Test: FEMA - UGC NET MCQ

1. FDI stands for Foreign Direct Investment, which indeed represents an equity investment made by a person residing outside India into any unlisted Indian company. This definition aligns with the essence of FDI as described in the FEMA Act.

2. When it comes to a listed Indian company, for FDI to occur, it is a requirement that the foreign investment must be ten per cent or more of the paid-up post-issue equity capital. This condition is crucial for foreign investment in listed Indian companies.

Hence, both statements are accurate in describing different aspects of FDI according to the FEMA regulations.

Assertion is Correct: Yes, as per FEMA regulations, dealing or transferring forex to unauthorized individuals is prohibited.

Reason is Correct: Yes, the reason aligns with the purpose of FEMA to regulate foreign exchange transactions.

Reason explains Assertion: The reason provides a logical explanation for the assertion, connecting the regulations to the broader aim of maintaining economic stability.

• The assertion is correct as per the FEMA Act, which allows current account transactions freely with specific exceptions.
• The reason is also true as certain transactions are prohibited under the FEMA Act, even though most current account transactions are freely permissible.
• However, the reason is not the correct explanation of the assertion because the reason does not explain why there are specific exceptions to the freely permissible current account transactions.

The Foreign Exchange Management Act (FEMA), which replaced the Foreign Exchange Regulation Act (FERA) in 1999, indeed introduced more liberalized provisions for foreign exchange management and aimed to facilitate external trade and payments in India. FEMA was designed to support India's integration into the global economy by easing restrictions on foreign transactions and making India more trade-friendly.

1. Statement 1 is correct because the introduction of FEMA made India more open to international trade, helping the country to be perceived as trade-friendly.

2. Statement 2 is also correct as FEMA included provisions that allowed Indian residents more freedom in dealing with foreign exchange and foreign trade, addressing many of the restrictions that were in place under FERA.

Thus, both statements are correct.

The primary objective of the Foreign Exchange Regulation Act (FERA) when it was enacted in 1974 was to restrict and regulate foreign exchange transactions. FERA aimed at controlling and monitoring foreign exchange activities within the country, imposing stringent rules and penalties for violators. This legislation was more focused on restrictions rather than facilitation, aiming to maintain control over foreign exchange transactions in India.

Assertion is Correct: Yes, FEMA prohibits making payments for credit to individuals outside India.

Reason is Correct: True, the reason relates to the broader economic objectives of FEMA.

Reason explains Assertion: While both statements are accurate, the reason does not directly explain why payments to individuals outside India are restricted; rather, it touches on broader economic considerations.

The primary objective of the Foreign Exchange Management Act (FEMA) is to regulate and facilitate foreign exchange management in India. FEMA empowers the Reserve Bank of India (RBI) and the Government of India to effectively manage and regulate foreign exchange transactions. It aims to ensure that the foreign exchange market functions smoothly and enables easy foreign exchange transactions, thus contributing to the stability and growth of the Indian economy.

One of the main objectives of FEMA, is to regulate and outline the rules and procedures for all foreign exchange transactions. This includes facilitating external trade and payments in the country, supporting, growing, and maintaining the foreign exchange market in India, and defining the balance of payments as a record of transactions of goods and services among citizens of various nations.

• Assertion is correct as per FEMA guidelines.
• Reason is also accurate as it explains why Indian residents are allowed to make outward remittances without a permit.
• The Reason is the correct explanation of the Assertion as it clarifies the basis for the permission granted to Indian residents for specific outward remittances.

The Foreign Exchange Management Act (FEMA) was enacted on June 1, 2000, with the objective of replacing the previous Foreign Exchange Regulation Act (FERA). This act aimed to revise and unify foreign exchange rules in India, with a focus on promoting the development of the foreign exchange market. FEMA is considered more liberal and less restrictive compared to the erstwhile FERA, providing a framework that is conducive to the growth of foreign exchange transactions in the country.