In 1999, the Indian central government formulated the FEMA Act to control import/export activities and manage cross-border payments. FEMA is an abbreviation of the Foreign Exchange Management Act. With the implication of the FEMA Act 1999, the government of India managed to mitigate the Foreign Exchange Regulation Act (FERA) irregularities and limitations. Hence, several economic reforms became the reason for an improved financial system of the country.
FEMA Act 1999 – Main Objectives
The prime objective of the FEMA Act 1999 is to facilitate the process of external payments and trade functions of the country. However, FEMA Act also helped in introducing a controlled environment for the modernized foreign exchange market.
FEMA stipulates an operational framework and devises procedural formalities for foreign exchange transactions. The foreign exchange transactions are subdivided into two main categories, including;
- Capital Account Transactions
- Current Account Transactions.
All transactions amid asset acquisitions, services, and commodities between two countries make part of the balance of payment under the FEMA Act 1999.
Proceedings against trading activities are recorded as current account transactions, whereas the remainder comprises capital account transactions. Capital account transactions generally involve receipts and payments against foreign investment in domestic assets and domestic investment in forex reserves, respectively.
Organizational Structure of FEMA
The head-office of FEMA is known as the Enforcement Directorate. It is located in New Delhi, India. The Directorate has 05 zonal offices situated in multiple cities across India, including Mumbai, Delhi, Chennai, Kolkata, and Jalandhar.
The official custodian of the Directorate office is the duly appointed director by the Government of India. On the other hand, deputy directors sit in the zonal offices. The zonal offices have further sub-zonal branches managed by assistant directors. Each sub-zonal branch operates through 5 field units occupied by chief enforcement officers.
Where Does FEMA Act 1999 Apply?
FEMA Act 1999 applies to all residents of India. It is also applicable to offices and agencies owned or controlled by Indian nationals outside India. Given below is the list of entities, agencies, and institutions that fall under the operational framework of FEMA;
- Foreign security
- Foreign exchange
- Exports of commodities or services from India to foreign countries
- Imports of commodities or services from foreign countries
- Securities covered under Public Debt Act 1994
- Purchase or Sale proceedings and any kind of Transfer of exchange of forex reserves
- Banks, insurance companies, and financial intermediaries
- Offshore companies / Overseas organizations in which an NRI (Non-Resident Indian) holds more than 60% of shares or voting rights
- All citizens of India, Residents or Non-Residents.
The FEMA Act further categorizes the Current Account transactions into three parts, including;
- Transactions that need RBI’s permission.
- Transactions requiring Central Government permission.
- Transactions prohibited by FEMA.
Having that being said, let’s quickly review what type of forex transactions are prohibited under the FEMA Act 1999.
- Remittances that involve lottery winnings
- Remittances from riding/racing activities.
- Remittance that involves buying football pools, purchasing lottery tickets, investment in sweepstakes, or buying banned/prescribed magazines, etc.
- Payment of commission on exports towards equity investment of Indian Companies (Joint ventures or overseas Subsidiaries)
- Remittances carrying dividend receipts on investment in equities from any company. Please note that the clause is applicable only if the dividend balancing requirement is applicable.
- Payment of commission on exports under Rupees State Credit Routes. However, commission up to 10% of the face value of invoice on the export of tea and tobacco, is exempted.
- Payment concerning Call back Services.
- Commuting to Bhutan or Nepal.
- Remittance of interest income on funds held in NRSR Account i.e. Non-resident Special Rupees Scheme account
- Carrying out transactions with Bhutan or Nepal residents.
Frequently Asked Questions (FAQs)
What does FEMA mean?
The FEMA stands for the Foreign Exchange Management Act. It is the regulatory framework under which the central government regulates the foreign exchange market of India.
What is the relation between FEMA and Forex Trading in India?
FEMA holds statutory power to allow or restrict Indian residents from carrying out transactions in forex (Forex trading). It also defines procedures to invest in foreign security or to own an immovable property abroad. If you want to know how to start Forex trading the right way click here. Or go straight to signing up the our list of best Forex brokers.
What if someone does not follow FEMA guidelines?
Anyone found in breach of conduct might end up in prison. Also, he/she might face excessive financial penalties. For more you may read the articles below:
- Is Forex Trading Legal In India?
- What is punishment for forex trading in India?
- Is Cross Currency Trading Allowed in India?
What are the objectives of FEMA?
The FEMA’s main objective is to formulate strategies to facilitate external trades. It also devises a framework and structure for the effective development and maintenance of the foreign exchange market in India.