ICAI Notes: The Foreign Exchange Management Act, 1999 | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


a    
 
 
CHAPTER 
3 
 
 
 
LEARNING OUTCOMES 
 
  
  
 
 
THE FOREIGN 
EXCHANGE 
MANAGEMENT  
ACT, 1999 
 
 
   
  
At the end of this Chapter, you will be able to: 
? Comprehend certain important terms and definitions under 
the Foreign Exchange Management Act, 1999 
? Gain knowledge about the concept of Residential Status 
under the Foreign Exchange Management Act, 1999 
? Identify the meaning of Current and Capital Account 
Transactions and the Rules and Regulations governing them 
  
© The Institute of Chartered Accountants of India
Page 2


a    
 
 
CHAPTER 
3 
 
 
 
LEARNING OUTCOMES 
 
  
  
 
 
THE FOREIGN 
EXCHANGE 
MANAGEMENT  
ACT, 1999 
 
 
   
  
At the end of this Chapter, you will be able to: 
? Comprehend certain important terms and definitions under 
the Foreign Exchange Management Act, 1999 
? Gain knowledge about the concept of Residential Status 
under the Foreign Exchange Management Act, 1999 
? Identify the meaning of Current and Capital Account 
Transactions and the Rules and Regulations governing them 
  
© The Institute of Chartered Accountants of India
 
CORPORATE AND ECONOMIC LAWS
 
a
 
 3.2 
 
 
 
 
1. INTRODUCTION  
Need for the Act 
The change in the economic scenario, 
globalization of capital, free trade across the 
globe, necessitated the need for managing 
foreign exchange in the country in an orderly 
manner. To facilitate cross border trade and cross 
border capital flows, exchange control law was 
required. Foreign exchange control led to 
introduction of exchange control law through 
Defense of India rules by the Britishers in 1939. Subsequently, Foreign Exchange 
Regulation Act (FERA) was enacted in 1947 which was later replaced with 'the 
Foreign Exchange Regulation Act, 1973' (FERA).  
FEMA, 1999
Definitions
Regulation and Management of 
Foreign Exchange
Current 
Account 
Transactions
Schedule I
Schedule II
Schedule III
Capital Account 
Permissible 
Transactions
Schedule I
Schedule II
 
© The Institute of Chartered Accountants of India
Page 3


a    
 
 
CHAPTER 
3 
 
 
 
LEARNING OUTCOMES 
 
  
  
 
 
THE FOREIGN 
EXCHANGE 
MANAGEMENT  
ACT, 1999 
 
 
   
  
At the end of this Chapter, you will be able to: 
? Comprehend certain important terms and definitions under 
the Foreign Exchange Management Act, 1999 
? Gain knowledge about the concept of Residential Status 
under the Foreign Exchange Management Act, 1999 
? Identify the meaning of Current and Capital Account 
Transactions and the Rules and Regulations governing them 
  
© The Institute of Chartered Accountants of India
 
CORPORATE AND ECONOMIC LAWS
 
a
 
 3.2 
 
 
 
 
1. INTRODUCTION  
Need for the Act 
The change in the economic scenario, 
globalization of capital, free trade across the 
globe, necessitated the need for managing 
foreign exchange in the country in an orderly 
manner. To facilitate cross border trade and cross 
border capital flows, exchange control law was 
required. Foreign exchange control led to 
introduction of exchange control law through 
Defense of India rules by the Britishers in 1939. Subsequently, Foreign Exchange 
Regulation Act (FERA) was enacted in 1947 which was later replaced with 'the 
Foreign Exchange Regulation Act, 1973' (FERA).  
FEMA, 1999
Definitions
Regulation and Management of 
Foreign Exchange
Current 
Account 
Transactions
Schedule I
Schedule II
Schedule III
Capital Account 
Permissible 
Transactions
Schedule I
Schedule II
 
© The Institute of Chartered Accountants of India
 
    
THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999 
 
a
    
 3.3 
Government as part of its agenda of liberalization of the Indian economy in 1991, 
permitted free movement of foreign exchange in connection to trade related 
receipts and payments as well as Foreign Investment in various sectors. This 
increased the flow of foreign exchange to India and consequently foreign exchange 
reserves increased substantially. The Foreign Exchange Management Act, 1999 was 
enacted and made effective from 1st June, 2000. This Act enables management of 
foreign exchange reserves for the country. 
Salient Features of the Act: It provides for- 
? Regulation of transactions between residents and non-residents 
? Investments in India by non-residents and overseas investments by Indian 
residents 
? Freely permissible transactions on current account subject to reasonable 
restrictions that may be imposed  
? Reserve Bank of India (RBI) and Central Government control over capital 
account transactions  
? Requirement for realisation of export proceeds and repatriation to India 
? Dealing in foreign exchange through 'Authorised Persons' like Authorised 
Dealer/ Money Changer/ Off-shore banking unit  
? Adjudication and Compounding of Offences  
? Investigation of offences by Directorate of Enforcement  
? Appeal provisions including Special Director (Appeals) and Appellate 
Tribunal. 
Enforcement of FEMA: Though RBI exercises overall control over foreign exchange 
transactions, enforcement of FEMA has been entrusted to a separate 'Directorate 
of Enforcement' formed for this purpose. [Section 36]. 
  
© The Institute of Chartered Accountants of India
Page 4


a    
 
 
CHAPTER 
3 
 
 
 
LEARNING OUTCOMES 
 
  
  
 
 
THE FOREIGN 
EXCHANGE 
MANAGEMENT  
ACT, 1999 
 
 
   
  
At the end of this Chapter, you will be able to: 
? Comprehend certain important terms and definitions under 
the Foreign Exchange Management Act, 1999 
? Gain knowledge about the concept of Residential Status 
under the Foreign Exchange Management Act, 1999 
? Identify the meaning of Current and Capital Account 
Transactions and the Rules and Regulations governing them 
  
© The Institute of Chartered Accountants of India
 
CORPORATE AND ECONOMIC LAWS
 
a
 
 3.2 
 
 
 
 
1. INTRODUCTION  
Need for the Act 
The change in the economic scenario, 
globalization of capital, free trade across the 
globe, necessitated the need for managing 
foreign exchange in the country in an orderly 
manner. To facilitate cross border trade and cross 
border capital flows, exchange control law was 
required. Foreign exchange control led to 
introduction of exchange control law through 
Defense of India rules by the Britishers in 1939. Subsequently, Foreign Exchange 
Regulation Act (FERA) was enacted in 1947 which was later replaced with 'the 
Foreign Exchange Regulation Act, 1973' (FERA).  
FEMA, 1999
Definitions
Regulation and Management of 
Foreign Exchange
Current 
Account 
Transactions
Schedule I
Schedule II
Schedule III
Capital Account 
Permissible 
Transactions
Schedule I
Schedule II
 
© The Institute of Chartered Accountants of India
 
    
THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999 
 
a
    
 3.3 
Government as part of its agenda of liberalization of the Indian economy in 1991, 
permitted free movement of foreign exchange in connection to trade related 
receipts and payments as well as Foreign Investment in various sectors. This 
increased the flow of foreign exchange to India and consequently foreign exchange 
reserves increased substantially. The Foreign Exchange Management Act, 1999 was 
enacted and made effective from 1st June, 2000. This Act enables management of 
foreign exchange reserves for the country. 
Salient Features of the Act: It provides for- 
? Regulation of transactions between residents and non-residents 
? Investments in India by non-residents and overseas investments by Indian 
residents 
? Freely permissible transactions on current account subject to reasonable 
restrictions that may be imposed  
? Reserve Bank of India (RBI) and Central Government control over capital 
account transactions  
? Requirement for realisation of export proceeds and repatriation to India 
? Dealing in foreign exchange through 'Authorised Persons' like Authorised 
Dealer/ Money Changer/ Off-shore banking unit  
? Adjudication and Compounding of Offences  
? Investigation of offences by Directorate of Enforcement  
? Appeal provisions including Special Director (Appeals) and Appellate 
Tribunal. 
Enforcement of FEMA: Though RBI exercises overall control over foreign exchange 
transactions, enforcement of FEMA has been entrusted to a separate 'Directorate 
of Enforcement' formed for this purpose. [Section 36]. 
  
© The Institute of Chartered Accountants of India
 
CORPORATE AND ECONOMIC LAWS
 
a
 
 3.4 
 
How to Read FEMA: 
 
*Rules are notified by the Ministry of Finance, Government of India
** Regulations are notified by the Reserve Bank of India
Broad Structure of FEMA 
Now let us have a glance at the broad structure the Act. The Act consists of 7 
Chapters dealing with following areas: 
Chapters Matters Sections 
I Preliminary 1 – 2 
II Regulation and Management of Foreign Exchange 3 – 9 
III Authorised Person 10 – 12 
IV Contravention and Penalties 13 – 15 
V Adjudication and Appeal 16 – 35 
VI Directorate of Enforcement 36 – 38 
VII Miscellaneous  39 – 49 
Act
Rules* & Regulations**
Notifications & Circulars
Master Directions
FAQs
© The Institute of Chartered Accountants of India
Page 5


a    
 
 
CHAPTER 
3 
 
 
 
LEARNING OUTCOMES 
 
  
  
 
 
THE FOREIGN 
EXCHANGE 
MANAGEMENT  
ACT, 1999 
 
 
   
  
At the end of this Chapter, you will be able to: 
? Comprehend certain important terms and definitions under 
the Foreign Exchange Management Act, 1999 
? Gain knowledge about the concept of Residential Status 
under the Foreign Exchange Management Act, 1999 
? Identify the meaning of Current and Capital Account 
Transactions and the Rules and Regulations governing them 
  
© The Institute of Chartered Accountants of India
 
CORPORATE AND ECONOMIC LAWS
 
a
 
 3.2 
 
 
 
 
1. INTRODUCTION  
Need for the Act 
The change in the economic scenario, 
globalization of capital, free trade across the 
globe, necessitated the need for managing 
foreign exchange in the country in an orderly 
manner. To facilitate cross border trade and cross 
border capital flows, exchange control law was 
required. Foreign exchange control led to 
introduction of exchange control law through 
Defense of India rules by the Britishers in 1939. Subsequently, Foreign Exchange 
Regulation Act (FERA) was enacted in 1947 which was later replaced with 'the 
Foreign Exchange Regulation Act, 1973' (FERA).  
FEMA, 1999
Definitions
Regulation and Management of 
Foreign Exchange
Current 
Account 
Transactions
Schedule I
Schedule II
Schedule III
Capital Account 
Permissible 
Transactions
Schedule I
Schedule II
 
© The Institute of Chartered Accountants of India
 
    
THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999 
 
a
    
 3.3 
Government as part of its agenda of liberalization of the Indian economy in 1991, 
permitted free movement of foreign exchange in connection to trade related 
receipts and payments as well as Foreign Investment in various sectors. This 
increased the flow of foreign exchange to India and consequently foreign exchange 
reserves increased substantially. The Foreign Exchange Management Act, 1999 was 
enacted and made effective from 1st June, 2000. This Act enables management of 
foreign exchange reserves for the country. 
Salient Features of the Act: It provides for- 
? Regulation of transactions between residents and non-residents 
? Investments in India by non-residents and overseas investments by Indian 
residents 
? Freely permissible transactions on current account subject to reasonable 
restrictions that may be imposed  
? Reserve Bank of India (RBI) and Central Government control over capital 
account transactions  
? Requirement for realisation of export proceeds and repatriation to India 
? Dealing in foreign exchange through 'Authorised Persons' like Authorised 
Dealer/ Money Changer/ Off-shore banking unit  
? Adjudication and Compounding of Offences  
? Investigation of offences by Directorate of Enforcement  
? Appeal provisions including Special Director (Appeals) and Appellate 
Tribunal. 
Enforcement of FEMA: Though RBI exercises overall control over foreign exchange 
transactions, enforcement of FEMA has been entrusted to a separate 'Directorate 
of Enforcement' formed for this purpose. [Section 36]. 
  
© The Institute of Chartered Accountants of India
 
CORPORATE AND ECONOMIC LAWS
 
a
 
 3.4 
 
How to Read FEMA: 
 
*Rules are notified by the Ministry of Finance, Government of India
** Regulations are notified by the Reserve Bank of India
Broad Structure of FEMA 
Now let us have a glance at the broad structure the Act. The Act consists of 7 
Chapters dealing with following areas: 
Chapters Matters Sections 
I Preliminary 1 – 2 
II Regulation and Management of Foreign Exchange 3 – 9 
III Authorised Person 10 – 12 
IV Contravention and Penalties 13 – 15 
V Adjudication and Appeal 16 – 35 
VI Directorate of Enforcement 36 – 38 
VII Miscellaneous  39 – 49 
Act
Rules* & Regulations**
Notifications & Circulars
Master Directions
FAQs
© The Institute of Chartered Accountants of India
 
    
THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999 
 
a
    
 3.5 
2. PREAMBLE, EXTENT, APPLICATION AND 
COMMENCEMENT OF FEMA, 1999 
(A) Preamble: This Act aims to consolidate and amend the law relating to foreign 
exchange with the objective of — 
(i) facilitating external trade and payments and 
(ii) for promoting the orderly development and maintenance of foreign 
exchange market in India. 
(B) Extent and Application [Section 1]: FEMA, 1999 extends to the whole of 
India.  In addition, it shall also apply to all branches, offices and agencies outside 
India owned or controlled by a person resident in India and also to any 
contravention thereunder committed outside India by any person to whom this Act 
applies.  
The scope of the Act has been extended to include branches, offices and agencies 
outside India.  The scope is thus wide enough because the emphasis is on the words 
“Owned or Controlled”.  Contravention of the FEMA committed outside India by a 
person to whom this Act applies will also be covered by FEMA. 
(C) Commencement:  The Act, 1999 came into force with effect from 1
st
June, 
2000 vide Notification G.S.R. 371(E), dated 1.5.2000.  
3. DEFINITIONS [SECTION 2] 
In this Act, unless the context otherwise requires: 
(1) “Authorised person” means an authorised dealer, money changer, off-shore 
banking unit or any other person for the time being authorised under section 
10(1) to deal in foreign exchange or foreign securities; [Section 2(c)] 
(2) “Capital Account Transaction” means a transaction, which alters the assets or 
liabilities, including contingent liabilities, outside India of persons resident in 
India or assets or liability in India of persons resident outside India, and 
includes transactions referred to in 
1
Section 6(3); [Section 2(e)] 
 
1
 Section 6(3) has been deleted with effect from 15
th
 October 2019. 
© The Institute of Chartered Accountants of India