The Foreign Exchange Management Act (FEMA) was introduced by the Indian Government in 1999, replacing the previous Foreign Exchange Regulation Act (FERA) of 1973. FEMA was designed to boost external payments and foreign trades. FEMA is a civil law against FERA which was a draconian police law.
In essence, FEMA was a modernization of the Indian economy and created to liberalize and privatize the Indian market.
The main aim of introducing FEMA was to liberalize the Indian economy by encouraging foreign trade and payments. It helped to regulate the Indian forex market.
According to FEMA, the balance of payment is a record of transactions in products, services, or properties between citizens of two separate countries.
FEMA can be classified into two categories:
Capital Account Transactions — all capital transactions and the inflow and outflow of money to and from India.
Current Account Transactions — all trade of merchandise as an indicator of an economy’s status.
Thus, creating the structure and measures for all foreign exchange transactions in India.
FEMA applies to the whole of India. It also applies to the agencies and offices located outside India that are managed or owned by an Indian citizen. The headquarters is situated in New Delhi and is known as the Enforcement Directorate.
More specifically, FEMA applies to:
- Indian foreign exchange
- Indian foreign security
- Banking, financial, and insurance services
- Exporting of any product and/or services from India to a foreign country
- Importing of any product and/or services from outside India
- Securities as defined under the Public Debt Act of 1994
- Buying, Selling,
- Any Indian Entity owned by a person resident outside India
- Any citizen of India, residing in India or in a foreign country
- And Exchanging of any kind of product/service
- Any overseas company owned by a non-resident Indian (NRI)
Current Account transactions listed by FEMA have been classified into three areas:
- Transactions prohibited by FEMA
- A transaction that requires Central Government’s permission
- A transaction that requires the Reserve Bank of India’s (RBI’s) permission
The Prohibitions Under FEMA :
- Sending money which is the result of winning the lottery.
- Sending money which is the result of winning horse racing, cricket games, etc.
- Sending money to buy a lottery ticket, football betting, sweepstakes, banned publications, etc.
The payment of commission on exports towards equity investment of Indian companies in joint ventures or wholly-owned subsidiaries abroad. The sending of a dividend by any company. This is only applicable if dividend balancing is applicable. The payment of commission on exports under Rupees State Credit Routes (except commission up to 10 percent of the invoice value of export of tea and tobacco).
Any payment regarding “Call-back Services” of telephones.
Any travel to Bhutan and/or Nepal.
Sending interest income on funds held in Non-resident Special Rupees (NRSR) scheme account.
A transaction of any kind with a resident of Bhutan or Nepal.
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