HISTORY

FERA was passed by the Indian Parliament in 1973 by

the government of Indira Gandhi and came into force with
effect from January 1, 1974. FERA was introduced at a time
when foreign exchange (Forex) reserves of the country were
low, Forex being a scarce commodity. FERA therefore proceeded
on the presumption that all foreign exchange earned by Indian
residents rightfully belonged to the Government of India and
had to be collected and surrendered to the Reserve Bank of
India (RBI). FERA primarily prohibited all transactions not
permitted by RBI.
The objective of FERA was to regulate certain payments,
dealings in foreign exchange and securities, transactions
indirectly affecting foreign exchange, the import and export of
currency and to conserve precious foreign exchange and to
optimize the proper utilization of foreign exchange so as to
promote the economic development of the country.
Coca-Cola was India's leading soft drink until 1977 when it
left India after a new government ordered the company to turn
over its secret formula for Coca-Cola and dilute its stake in its
Indian unit as required by the Foreign Exchange Regulation Act
(FERA). In 1993, the company (along with PepsiCo) returned
after the introduction of India's Liberalization policy.
FERA was repealed in 1998 by the government of Atal
Bihari Vajpayee and replaced by the Foreign Exchange
Management
Act,
which
liberalised foreign
exchange
controls and restrictions on foreign investment.
FERA was enacted in September 1973 and it came in force from
January 1, 1974. It was amended by the Foreign Exchange
Regulation (Amendment) Act 1993 and later in 2000, was
replaced by FEMA.
FERA applied to all citizens of India, all over India.

 The idea was to regulate the foreign payments, regulate

the dealings in Foreign Exchange & securities and
conservation of Foreign exchange for the nation.

MAIN FEATURES OF FERA:

RBI can authorize a person / company to deal in foreign
exchange.
RBI can authorize the dealers to do transact the Foreign
Currencies, subject to review and RBI was given power to
revoke the authorization in case of non-compliancy
RBI would authorize the persons as Money Changers who
will convert the currency of one nation to currency of their
nation at rates Determined by RBI
NO person, other than authorized dealer would enter in
any transaction of the foreign currency.
For whatever purpose Foreign exchange was required, it
was to be used only for that purpose. If he feels that he
cannot use the currency of that particular purpose, he
would sell it to a authorized dealer within 30 days.
No person in India, without permission from RBI shall
make payments to a person resident outside India and
receive any payment from a person from outside India.
No person shall draw issue or negotiate any bill of
exchange in which a right to receive payment outside
India is created.
No person shall make any credit in an account of a person
resident out of India.
No person except authorized by RBI shall send foreign
currency out of India.
A person who has right to receive the foreign exchange
would have not to delay the receipt of the foreign
exchange.
To sum up, in FERA anything and everything that has
to do something with Foreign Exchange was regulated. The

Experts called it a Draconian Act which hindered the growth

and modernization of Indian Industries.
The Important aspect of FEMA, in contrast with FERA is
that it facilitates Trade, while that of FERA was that it
prevented misuse. The focus was shifted from Control to
Management.
(1) This Act may be called the Foreign Exchange Regulation Act,
1973.
(2) It extends to the whole of India.
(3) It applies also to all citizens of India outside India and to
branches and agencies outside India of companies or bodies
corporate, registered or incorporated in India.
(4) It shall come into force on such date as the Central
Government may, by notification in the Official Gazette,
appoint in this behalf:
Provided that different dates may be appointed for different
provisions of this Act and any reference in any such provision to
the commencement of this Act shall be construed as a
reference to the coming into force of that provision.

OBJECTIVES OF FERA
1. To regulate certain payments.
2. To regulate dealings in foreign exchange and securities.
3. To regulate
exchange.

transactions,

indirectly

affecting

4. To regulate the import and export of currency.

5. To conserve precious foreign exchange.

foreign

6. The proper utilization of foreign exchange so as to promote

the economic development of the country.

BASIC CONCEPTS UNDER FERA

FERA contains definitions of certain terms which have
been used throughout the Act. Their meaning of these terms
may differ under other laws or under common language. But for
the purposes of FERA, the terms will signify the meaning as
defined there under. Let us take up some of the more important
ones.
Authorized dealer means a person for the time being
authorized by the Reserve Bank of India (RBI) under section 6
to deal in foreign exchange.
Bearer certificate means a certificate of title to securities,
whose ownership can be transferred by mere delivery,
whether with endorsement or not. In this sense, it is similar to
a bearer cheque ie whoever has such a certificate can easily
encash it without any other persons endorsement.
Certificate of title to a security means any document
used in the ordinary course of business as a proof of the
possession or control of the security or authorizing or
purporting to authorize, either by endorsement or by delivery
the possessor of the document to transfer or receive the
security thereby represented.
Coupon means the coupon representing the dividends or
interest on a security. Eg Dividend warrants
Currency includes all coins, currency notes, bank notes,
postal notes, postal orders, money orders, cheques, drafts,
travellers cheques, letters of credit, bills of exchange and
promissory notes.
Foreign currency means any currency other than Indian
currency.
Foreign exchange means foreign currency and includes :-:
1. All deposits, credits and balances payable in any foreign
currency and any drafts, travellers cheques, letters of credit

and bills of exchange expressed or drawn in Indian currency

but payable in any foreign currency.
2. Any instrument payable at the option of the drawee or
the holder thereof or any other party, either in Indian
currency or in foreign currency or partly in one and partly in
the other.
Foreign security means any security created or issued
outside India and any security, the principal of or the interest
on which is payable in any foreign currency or is payable
outside India.
Indian currency means the currency which is expressed or
drawn in Indian rupees but does not include special bank
notes and special one rupee notes issued under section 28A of
the Reserve Bank of India Act, 1934. Such Rupee One notes
are issued by the Ministry of Finance.
Indian Customs Waters means water extending into the sea
upto a distance of 12 nautical miles measured from the
appropriate base line on the coast of India and includes any
bay, gulf, harbour, creek or tidal river.
Money changer means a person for the time being
authorized under section 7 to deal in foreign exchange.
Owner, in relation to any security, includes :1. Any person who has the power to transfer the security;
or
2. Any person who has the custody thereof; or
3. Any person who receives, whether on his own behalf or
on behalf of any other person, dividends or interest thereon
and who has any interest therein;
4. In a case where a security is held on in any trust or
dividends or interest thereon are paid into a trust fund, owner
also includes any trustee or any person entitled to enforce
performance of the trust or to revoke or vary, with or without
the consent of any other person, the trust or any terms
thereof or to the control investments of the trust moneys.

 Person resident in India means

1. A citizen of India, who has at anytime after 25th March 1947
been staying in India but does not include citizen of India who
has gone out of or stays outside India :(i) for taking an employment outside India ; or
(ii) for carrying on outside India any business or vocation ;
or
(iii) for any other purpose, in circumstances which indicate
the intention to stay outside India for an uncertain period.
2. A citizen of India who having ceased to be a person resident
in India as per the above conditions, who returns to or stays in
India :(i) for taking an employment in India ; or
(ii) for carrying on business or vocation in India ; or
(iii) for any other purpose in circumstances which indicate
his intention to stay in India for an uncertain period.
3. A person, not being a citizen of India who has come to or
stays in India :(i) for taking an employment ; or
(ii) for carrying on business or vocation in India ; or
(iii) for any other purpose in circumstances which indicate
his intention to stay in India for an uncertain period.
(iv) for staying with his or her spouse, such spouse being a
person resident in India.
4. A citizen of India who has not stayed in India at anytime
after 25th day of March 1947 comes to India for any of the
aforesaid purposes.
Person resident outside India means a person who is not
resident in India.

 Securities means shares, stock, bonds, debentures stock,

government securities as defined in the Public Debt Act, 1944,
savings certificates to which the Government Savings
Certificate Act, 1959 applies, deposit receipts in respect of
deposits of securities and units or sub-units of the Unit Trust
and includes certificates of title to securities but does not
include bills of exchange or promissory notes other than
government promissory notes.
Authorized dealer in foreign exchange:
Authorized dealers are persons who can legally deal in foreign
exchange. Most of the authorized dealers are banks. However,
not all branches of the banks are authorized dealers. Only
certain designated branches of banks act as authorized dealers.
Any person wanting to deal in foreign exchange must deal
through the authorized dealers unless specifically exempted
from doing so.
Money Changer:
Money changers are authorized to deal in foreign exchange but
for very limited and specific purposes. Generally, hotels, foreign
travel agents, foreign tour operators, etc who have foreign
exchange requirements for specific purposes only are allowed
to become money changers. They must function strictly within
the terms and conditions under which they are licensed to act
as money changers.

INTRODUCTION
FEMA (FOREIGN EXCHANGE MANAGEMENT ACT,
1999)

The Foreign Exchange Management

Act,1999 (FEMA) is an Act of the Parliament of India "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". It was passed in the winter
session of Parliament in 1999, replacing the Foreign Exchange
Regulation Act (FERA). This act makes offences related to
foreign exchange civil offenses. It extends to the whole of India
replacing FERA, which had become incompatible with the proliberalisation policies of the Government of India.

It enabled a new foreign exchange management regime

consistent with the emerging framework of the World Trade
Organisation (WTO). It also paved the way for the introduction
of the Prevention of Money Laundering Act 2002, which came
into effect from 1 July 2005.
Unlike other laws where everything is permitted unless
specifically prohibited, under this act everything was prohibited
unless specifically permitted. Hence the tenor and tone of the
Act was very drastic. It required imprisonment even for minor
offences. Under FERA a person was presumed guilty unless he
proved himself innocent, whereas under other laws a person is
presumed innocent unless he is proven guilty.
FEMA is a regulatory mechanism that enables the Reserve Bank
of India and the Central Government to pass regulations and
rules relating to foreign exchange in tune with the Foreign Trade
policy of India.
Switch from FERA
FERA (FOREIGN
EXCHANGE
REGULATION ACT)
1973

FEMA (FOREIGN EXCHANGE

MANAGEMENT, ACT)

1999

FERA, in place since 1974, did not succeed in restricting

activities such as the expansion of (TNCs). The concessions
made to FERA in 1991-1993 showed that FERA was on the
verge of becoming redundant. After the amendment of FERA in
1993, it was decided that the act would become the FEMA. This
was done in order to relax the controls on foreign exchange in
India, as a result of FEMA served to make transactions for
external trade and easier transactions involving current
account for external trade no longer required RBIs permission.
The deals in Foreign Exchange were to be managed instead of

regulated. The switch to FEMA shows the change on the part

of the government in terms of for the capital.
The buying and selling of foreign currency and other
debt instruments by businesses, individuals and governments
happens in the foreign exchange market. Apart from being very
competitive, this market is also the largest and most liquid
market in the world as well as in India. It constantly undergoes
changes and innovations, which can either be beneficial to a
country or expose them to greater risks. The management of
foreign exchange market becomes necessary in order to
mitigate and avoid the risks. Central banks would work towards
an orderly functioning of the transactions which can also
develop their foreign exchange market. Foreign Exchange
Market Whether under FERA or FEMAs control, the need for the
management of foreign exchange is important. It is necessary
to keep adequate amount of foreign exchange from Import
Substitution to Export Promotion.

MAIN FEATURES OF FEMA:

1. Activities such as payments made to any person outside
India or receipts from them, along with the deals in foreign
exchange and foreign security is restricted. It is FEMA that
gives the central government the power to impose the
restrictions.
2. Without general or specific permission of the FEMA restricts
the transactions involving foreign exchange or foreign
security and payments from outside the country to India
the transactions should be made only through an authorised
person.
3. Deals in foreign exchange under the current account by an
authorised person can be restricted by the Central
Government, based on public interest generally.

4. Although selling or drawing of foreign exchange is done

through an authorized person, the RBI is empowered by this
Act to subject the capital account transactions to a number
of restrictions.
5. Residents of India will be permitted to carry out transactions
in foreign exchange, foreign security or to own or hold
immovable property abroad if the currency, security or
property was owned or acquired when he/she was living
outside India, or when it was inherited by him/her from
someone living outside India.

REGULATION/RULES UNDER FEMA

Foreign Exchange Management (Current Account

Transactions) Rule, 2000

Foreign Exchange Management (Permissible Capital

Account Transactions) Regulations, 2000

Foreign Exchange Management (Transfer or Issue of any

Foreign Security) regulations, 2004

Foreign Exchange Management (Foreign currency

accounts by a person resident in India)Regulations, 2000

Foreign Exchange Management (Acquisition and transfer

of immovable property in India) regulations, 2000

Foreign Exchange Management (Establishment in India of

branch or office or other place of business) regulations, 2000

Foreign Exchange Management (Manner of Receipt and

Payment) Regulations, 2000

Foreign Exchange Management (Export of Goods and

Services) regulations, 2000

Foreign Exchange Management (Realisation, repatriation

and surrender of Foreign Exchange)regulations, 2000

Foreign Exchange Management (Possession and Retention

of Foreign Currency) Regulations, 2000

Foreign Exchange (g proceedings) rules, 2000

TO WHOM ACT IS APPLICABLE?

A Bill based on the recommendations of the Task Force,
was introduced in the Lok Sabha on 4 August, 98. The Bill was
referred to the standing committee on Finance which submitted
it's report to the House on 23 December'98 with suggestion and
modifications. The 12th Lok Sabha was dissolved before any
decision could be taken on the bill. The Bill subsequently
lapsed. The bill was again introduced in the 13th Lok Sabha on
25th Oct'99. The presidential Assent was received on 6th Jan
2000. Finally the FEMA came into operation w.e.f. 1st June
2000.
The FEMA, is applicable1. To the whole of India.
2. Any Branch, office and agency, which is situated outside
India, but is owned or controlled by a person resident in
India.
Any contravention of provisions of FEMA, by all those, who are
covered under above two aspects committed outside India.

CATEGORIES & STATUS OF DIFFERENT PERSONS:

Broadly speaking FEMA, covers, three different types of
categories, and deals differently with them.
These categories are:
1. Person
2. Person Resident In India
3. Person Resident Outside India
1. PERSON
For the purpose of provisions, a person shall include any of
the following:
i.

An individual

ii.

A Hindu Undivided family

iii.

A company

iv.

A Firm

v.

An association of persons or a body of individuals,

whether incorporated or not,

vi.

Every artificial judicial person, not falling within any

of the preceding sub clauses, and

vii.

Any agency, office or branch owned or controlled by

such person.

2. "PERSON RESIDENT IN INDIA"

"A person resident in India", shall include any of the following

i.

A person who has been residing in India for more

than 182 days, in the last financial year. This means
if a person has to be assessed, as to whether he is
person resident in India, for any offence committed in
August 2001, then he should be residing in India for
more than 182 days during April 2000 to March 2001

ii.

Any person or body

incorporated in India, or

iii.

An office, branch or agency in India owned or

controlled by a person resident outside India, or

iv.

An office, branch or agency outside India owned or

controlled by a person resident in India.

corporate

registered

or

However, in following cases a person shall not be person

resident in India", even if he is residing in India for more than
182 days in the last financial year:
i.

ii.

A person who has gone abroad, for:

Taking up employment outside India or

For carrying on any business outside India, or

For any other purpose, which itself would

indicate his intention to stay outside India for an
uncertain period.

Similarly, a person who has come to India for any

purpose except:

Taking up employment in India, or

Carrying on any business in India, or

For any other purpose, which itself would

indicate his intention to stay in India for an
uncertain period.

3. PERSON RESIDENT OUTSIDE INDIA

Simply putting it, "a person resident outside India" means "a
person who is not resident in India"

EXEMPTIONS
CIRCUMSTANCES WHERE HOLDING AND REPATRIATION
OF FOREIGN EXCHANGE IS "EXEMPTED" FROM FEMA
RULES
In following circumstances, the provisions of FEMA will not
apply with regard to Holding and Repatriation of Foreign
Exchange:
1. Possession of foreign currency or foreign coins by any
person upto such limit as the Reserve Bank may specify.
2. Foreign currency account held or operated by such person
or class of persons and the limit upto, which the Reserve
Bank specifies.
3. Foreign Exchange acquired or received before the 8th day
of July 1947 or any income arising or accruing thereon,
which is held outside India by any person in pursuance of
a general or special permission granted by the Reserve
Bank.
4. Foreign Exchange held by a person resident in India upto
such limit as the Reserve Bank may specify, if such foreign
exchange was acquired by way of gift or inheritance from
a person who acquired or received it before 8th of July
1947 or if the income has occurred to him, which was held

outside India in pursuance of a general or special

permission granted by the Reserve Bank.
5. Foreign Exchange acquired from employment, business,
trade vocation, services, honorarium, gifts, inheritance or
any other legitimate means upto such limit as the Reserve
Bank may specify.
Such other receipt in foreign Exchange as the Reserve Bank
may specify.

IMPORTANT PROVISIONS FROM FEMA

RELEVANT
PROVISIONS
OF
EXCHANGE
MANUAL FOR THE PURPOSE OF FEMA

CONTROL

Some of the relevant provisions of Exchange Control Manual

under FEMA, which are still existing are:
1. REFUND OF INWARD REMITTANCES
If a request is made from the overseas for cancellation of
Inward Remittances, Authorised Dealers may do so without
referring to Reserve Bank, if refunds is not to compensate for a
loss.
2. APPLICATION
CURRENCY

FOR

REMITTANCES

IN

FOREIGN

i.

A person firm or bank may apply to an Authorised Dealer

for remittances in any foreign currency to a beneficiary
abroad.

ii.

Application should be made in FORM -A1, if the purpose of

remittance is import of goods into India.

iii.

For any other purpose in Form-A2

iv.

The Authorised Dealer may sell the foreign Exchange

applied for if he think fit provided it is within his powers,
and the purpose of remittance is an approved one.

3. MODE OF PAYMENT OF RUPEES AGAINST SALE OF

FOREIGN EXCHANGE
In case of sale of foreign Exchange or remittance foreign
Exchange amounting to Rs. 20,000 or more the payment
received by the Authorised Dealer, from the applicant should be
through a crossed cheque drawn on the applicant bank account
or on the bank account of the Firm/ Company. Payment can also
be accepted in the form of a Banker's cheque / Pay Order /
Demand Draft.
Receipt of Payment in cash in case of such sale of
foreign Exchange or remittance in foreign Exchange is strictly
prohibited.
EXCEPTION:
However where purpose of sale of foreign exchange is for
travel abroad for business etc, cash may be received by
Authorised Dealer from Applicant upto Rs. 50,000/Where the rupee equivalent for drawing foreign
exchange exceeds Rs. 50,000 either for any single installment
or for more than one installment recokned--- together for a
single journey / visit it should be paid by the traveler by means
of a gross cheque / demand draft/ pay order as stated above.
4. TRAVELLERS CHEQUE NEGOTIABLE ONLY IN INDIA

Rupee Travellers cheque cannot be encashed outside

India, if they are issued solely for use within India. In such a
case they cannot be taken or sent out of India.
Reimbursements should be strictly refused where such
travellers cheques have been encashed outside India.

5. REIMBURSEMENT OUTSIDE INDIA

Rupee Travellers cheque, which are issued by authorised
dealers, encashable outside India, may be reimbursed by
Authorised Dealers or by their selling Agent.
6. IMPORT OF FOREIGN CURRENCY NOTES
When the stock of foreign currency notes with Authorised
Dealer is not adequate for meeting their normal business
requirement they could import foreign currency notes from
their overseas branches or correspondents.
7. RECONVERSION OF INDIAN CURRENCY
i.

Foreign currency may be sold against Indian Rupees held

by persons who are not resident of India but are passing
through or leaving India after a visit, at the time of their
departure from India.

ii.

For this purpose, a Bank or Encashment certificate issued

by Authorised Dealer, exchange bureau or Authorised
Money changer in form BCI, ECF OR ECR, is required to
show that the rupee had been acquired by sale of foreign
Exchange to an Authorised Dealer or money changer in
India.

iii.

Such a certificate is valid for such reconversion i.e. a

period of three months is not over from the date of sale
of the foreign currency by the traveller.

8. RATES OF EXCHANGE
Authorised dealers and their Exchange bureau may buy
from and sell to public foreign currency notes and coins at rates
of exchange determined by market conditions. Dealings in
foreign currency notes and coins between authorised dealers
and between authorised dealers and money changers would
also be at rates determined by market conditions.

FERA AND FEMA-COMPARISON

1. SIMILARITIES
2. DIFFERENCES
3. CHANGES/PROGRESSION FROM FERA TO FEMA- A
STEP AHEAD
A. SIMILARITIES
The similarities between FERA and FEMA are as follows:
1. The Reserve Bank of India and central government would
continue to be the regulatory bodies.
2. Presumption of extra territorial jurisdiction as envisaged in
section (1) of FERA has been retained.
3. The Directorate of Enforcement continues to be the
agency for enforcement of the provisions of the law such
as conducting search and seizure
B. DIFFERENCES BETWEEN FERA AND FEMA
Sr. DIFFERENCES
No
1 PROVISIONS

FERA

FEMA

FERA consisted of FEMA is much simple, and

81 sections, and
consist of only 49 sections.
was more complex

2 FEATURES

Presumption of
These presumptions of
negative intention Mens Rea and abatement
(Mens Rea ) and
have been excluded in
joining hands in
FEMA
offence
(abatement)
existed in FEMA
3 NEW TERMS IN Terms like Capital Terms like Capital Account
FEMA
Account
Transaction, current
Transaction,
account Transaction
current Account
person, service etc., have
Transaction,
been defined in detail in
person, service
FEMA
etc. were not
defined in FERA.
4 DEFINITION OF Definition of
The definition of
AUTHORISED
"Authorised
Authorised person has
PERSON
Person" in FERA
been widened to include
was a narrow one ( banks, money changes, off
2(b)
shore banking Units etc. (2
(c)
5 MEANING OF
There was a big
The provision of FEMA, are
"RESIDENT" AS difference in the
in consistent with income
COMPARED
definition of
Tax Act, in respect to the
WITH INCOME
"Resident", under definition of term "
TAX ACT.
FERA, and Income Resident". Now the criteria
Tax Act
of "In India for 182 days"
to make a person resident
has been brought under
FEMA. Therefore a person
who qualifies to be a nonresident under the income
Tax Act, 1961 will also be
considered a non-resident
for the purposes of
application of FEMA, but a
person who is considered

6 PUNISHMENT

7 QUANTUM OF
PENALTY.

8 APPEAL

to be non-resident under
FEMA may not necessarily
be a non-resident under
the Income Tax Act, for
instance a business man
going abroad and staying
therefor a period of 182
days or more in a financial
year will become a nonresident under FEMA.
Any offence under Here, the offence is
FERA, was a
considered to be a civil
criminal offence , offence only punishable
punishable with
with some amount of
imprisonment as money as a penalty.
per code of
Imprisonment is
criminal procedure, prescribed only when one
1973
fails to pay the penalty.
The monetary
Under FEMA the quantum
penalty payable
of penalty has been
under FERA, was considerably decreased to
nearly the five
three times the amount
times the amount involved.
involved.
An appeal against The appellate authority
the order of
under FEMA is the special
"Adjudicating
Director
office", before "
(Appeals)Appeal against
Foreign Exchange the order of Adjudicating
Regulation
Authorities and special
Appellate Board
Director (appeals) lies
went before High before "Appellate Tribunal
Court
for Foreign Exchange."An
appeal from an order of
Appellate Tribunal would
lie to the High Court. (sec
17,18,35)

9 RIGHT OF
ASSISTANCE
DURING LEGAL
PROCEEDINGS.

10 POWER OF
SEARCH AND
SEIZE

FERA did not

FEMA expressly recognises
contain any
the right of appellant to
express provision take assistance of legal
on the right of on practitioner or chartered
impleaded person accountant (32)
to take legal
assistance
FERA conferred
The scope and power of
wide powers on a search and seizure has
police officer not been curtailed to a great
below the rank of a extent
Deputy
Superintendent of
Police to make a
search

C. CHANGES/PROGRESSION FROM FERA TO FEMA- A STEP

AHEAD
Enactment of FEMA has brought in many changes in the
dealings of Foreign Exchange, as compared to FERA. Some of
them are restrictive, and some has widened the scope.
However some of the relevant progress made, from FERA to
FEMA, are as follows:
1. RAWAL OF FOREIGN EXCHANGE
Now, the restrictions on drawal of Foreign Exchange for
the purpose of current Account Transactions, has been
removed. However, the Central Government may, in public
interest in consultation with the Reserve Bank impose such
reasonable restrictions for current account transactions as may
be prescribed.
FEMA has also by and large removed the restrictions on
transactions in foreign Exchange on account of trade in goods,
services except for retaining certain enabling provisions for the

Central Government to impose reasonable restriction in public

interest.

2. OMISSION OF CRIMINAL PROCEEDINGS

Under FERA, any contravention was a criminal offence
and the proceedings were governed by the code of Criminal
Procedure. Moreover the Enforcement Directorate had powers
to arrest any person, search any premises, seize documents,
initiate proceeding.
Now all these have been done away with, and
contravention of FEMA is no more a Criminal offence, and only
monetary penalty, i.e. civil proceedings are applicable. Civil
imprisonment is provided, only in case of default to pay fine.

3. RESIDENTIAL STATUS
The definition of "Residential Status" under FEMA has
gone through considerable change. It has now been made
compatible with the definition provided under "Income Tax" Act.
The residential status is now based on the physical stay of
the person in the country. The period of 182 days as provided,
indicates that it is not necessary that there should be a
continuos period of stay. The period of stay would be calculated
by adding up all the days of stay of the individual in the
country.
An Indian resident becomes a non-resident when he goes
abroad and takes up a job or engages in business.
A major change in the definition of residential status of
partnerships and firms in worth noticing. Earlier, under FERA, a
branch was considered a resident of a place where it was
situated. Now, under FEMA, an office, branch or agency outside
India owned or controlled by a person resident in India will be
considered a resident in India for the purposes of this Act.

For example, a person residing in India has a branch in

Maurtius; such branch will be considered a resident in India.
4. IMMOVABLE PROPERTY OUTSIDE INDIA
Earlier, under FERA, there was no restriction placed on
foreign citizens who were residents of India, for acquiring
immovable property outside India.
Now FEMA prohibits a resident to acquire, own process,
hold or transfer any immovable property situated outside India.
This restriction applies irrespective of whether the resident is
an Indian citizen or foreign citizen. With this provision being
effective a foreign citizen who is a resident in India has to take
approval of Reserve Bank of India for selling or buying any
immovable property situated outside India.

5. IMMOVABLE PROPERTY IN INDIA

Earlier, under FERA, a foreign citizen could acquire or
transfer immovable property in India only after seeking
permission from the Reserve Bank.
Now, under FEMA, the control of Reserve Bank is
determined by the residential status of a person. Only a nonresident as defined within the meaning of FEMA would require
permission of the Reserve Bank to acquire or transfer an
immovable property in India. The distinction based on
citizenship has been abolished and that based on residentship
has been introduced.

6. EXPORT OF SERVICES
FERA had no provision for export of services. Now, FEMA
has included payment received by an Exporter of Services in its
ambit. Every Exporter, who receives payment from outside
India, for his services rendered is obliged to furnish details of
payment to the 'Reserve Bank.

For example; a Doctor, or Engineer or Lawyer or

Accountant or any other professional may give opinions or
consultation to people outside India, via internet or mail, and
his fees may be credited to his credit account. Then he is
obliged to furnish details of such payment to Reserve Bank.

7. INCLUSION OF NEW TERMS

Some new terms like "Capital Account Transactions,
Current Account Transactions"; have been included in FEMA.
Reserve Bank has been confirmed with powers and with
consultation with central government to specify maximum
permissible limit upto which exchange is admissible for such
transactions.

WHAT TYPE OF OFFENCES?

Although under FEMA, offences pertain to transactions in
foreign Exchange only. However relevant offences are as
follows:
DETAILS IN FOREIGN EXCHANGE:
1. Only a person Authorised by Reserve Bank can deal in
foreign Exchange
2. No one can make a payment to a person resident outside
India, without permission of Reserve Bank.
3. No one receives any payment from a person resident
outside India, without permission of Reserve Bank.
4. A person resident in India cannot deal in foreign exchange,
foreign security or any immovable property situated
outside India, without permission of Reserve Bank. (sec 4)
5. Similarly a person resident outside India, cannot acquire
immovable property in India without permission.

EXPORTER OF GOODS AND SERVICES

Every exporter of goods and services is under an obligation, to
give details to Reserve Bank regarding value of export, mode of
payment, amount of payment received etc.
REPATRIATION OF FOREIGN EXCHANGE
Where any amount of foreign exchange has become due or
accrued to any person who is a resident in India, he shall realise
and repatriate (Bring ) such amount, within the time specified
by Reserve Bank.
AUTHORISED PERSON
An "Authorised Person" under FEMA, is a person who is
authorised by Reserve Bank to deal in Foreign Exchange.
For being registered as an "Authorised Person", necessary
application alongwith relevant documents has to be furnished
to Reserve Bank.
An "Authorised Person" is also, not given a free hand to deal in
foreign Exchange. He has to furnish details and information, to
Reserve Bank from time to time as may be required by it.
PROSECUTION OF OFFENCES COMMITTED
Before detailing the procedure for prosecution, it is important to
mark out the Adjudicating Agencies. They are:
ADJUDICATING AUTHORITY
The inquiry of any contravention of FEMA is conducted by an
Adjudicating Authority appointed by the Central Government.
APPEAL TO SPECIAL DIRECTOR (APPEALS)
The special Director (Appeals) is authorised to hear the appeals
arising out of in order of the Adjudicating Authority.
APPEAL TO THE APPELLATE TRIBUNAL

The Appellate Tribunal is entitled to hear appeals made in

accordance, from an order made by Adjudicating Authority or
special Director (Appeals).
DIRECTOR OF ENFORCEMENT
The Director of Enforcement and other officers has power to
conduct investigation, search and seize any articles.

ACQUISITION
AND
TRANSFER
PROPERTY OUTSIDE INDIA

OF

IMMOVABLE

RBI'S PERMISSION FOR ACQUISITION AND TRANSFER:

A person, resident in India, shall acquire or transfer any
immovable property situated outside India only with the
general or special permission of the Reserve Bank of India.
The following properties are exempted from these regulations:
1. Property held by a foreigner who is resident in India;
2. Property acquired by a person resident in India on or
before 8th July, 1947 and continued to be held by him with
the permission of the Reserve Bank of India.
PERMISSIBLE ACQUISITION OF IMMOVABLE PROPERTY
OUTSIDE INDIA:

1. Gift or Inheritance: A person resident in India may acquire

immovable property outside India by way of gift or
inheritance from a person
i.

who was resident outside India;

ii.

who was resident in India on or before 8th July, 1947.

2. Purchase from Resident Foreign Currency (RFC) account: A

person resident in India may acquire immovable property
outside India by way of purchase out of foreign exchange
held in Resident Foreign Currency account which is
maintained according to the FEMA Regulations, 2000.
3. Permission granted to a company by RBI: On an
application made to it, the Reserve Bank of India may
permit a company incorporated in India having overseas
offices, to acquire immovable property outside India for its
business and for residential purposes of its staff, subject to
certain terms and conditions.
PERMISSIBLE TRANSFER OF IMMOVABLE PROPERTY
OUTSIDE INDIA:
Transfer by way of Gift: A person resident in India, who has
acquired immovable property outside India as per the
permissibility mentioned above, may transfer it by way of gift
to
his
relative
(spouse,
sibling,
any
lineal
ascendant/descendant) who is a person resident in India.

ACQUISITION
AND
PROPERTY IN INDIA

TRANSFER

OF

IMMOVABLE

Acquisition:
An Indian citizen resident outside India may acquire immovable
property in India provided it is not an agricultural or plantation

property or a farm house. It is required that payment of the

purchase price, if any, is made out of:
1. funds received in India through normal banking channels
by way of inward remittance from any place outside India;
2. funds held in any non-resident account
maintained
according
to
the
Foreign
Management Act or RBI's regulations.

which is
Exchange

It is further required that such payment is not made by

traveller's cheque or by foreign currency notes.
Transfer:
An Indian citizen resident outside India may transfer:
1. any immovable property in India to a person resident in
India, and
2. any immovable property other than agricultural or
plantation property or a farm house to a person resident
outside India who is an Indian citizen or to a person of
Indian origin who is resident outside India.
ACQUISITION AND TRANSFER BY A PERSON OF INDIAN
ORIGIN:
A person of Indian origin as per the Reserve Bank regulations
refers to an individual who is not a citizen of
Pakistan/Bangladesh/Sri
Lanka/Afghanistan/China/Iran/Nepal/Bhutan, and who at any
time held Indian passport; or who or either of whose
father/grandfather was an Indian citizen by virtue of the Indian
Constitution or the Citizenship Act, 1955.
Acquisition:

A person of Indian origin resident outside India may acquire any

immovable property in India other than an agricultural or
plantation property or a farm house:
1. provided that payment of the purchase price, if any, is
made out of:
2. funds received in India through normal banking channels
by way of inward remittance from any place outside India;
3. funds held in any non-resident account
maintained
according
to
the
Foreign
Management Act or RBI's regulations.
4. It is further required that such
traveller's cheque or by foreign
gift from a person resident in
outside India who is an Indian
origin resident outside India;

which is
Exchange

payment is not made by

currency notes. by way of
India / a person resident
citizen/a person of Indian

5. by way of inheritance from a person resident outside India

who had acquired such property in accordance with the
provisions of the foreign exchange law in force at the time
of
acquisition
by
him/the
provisions
of
these
Regulations/from a person resident in India.

Transfer:
1. A person of Indian origin resident outside India may
transfer any immovable property in India other than an
agricultural or plantation property or a farm house by way
of sale to a person resident in India.
2. A person of Indian origin resident outside India may
transfer agricultural or plantation property or a farm house
in India, by way of gift or sale to a person resident in India
who is an Indian citizen.

3. A person of Indian origin resident outside India may

transfer residential or commercial property in India by way
of gift to a person resident in India / to a person resident
outside India who is an Indian citizen / to a person of
Indian origin resident outside India.
ACQUISITION
OF
IMMOVABLE
PROPERTY
CARRYING ON A PERMITTED ACTIVITY:

FOR

A person resident outside India who has established in India a

branch, office or other place of business (as per the Foreign
Exchange Management Regulations, 2000) for carrying on in
India any activity, excluding a liaison office, may:
1. acquire any immovable property in India, which is
necessary for or incidental to carrying on such activity,
provided all applicable laws, rules, regulations, and
directions are complied with and the person files a
declaration with the Reserve Bank;
transfer the immovable property acquired in the manner
mentioned above, by mortgaging it to an authorized dealer as a
security for any borrowing.

DIFFERENT TYPES OF DEPOSITS AND BANK

ACCOUNTS UNDER FEMA
Particulars

Foreign
Currency (NonResident)
Account
(Banks)
Scheme [FCNR
(B) Account]

Non-Resident
(External) Rupee
Account Scheme
[NRE Account]

NonResident
Ordinary
Rupee
Account
Scheme
[NRO

(1)
(2)
Who
can NRIs
open
an (individuals/
account?
entities
of
Bangladesh
/
Pakistan
nationality
/
ownership
require
prior
approval
of
RBI)

(3)
NRIs (individuals /
entities
of
Bangladesh
/
Pakistan
nationality/owners
hip require prior
approval of RBI)

Joint
account

In the names of
two or more nonresident
individuals
provided all the
account
holders
are
persons
of
Indian nationality
or origin;

In the names
of two or more
non-resident
individuals
provided
all
the
account
holders
are
persons
of
Indian

Account]
(4)
Any person
resident
outside
India (other
than
a
person
resident in
Nepal and
Bhutan).
Individuals /
entities of
Pakistan
nationality /
ownership,
entities of
Bangladesh
ownership
and
erstwhile
Overseas
Corporate
Bodies requ
ire
prior
approval of
the Reserve
Bank.
May
be
held jointly
with
residents

Nominatio
n
Currency
in
which
account is
denominat
ed

nationality or
origin;
Resident close
relative
(relative
as
defined
in
Section 6 of
the Companies
Act, 1956) on
former
or
survivor basis.
The
resident
close relative
shall
be
eligible
to
operate
the
account as a
Power
of
Attorney
holder
in
accordance
with
extant
instructions
during the life
time of the
NRI/
PIO
account holder.
Permitted

Resident
close
relative
(relative
as
defined
in
Section 6 of the
Companies
Act,
1956) on former
or survivor basis.
The resident close
relative shall be
eligible to operate
the account as a
Power of Attorney
holder
in
accordance
with
extant instructions
during the life time
of the NRI/ PIO
account holder.

Permitted

Any permitted Indian Rupees

currency i.e. a
foreign
currency which
is
freely
convertible
Repatriabli Repatriable
Repatriable
ty

Permitted
Indian
Rupees

Not
repatriable

Type
of Term
Account
only

Deposit Savings, Current,

Recurring,
Fixed
Deposit

Period for For terms not

fixed
less than 1
deposits
year and not
more than 5
years.

Rate
of With
effect
Interest
from March 1,
2014
(i)deposits of 1
year to less
than 3 year
maturity,
interest
shall
be paid within
the ceiling rate
of
LIBOR/

From one to three

years,
However,
banks are allowed
to
accept
NRE
deposits
above
three years from
their
AssetLiability point of
view
With effect from
March 1, 2014,
interest
rates
offered by banks
on NRE deposits
cannot be higher
than those offered
by
them
on
comparable
domestic
rupee
deposits.

except for
the
following:
i) all current
income and
ii) up to
USD 1 (one)
million per
financial
year (AprilMarch), by
A NRI/ PIO.
Savings,
Current,
Recurring,
Fixed
Deposit
As
applicable
to resident
accounts.

Banks are
free
to
determine
their
interest
rates
on
savings
deposits
under
Ordinary
Non-

Operations
by Power
of
Attorney in
favour of a
resident
by
the

SWAP
rates
plus 200 basis
points;
(ii)
deposits of 3-5
years maturity,
interest
shall
be paid within
the ceiling rate
of
LIBOR/
SWAP
rates
plus 300 basis
points
On
floating
rate deposits,
interest
shall
be paid within
the ceiling of
SWAP rates for
the respective
currency
/maturity plus
200 bps/ 300
bps
as
the
case may be.
For
floating
rate deposits,
the
interest
reset
period
shall be six
months.
Operations in
the account in
terms of Power
of Attorney is
restricted
to
withdrawals for
permissible

Resident
(NRO)
Accounts.
However,
interest
rates
offered by
banks
on
NRO
deposits
cannot be
higher than
those
offered by
them
on
comparable
domestic
rupee
deposits.

Operations in the
account in terms
of
Power
of
Attorney
is
restricted
to
withdrawals
for
permissible
local

Operations
in
the
account in
terms
of
Power
of
Attorney is
restricted

nonresident
account
holder

local payments
or remittance
to the account
holder himself
through
normal
banking
channels.

Loans
a. In India
i) to the Permitted

payments
or
remittance to the
account
holder
himself
through
normal
banking
channels.

Permitted

to
withdrawals
for
permissible
local
payments
in rupees,
remittance
of
current
income to
the account
holder
outside
India
or
remittance
to
the
account
holder
himself
through
normal
banking
channels.
Remittance
to the NRI/
PIO account
holder
is
subject to
the ceiling
of USD 1
(one)
million per
financial
year.

without Permitted

Account
holder

without
any
ceiling subject
to
usual
margin
requirements.
ii) to Third Permitted
Parties
without
any
ceiling subject
to
usual
margin
requirements.
b. Abroad
i) to the Permitted
Account
without
any
holder
ceiling subject
to
usual
margin
requirement
ii) to Third Permitted with
Parties
out any ceiling
subject
to
usual
margin
requirements.
c. Foreign
Currency
Loans
in
India
i) to the Permitted
Account
without
any
holder
ceiling subject
to
usual
margin
requirements.
ii) to Third Permitted
Parties
without
any
ceiling subject
to
usual

any ceiling subject subject to

to usual margin the extant
requirements
rules3

Permitted without Permitted,

any ceiling subject subject to
to usual margin conditions4
requirements.

Permitted without Not

any ceiling subject Permitted
to usual margin
requirement

Permitted without Not

any ceiling subject Permitted
to usual margin
requirements.

Permitted without Not

any ceiling subject Permitted
to usual margin
requirements.

Permitted without Not

any ceiling subject Permitted
to usual margin
requirements

margin
requirements
Purpose of
Loan
a. In India
i) to the i)
Personal
Account
purposes or for
holder
carrying
on
business
activities *
ii)
Direct
investment in
India on nonrepatriation
basis by way of
contribution to
the capital of
Indian firms /
companies
iii) Acquisition
of flat / house
in India for his
own residential
use.
(Please
refer to para 9
of Schedule 2
to FEMA 5).
ii) to Third Fund
based
Parties
and / or nonfund
based
facilities
for
personal
purposes or for
carrying
on
business
activities
*.
(Please refer to

i)
Personal
purposes or for
carrying
on
business
activities.*
ii)
Direct
investment
in
India
on
nonrepatriation basis
by
way
of
contribution to the
capital of Indian
firms / companies.
iii) Acquisition of
flat / house in India
for
his
own
residential
use.
(Please refer to
para
6(a)
of
Schedule1 to FEMA
5).

Personal
requiremen
t and / or
business
purpose.*

Fund based and /

or non-fund based
facilities
for
personal purposes
or for carrying on
business activities
*. (Please refer to
para 6(b) of Sch. 1
to FEMA 5)

Personal
requiremen
t and / or
business
purpose *

para
9
of
Schedule 2 to
FEMA 5).
b. Abroad Fund
based
To
the and / or nonaccount
fund
based
holder and facilities
for
Third
bonafide
Parties
purposes.

Fund based and / Not

or non-fund based permitted.
facilities
for
bonafide purposes.

CASE STUDY:
FEMA: RBI SLAPPED RS.125 CRORE ON RELIANCE
INFRASTRUCTURE

The Reserve Bank of India (RBI) has asked the Anil

Dhirubhai Ambani Group firm, Reliance Infrastructure (earlier,
Reliance Energy), to pay just under Rs 125 crore as
compounding fees for parking its foreign loan proceeds worth
$300 million with its mutual fund in India for 315 days, and
then repatriating the money abroad to a joint venture company.
These actions, according to an RBI order, violated various
provisions of the Foreign Exchange Management Act (FEMA).
In its order, RBI said Reliance Energy raised a $360million ECB on July 25, 2006, for investment in infrastructure
projects in India. The ECB proceeds were drawn down on
November 15, 2006, and temporarily parked overseas in liquid
assets. On April 26, 2007, Reliance Energy repatriated the ECB
proceeds worth $300 million to India while the balance
remained abroad in liquid assets.
It then invested these funds in Reliance Mutual Fund
Growth Option and Reliance Floating Rate Fund Growth Option
on April 26, 2007. On the following day, i.e., on April 27 2007,
the entire money was withdrawn and invested in Reliance Fixed
Horizon Fund III Annual Plan series V. On March 5, 2008,
Reliance Energy repatriated $500 million (which included the
ECB proceeds repatriated on April 26, 2007, and invested in
capital market instruments) for investment in capital of an
overseas joint venture called Gourock Ventures based in British
Virgin Islands.
RBI said, under FEMA guidelines issued in 2000, a
borrower is required to keep ECB funds parked abroad till the

actual requirement in India. Further, the central bank said a

borrower cannot utilise the funds for any other purpose.
The conduct of the applicant was in contravention of
the ECB guidelines and the same are sought to be
compounded, the RBI order signed by its chief general
manager Salim Gangadharan said. During the personal hearing
on June 16, 2008, Reliance Energy, represented by group
managing director Gautam Doshi and Price waterhouse Coopers
executive director Sanjay Kapadia, admitted the contravention
and sough compounding. The company said due to unforeseen
circumstances, its Dadri power project was delayed. Therefore,
the ECB proceeds of $300 million were bought to India and was
parked in liquid debt mutual fund schemes, it added.
Rejecting Reliance Energys contention, RBI said it took
the company 315 days to realise that the ECB proceeds are not
required for its intended purpose and to repatriate the same for
alternate use of investment in an overseas joint venture on
March 5, 2008. Reliance also contended that they invested the
ECB proceeds in debt mutual fund schemes to ensure
immediate availability of funds for utilisation in India. I do not
find any merit in this contention also as the applicant has not
approached RBI either for utilising the proceeds not provided
for in the ECB guidelines, or its repatriation abroad for
investment in the capital of the JV, the RBI official said in the
order.
In its defence, the company said the exchange rate
gain on account of remittance on March 5 2008, would be a
notional interim rate gain as such exchange rate gain is not
crystallised. But RBI does not think so. They have also stated
that in terms of accounting standard 11 (AS 11), all foreign
exchange loans have to be restated and the difference between
current exchange rate and the rate at which the same were
remitted to India, has to be shown as foreign exchange
loss/gain in profit and loss accounts.

However, in a scenario where the proceeds of the ECB

are parked overseas, the exchange rate gains or losses are
neutralized as the gains or losses restating of the liability side
are offset with corresponding exchange losses or gains in the
asset. In this case, the exchange gain had indeed been realised
and that too the additional exchange gain had accrued to the
company through an unlawful act under FEMA, the order said.
It said as the company has made additional income of
Rs 124 crore, it is liable to pay a fine of Rs 124.68 crore. On
August this year, the company submitted another fresh
application for compounding and requested for withdrawal of
the present application dated April 17, 2008, to include
contravention committed in respect of an another transaction
of ECB worth $150 million. But RBI said the company will have
to make separate application for every transaction and two
transactions are different and independent and cannot be
clubbed together.

CONCLUSION
FEMA permits only authorized person to deal in foreign
exchange or foreign security. Such an authorized person,
under the Act, means authorizeddealer, money changer, offshore banking unit or any other person for the time being
authorized by Reserve Bank. The Act thus prohibits any person
who deal in or transfer any foreign exchange or foreign
security to any person not being an authorized person. Make
any payment to or for the credit of any person resident outside
India in any manner. Receive otherwise through an authorized
person, any payment by order or on behalf of any person
resident outside India in any manner.
Enter into any financial transaction in India as
consideration for or in association with acquisition or creation
or transfer of a right to acquire, any asset outside India by any
person is resident in India which acquires, hold, own, possess
or transfer any foreign exchange, foreign security or any
immovable property situated outside India.

BIBLIOGRAPHY

www.slideshare.com

www.scribd.com

www.managementparadise.com

www.wikipedia.com

Economics textbook (Manan prakashan)