An Insight to the Foreign Exchange Management Act, 1999 and the role of RBI


Foreign Exchange Management Act, 1999 (FEMA) is a set of rules and regulations that have empowered the Reserve Bank of India to pass general or specific laws. It enables the Indian government to lay guidelines related to foreign exchange in tune with the foreign trade policy of India.

There have been many misunderstandings related to the transactions or dealings related to foreign exchange or the functioning of the Foreign Exchange Market. Therefore, FEMA came into effect.

In this paper, the author has tried to analyse the basic concept of the Foreign Exchange Management Act, 1999 and has attempted to lay down the objectives and the provisions of the Act to understand it in the broader sense. The author has also tried to focus on the role and powers of the RBI under FEMA, 1999.


Foreign Exchange Management Act, 1999, popularly known as FEMA, was passed in the winter session of the Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA). This Act was enacted "to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India."[1]

It extends to the whole of India, supplanting FERA, which became incongruent with the pro-liberalisation policies of the Indian government.

Under this Act, all the offences related to foreign exchange would be considered civil. FEMA is an administrative component that empowers the Reserve Bank of India and the central government to pass guidelines related to foreign exchange in tune with the foreign trade policy of India. The Foreign Exchange Management Act came officially into force on June 1, 2000.

Objectives of FEMA

The main objective for which FEMA was introduced in India was to facilitate external trade and payments. In addition, it was set to assist the orderly development and maintenance of the Indian Foreign Exchange market. Therefore, FEMA traces the conventions and methods for the dealings of all Foreign Exchange transactions in India.

It lays down all the guidelines, procedures, and formalities concerning India's foreign exchange trade or transactions. It aims to utilise the foreign exchange resource of the country efficiently and remove the payment imbalances.

It was enacted to make a robust foreign exchange market in India.

Under the Act, the balance of payment is the record of transactions between the citizens of different countries in goods, services and assets. It is divided into two categories, i.e. capital account and current account. The former comprises all capital transactions, whereas the latter involves the trade of merchandise.

Applicability of FEMA

FEMA is relevant to the whole of India and also to the offices and workplaces situated outside India (owned or managed by an Indian Citizen).

The head office of FEMA is situated in the national capital, i.e. New Delhi, known as the Enforcement Directorate.

It applies to:

● Foreign exchange

● Foreign security

● Export and import of goods or services to and from India.

● Securities as defined under Public Debt Act 1994

● Purchase, sale and exchange of any kind (i.e. Transfers)

● Banking, financial and insurance services

● Any overseas company owned by an NRI (Non-Resident Indian) has a share of 60% or more

● Any Indian citizen residing in the country or outside

Authorities and Enforcement Machinery

FEMA in itself is not independent. The provisions of FEMA are widespread at different places, so there are regulatory bodies. The RBI makes regulations for FEMA, and the central government makes the rules. According to Section 36 of FEMA, even though the RBI is the controlling authority regarding FEMA, its enforcement has been entrusted to a separate "Directorate of Enforcement."

There are mainly four authorities governing the enforcement of FEMA:

  1. Foreign Exchange Department of Reserve Bank of India.

  2. Directorate of Enforcement, Department of Revenue, Ministry of Finance.

  3. Capital Market Division, Department of Economic Affairs, Ministry of Finance.

  4. Foreign Trade Division, Department of Economic Affairs, Ministry of Finance.

The organisations responsible for various aspects of FEMA are:

  1. Enforcement Directorate: The central government has established it with Directors and other officers as officers of the enforcement to investigate the provisions of the Act.

  2. Adjudicating Authorities: The Adjudicating Authority may issue a notice to an individual who has violated the Act's provisions, rules, regulations, notifications or any directions issued by the RBI.

  3. Special Director (Appeals): Anyone aggrieved by an order made by the Adjudicating Authority, an Assistant Director of Enforcement or a Deputy Director of Enforcement can appeal to the Special Director (Appeals.)

  4. Appellate Tribunal: Any individual aggrieved by an order made by the adjudicating authority or the Special Director (Appeals) can appeal to the Appellate Tribunal.

  5. Foreign Exchange Department of RBI (known as Exchange Control Department till 31.01.2004)

  6. Foreign Investment Implementation Authority (FIIA)

  7. Foreign Investment Promotion Board

  8. The Authority for Advance Rulings (AAR) pronounces rulings on the applications of the non-resident/residents submitted in the prescribed form with the prescribed procedure, and these rulings are binding both on the applicant and the income-tax department.

Though FEMA does not treat the violation of its provisions as a criminal offence, prevention detention is permissible under COFEPOSA. FEMA and COFEPOSA occupy different fields.[2]

Provisions under FEMA, 1999

➔ Provisions of FEMA provide free transactions on current accounts subject to the RBI guidelines.

➔ Enforcement/Authorisation of FEMA is endowed to a separate directorate, which undertakes investigations on repudiations of the Act.

➔ A person authorised under the government terms can deal in foreign exchange in India.[3]

➔ The provisions under FEMA can be categorised into four major heads. Essential provisions under each of the four heads, having a bearing on promoting economic development through foreign investment with enabling provisions to ensure the curtailing of inflationary trends from such transactions, are explained below:

1. The regulations relating to Current Account Transactions:

➔ Any individual can sell or draw foreign exchange to or from an authorised dealer (only in the current account transactions) except for prohibited transactions like remittance of interest income on funds held in the Non-Resident Special Rupee (NRSR) account scheme.

➔ There are also certain transactions for which the approval of the RBI is required.

➔ Authorised dealers can remit surplus freight/passage collections by shipping/airline companies or their agents after verification of documentary evidence supporting the remittance.

2. Regulations Relating to Capital Account Transactions:

➔ Foreign nationals are not permitted to invest in any firm (sole- proprietorship or partnership), which is engaged in the business of chit funds, agricultural activities, and real estate—a list of permissible classes of capital account transaction for an individual residing in India. Furthermore, an individual residing outside India has been given the guidelines/ regulations.

➔ Rules regarding lending and borrowing in foreign currency by an Indian resident from/to an individual residing outside India either on a non-repatriation or repatriation basis have been laid down in detail.

➔ The authorised dealers now have a right to grant rupee loans to NRIs against the security of immovable property or shares in India, subject to some terms and conditions as laid down.

➔ Permission is granted to Indian companies (including non-banking finance companies) registered under RBI to accept deposits from NRIs on (repatriation or non-repatriation basis), per the terms and conditions laid down in the schedule.

3. Regulations relating to the export of goods and services:

➔ Export proceeds need to be realised within six months from the date of shipment. In case of exports to a warehouse established abroad, the proceeds have to be realised within 15 months from the date of shipment, with the approval of the RBI.

➔ This regulation has added an enabling provision to delegate the powers to authorised dealers to allow extension of time. Prior approval of the Reserve Bank of India is required when the export of goods on extended credit terms is beyond six months.

4. Other Regulations:

➔ An individual who is a resident of India, to whom any foreign exchange is due or has accrued, is obligated to take reasonable steps to realise and repatriate to India such foreign exchange unless an exemption has been provided in the Act or regulations made under the general or special permission of Reserve Bank.

➔ Any foreign exchange due or accrued as remuneration for services rendered or settlement of any lawful obligation or gift to a person residing in India should be sold to an authorised person within seven days of its receipt and in all other cases within 90 days of its receipt.

➔ Any person who happens not to utilise the drawn exchange for the purpose they had drawn it for or any other permissible purpose should surrender such foreign exchange or the leftover foreign exchange to an authorised dealer within 60 days from the date of acquisition.

➔ The RBI specifies the limit for possession and retention of foreign currency by an Indian resident. However, there is no restriction on the possession of foreign coins.

The role of Reserve Bank of India in FEMA, 1999

RBI is believed to be the custodian of Foreign Exchange Reserves. Therefore, the Reserve Bank of India plays a vital role under FEMA, 1999.

It is entrusted with many powers like:

  1. It controls foreign exchange dealings by giving a general or specific permission to deal in foreign exchange, excluding the cases where specific provisions have been made in the Act.[4]

  2. RBI does not possess the right to impose any restrictions on current account transactions. The central government can only impose such restrictions in consultation with the RBI.[5] However, as per the guidelines provided in Foreign Exchange Management (Current Account Transactions) Rules, 2000, prior approval of RBI is needed in certain current account transactions.

  3. As per Section 6(2) of FEMA, the RBI is entitled to specify conditions for payments concerning capital account transactions.

  4. RBI has been entrusted with the duty to regulate/prohibit/restrict the following by issuing regulations or guidelines.

  5. Transfer/issuance of foreign security to residents and Indian- security to non-residents.

  6. Borrow or lend foreign exchange to/from a foreign person

  7. Export and import of currency

  8. Transfer of immovable property outside the territory of India

  9. Give guarantee or surety wherever transactions related to foreign exchange are involved.[6]

  10. Section 8 asks RBI to specify (by regulation) the period and how the foreign exchange due from the export of goods and services should be received.

  11. RBI is entrusted with the duty to grant exemption from realisation and repatriation in cases mentioned under Section 9.

  12. As per Sections 10, 11, and 12 of FEMA, 1999, RBI has the power to grant authorisation to an "authorised person" to deal in foreign exchange, give directions to them and lastly, inspect the authorised person.


After analysing FEMA, 1999, the author has understood that the RBI acts as a custodian to FEMA in India. The promotion of FDI forms an integral part of the Indian Economic Policy. It increases growth by inculcating capital, technology, and modern management practices. As a result, retailing in India is slightly different than in developed markets.

Author's Suggestions

The author feels that in India, the unorganised retail sector should be widened more. First, the RBI, FEMA, and FDI policy should consider taking more steps to improve this sector. Secondly, as per the author's understanding, offences related to FEMA should be made criminal rather than civil.


[1] RBI Website official PDF [2] UOI v. Venkateshan 2002 AIR SCW 1978 = 38 SCL 669 (SC). [3] Section 3 of FEMA, 1999 [4] Section 3 of FEMA, 1999 [5] Section 5 of FEMA, 1999 [6] Section 6(3) of FEMA, 1999

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