder is the Capital Account. However, it contains the movement of capital within the economy because of capital expenditure and receipts. However, the Capital account acknowledges domestic investments within foreign assets and vice-versa. 

Accordingly, FEMA defines “Capital Account Transactions” as means a transaction which alters the assets or liabilities outside India of persons resident in India or assets or liabilities in India of persons resident outside India.

4. Rationale behind classification of transactions

Purpose of FEMA is to regulate the foreign currency transactions. Foreign transactions without any control may lead to huge losses to Indian Economy. Therefore, considering the national interest it is important to completely prohibit few foreign currency transactions which are against national interest, permit few transactions with prior approval from the government or Reserve Bank of India and few transactions can be carried out freely.

For this purpose, transactions are divided in two parts and different conditions are imposed on different types of transactions.

Generally, all current account transactions are permitted unless prohibited and on the contrary, all capital account transactions are prohibited unless permitted.

5. Relevancy of FEMA

The Foreign Exchange Management Act (FEMA) is applicable for the whole of India along with organizations based outside India but owned or maintained by an Indian citizen. Hence, the FEMA is relevant to-

  • Exportation of any service or commodity from India to any country situated outside India
  • Importation of any service or merchandise from a country located outside India
  • Foreign security
  • Foreign exchange
  • Securities as per the Public Debt Act 1994
  • Alongside, NRI owned overseas company, and 60% ownership is assigned to the person also
  • Financial, Insurance, and Banking services
  • Any citizen of India who is residing in the country or outside (NRI)
  • Apart from that, sale, purchase, and exchange of any transfer also

6. Prohibition for drawing Foreign Exchange

Considering the welfare of the country and economy, there are certain transactions which are prohibited under FEMA.

Hence, such transactions are given in Schedule I of reading with Rule 3 of Foreign Exchange Management (Current Account Transactions) Rules, 2000. Following are the prohibited transactions, that are- 

  • Remittance to buy sweepstakes, lottery tickets, football pools, banned magazines. Alongside that, any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000 also.
  • Remittance from winning any lottery or from the income on riding/racing
  • Commission payment for exports made for any joint venture of an Indian company or entirely owned subsidiaries sent to abroad
  • Remittance on exportation according to Rupees State Credit Routes, only except the commission on 10% of the invoice value on the exportation of tobacco and tea
  • A trip to Nepal or Bhutan
  • Payment made for “Call back services.” 
  • However, a transaction made with a resident of Nepal or Bhutan also comes under this
  • Alongside, remittance of the interest income of funds in a Non-resident Special Rupees Scheme account (NRSR) also

7. Where the Central Government’s prior approval is mandatory to draw foreign exchange?

There are certain transactions for which the Central Government’s prior approval is mandatory to draw foreign exchange. However, these transactions are specified in Schedule III of Foreign Exchange Management (Current Account Transactions) (FEMA) Rules, 2000 along with the corresponding ministry from which approval is required, which is as follows-

Nature of TransactionMinistry from which approval is required
Putting an advertisement in a foreign country-based print media, for any purpose except the promotion of tourism, foreign investments and international bidding (more than 10,000 USD), made by the State Government or its Public Sector UnitsMinistry of Finance, (Department of Economic Affairs)
Also a cultural trip to any foreign countryMinistry of Human Resources Development, (Department of Education and Culture)
Moreover, the allowance of freight of vessels hired by a PSU.Ministry of Surface Transport, (Chartering Wing)
Alongside that, payment of importation through ocean transport, made by a department of Government on C.I.F. or a Public Sector UnitMinistry of Surface Transport, (Chartering Wing)
Remittance of the detention charges of container crossing the rate estimated by the Director-General of ShippingMinistry of Surface Transport (Director General of Shipping)
Allowance of the sponsorship or prize money of any sports activity outside India. However, that has to be done by a person except for street level, national, or international sports bodies; in case the amount of the same exceeds 100,000 USDMinistry of Human Resources Development (Department of Youth Affairs and Sports)
Remittance of hiring charges of the transponder by TV channels and Internet Service ProvidersMinistry of Information and BroadcastingMinistry of Communication and Information Technology
Allowance provided by Multi-model transport operators to their agents working abroadMinistry of Information and BroadcastingMinistry of Communication and Information Technology
Remittance for P&I Club ministry’s membershipMinistry of Finance (Insurance Division)

8. Approved Route to draw Foreign Exchange 

Individuals can avail of a foreign exchange facility for the following purposes. But the limit given under the Liberalisation Remittance Scheme (“LRS”) of USD 2,50,000 on a financial year basis has to be maintained.

  1. Private visits to any country (except Nepal and Bhutan)
  2. Gift or donation
  3. Going abroad for employment
  4. Emigration
  5. However, the maintenance of close relatives abroad also falls under this
  6. Moreover, travel for business, or attending a conference or specialized training or for meeting expenses for meeting medical expenses. Alongside, check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up also comes under this.
  7. Alongside, expenses in connection with medical treatment abroad also
  8. Studies abroad
  9. However, any other current account transaction which is not covered under the definition of a current account in FEMA 1999.

For this purpose, AD bank may undertake the remittance transaction. That’s too without prior approval of RBI for all residual current account transactions. However, the transactions must not be prohibited or restricted transactions under Schedule I, II or III of Foreign Exchange Management (Current Account Transactions) Act (FEMA), 2000.

Hence, it is for the AD to satisfy themselves about the genuineness of the transaction, as hitherto.

However, any additional remittance in excess of the said limit for the following purposes shall require prior approval of the Reserve Bank of India.

9. Conclusion

However, now its time for us to bid adieu. Hope the article has helped you to get the right information since our experts have tried to cover all the aspects of FEMA. Moreover, if you have any doubt over this post your queries in the comment section.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Related Post

V J M & Associates LLP

Contact Us