In an effort to modernise the Indian economy and promote international payments and cross-border trade, the Foreign Exchange Management Act (FEMA) was introduced in 1999. The Foreign Exchange Regulation Act (FERA) was intended to be improved upon, and it brought in a number of significant economic reforms.

The Reserve Bank of India and the Central Government utilise FEMA as a regulatory mechanism to enact foreign exchange regulations that are consistent with India's foreign trade policy. It applies to both Indian citizens and foreign branches, offices, and businesses that Indian citizens own or control. Unlike the strict police law of FERA, which resulted in criminal charges for all violations, FEMA treats crimes relating to currency exchange as civil offences.

The formalities and procedures governing all foreign exchange transactions in India are outlined by FEMA.The two categories into which these foreign exchange transactions have been divided are Capital Account Transactions and Current Account Transactions.

All capital transactions fall under the Capital Account, while trade in goods is included in the Current Account.The term "current account transactions" refers to financial inflows and outflows from a country or countries over the course of a year as a result of trading or providing income, services, and commodities.One measure of the health of an economy is its current account.

FEMA (Foreign Exchange Management Act) is applicable to the whole of India and equally applicable to the agencies and offices located outside India (which are owned or managed by an Indian Citizen).

The head office of FEMA is situated in New Delhi and known as Enforcement Directorate.

IMPORTANT DEFINITIONS
Section 2(c) defines "authorised person" as:

• an authorised dealer,
• money changer,
• off-shore banking unit or
• any other person for the time being authorised

Section2(e) defines "capital account transaction" as a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6;

Capital account transactions are regulated and subject to specific rules, regulations, and approvals from the RBI.

Section 2(h) defines "currency" as:

• All currency notes
• Postal notes
• Postal orders
• Money orders
• Cheques
• Drafts
• Travellers cheques
• Letters of credit
• Bills of exchange and promissory notes
• Credit cards
• Or such other similar instruments, as may be notified by the Reserve Bank

Section 2(j) "current account transaction" means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes:

1. Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,
2. Payments due as interest on loans and as net income from investments,
3. Remittances for living expenses of parents, spouse, and children residing abroad,
4. Expenses in connection with foreign travel, education, and medical care of parents, spouse, and children;

The Current Account transactions under the FEMA Act has been categorized into three parts:

1. Transactions prohibited by FEMA,
2. The transaction requires Central Government's permission,
3. The transaction requires RBI's permission.

Regulation And Management Of Foreign Exchange

Section 3 states that no persons shall:

• Deal in or transfer foreign exchange or security to non-authorized individuals.
• Make payments to or for credit of non-resident outside India.
• Receive payments by order or on behalf of non-resident outside India through an authorised person.
• Enter into any financial transaction in India in relation to any asset outside India.

Sections 4 prohibits any possession or transfer of any foreign exchange, foreign security or any immovable property situated outside India by any person resident in India shall acquire

Section 5 states The Central Government can impose reasonable restrictions on current account transactions in public interest, in consultation with the Reserve Bank, allowing anyone to sell or draw foreign exchange to or from an authorized person.

Section 6 gives power to any person to sell or draw foreign exchange to or from an authorised person for a capital account transaction and also gives rbi to specify transactions which are permissible, and the amounts upto which transactions will be permitted.

However RBI cannot impose any restrictions for drawing foreign exchange for amortisation of loan; and for depreciation of direct investments in the ordinary course of business.

The section also states the following:

• Residents in India can own, transfer, or invest in foreign currency, security, or immovable property outside India if acquired, held, or owned by them when outside India or inherited from a resident outside India.
• Residents outside India can own, transfer, or invest in Indian currency, security, or property if acquired, held, or owned by them when outside India or inherited from a resident outside India.
• The Reserve Bank can regulate the establishment of a branch, office, or other business by a resident outside India.

Section 7 deals with export of goods and services. It states every exporter of goods shall:

• Provide a declaration to the Reserve Bank or other authority.
• Include true and correct material particulars, including full export value or expected value for sale outside India.
• Provide additional information to the Reserve Bank for ensuring export proceeds realization.

Also, the Reserve Bank can direct exporters to comply with requirements to ensure full export value or reduced value is received promptly, considering market conditions. The person resident in India is required to take reasonable steps to realize and repatriate any foreign exchange due or accrued within a specified period and manner. (Section 8) Section 9 lays down Exemption from realization and repatriation in certain cases:

• Possession of foreign currency or coins by any person up to specified limit.
• Foreign currency account held or operated by such person or class.
• Foreign exchange acquired or received before July 8, 1947, or income arising from it held outside India.
• Foreign exchange held by a person resident in India up to specified limit if acquired by gift or inheritance.
• Foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance, or other legitimate means up to specified limit.

Authorised Person

Section 10 defines authorised person
The Reserve Bank can authorise authorised persons to deal in foreign exchange or foreign securities, as an authorised dealer, money changer, or off-shore banking unit. Authorisations must be in writing and subject to conditions. The authorization can be revoked if it's in public interest or if the authorised person has failed to comply with the conditions. Authorised persons must comply with directions and not engage in transactions that don't conform to their authorization.

Category I: Authorised Person Under FEMA

Category I includes entities like State Banks, Commercial Banks, Co-op and Urban Co-op Banks. From time to time, they are permitted to follow RBI issued directions for all their capital account and current account transactions.

Category II: Authorised Person Under FEMA

Category II is inclusive of Coop Banks, Regional Rural Banks, and Upgraded FFMCs among other such entities. These entities are permitted certain non-trade related transactions from their current accounts. When it comes to FFMCs though, all activities are permitted. These include the following:

• Remittances of tour operators.
• Business or private visits abroad.
• Participation in specialized training, global conferences, and international events.
• Remittance of international exam fees such as the TOEFL, GRE, and more.
• Any medical treatment that needs to be carried out abroad due to lack of availability of treatments and technology nationally.
• Overseas education.
• Any overseas employment or job applications.
• Emigration overseas, as well as the consultancy fees for emigrating.
• Any fees or payments for registering one's documents.
• Fees for one's international visa.
• Fees for any international organizations.

Category III: Authorised Person Under FEMA

Entities such as some selective financial institutions and others are included in Category III of authorised persons under FEMA. All transactions that are incidental to foreign exchange are permitted to these entities by the Reserve Bank of India.

Category IV: Authorised Person Under FEMA

The final category of authorised persons under FEMA includes entities like Full-fledged money changers. These include urban cooperative banks, the department of post, and other full-fledged money changers. When it comes to permissible activities under Category IV, as per RBI's regulations such entities can purchase foreign exchange securities for business visits abroad or private purposes.

Section 11 gives power to the reserve bank to issue directions to authorised person
The Reserve Bank can provide direction to authorized persons regarding payment, foreign exchange, and foreign security. It can also direct them to provide necessary information. If an authorized person violates a direction or fails to file a return, the Reserve Bank may impose a penalty of up to ten thousand rupees, and up to two thousand rupees for each day of continued contravention.

Section 12 states Power of Reserve Bank to inspect authorised person

• he Reserve Bank can inspect any authorized person's business at any time.
  The inspections are for verifying the accuracy of statements, information, or particulars provided.
• The inspections also aim to obtain information or particulars that the authorised person has not provided.
• The inspections also aim to ensure compliance with the Act's provisions or any rules, regulations, directions, or orders.

Every authorized person, including directors, partners, or other officers of a company or firm, is required to provide books, accounts, and other documents to an officer conducting an inspection, and to provide any necessary statements or information.

Contravention And Penalties

Section 13 rights, obligations, and proceedings cannot be terminated due to the person's death or insolvency. Upon death or insolvency, these rights and obligations pass to the legal representative, official receiver, or assignee, unless the deceased's estate is involved.

If a person contravenes any provision of this Act, rules, regulations, or conditions issued by the Reserve Bank, they may face penalties up to three times the amount involved or two lakh rupees. If they acquire foreign exchange, foreign security, or immovable property outside India of an aggregate value exceeding the threshold, they may be liable to imprisonment for up to five years and a fine.

If a person fails to pay a penalty imposed under section 13 within 90 days, they are liable to civil imprisonment. The Adjudicating Authority must issue a notice to the defaulter, requiring them to appear and show cause why they should not be committed to the civil prison. If the defaulter is dishonest, refuses to pay, or is likely to abscond, a warrant for arrest may be issued.

If arrested, the defaulter must be brought before the Adjudicating Authority within 24 hours. If the defaulter is a Hindu undivided family, the karta is considered the defaulter. The Adjudicating Authority may detain the defaulter in civil prison for up to three years or six months, depending on the demand.(Section 14)

Adjudication And Appeal

Section 16 states Appointment of Adjudicating Authority
The Central Government can appoint Adjudicating Authorities to hold investigations against individuals alleged to have committed contraventions under section 13. They must give the person a reasonable opportunity to be heard and impose penalties, with the possibility of a bond or guarantee if the person is likely to evade payment. The Adjudicating Authorities have the same powers as a civil court.

Section 17 has the provision for appeals to the Special Director in the act. The Central Government appoints Special Directors (Appeals) to hear appeals against Adjudicating Authorities' orders. Appeals can be filed within 45 days, with the Special Director having the same powers as a civil court. The Director may pass orders, confirm, modify, or set aside the order, and send copies to parties and the Adjudicating Authority.

The Central Government or aggrieved person can appeal an order made by an Adjudicating Authority or Special Director (Appeals) levying a penalty. The person must deposit the amount of the penalty with the authority notified by the Central Government. If the Appellate Tribunal deems the deposit to cause undue hardship, it may dispense with it subject to certain conditions.

The appeal must be filed within 45 days of receiving the order, and the Appellate Tribunal may entertain an appeal after 45 days if there was sufficient cause. The appeal must be dealt with expeditiously and disposed of within 180 days. If the appeal cannot be disposed of within the 180-day period, the Appellate Tribunal must record its reasons. The Tribunal may also examine the legality, propriety, or correctness of any order made by the Adjudicating Authority(Section 19)

Individuals impacted by Appellate Tribunal decisions may appeal to the High Court within 60 days, with the High Court allowing a further 60-day extension if the appellant was prevented from filing within the specified timeframe Under section 35

Directorate Of Enforcement
Section 36 states The Central Government establishes a Directorate of Enforcement with a Director and other officers. The Director may appoint officers below Assistant Director of Enforcement rank. Officers of Enforcement can exercise powers and discharge duties under the Act, subject to conditions and limitations imposed by the Central Government.

Section 37 gives Power of search, seizure
The Director of Enforcement and other officers of Enforcement, not below Assistant Director rank, are responsible for investigating contraventions in section 13. The Central Government may authorize officers in the Central, State, or Reserve Bank, not below Under Secretary rank, to investigate such contraventions, subject to limitations.

Section 37A states Special provisions relating to assets held outside India in contravention of section 4:

• The Central Government's Authorised Officer can seize value equivalent of foreign exchange, security, or immovable property suspected of contravention of section 4.The order must be recorded and placed before a competent authority appointed by the Central Government.
   
• The authority must dispose of the petition within 180 days of the seizure, either confirming or setting aside the order, after hearing the representatives of the Directorate of Enforcement and the aggrieved person.

The Competent Authority's order confirming the seizure of equivalent asset will continue until adjudication proceedings are completed. If the aggrieved person discloses the fact of foreign exchange, security, or immovable property and returns it, the Adjudicating Authority will pass an appropriate order, including setting aside the seizure, after hearing the aggrieved person and Directorate of Enforcement representatives

Any person aggrieved by any order passed by the Competent Authority may prefer an appeal to the Appellate Tribunal.

The Central Government can authorize officers of customs, central excise, police, or other government officers to exercise powers and duties of the Director of Enforcement or other enforcement officers under this Act, subject to conditions and limitations imposed by the Central Government.(section38)

Miscellaneous
If a document is produced, furnished, or seized in investigation of alleged contraventions, the court presumes its signature and handwriting is in the person's handwriting. If the document is admissible, it may be admitted despite not being duly stamped, and the truth of its contents is presumed unless proven otherwise.(section 39)

The Central Government can suspend or relax the operation of provisions of this Act by notification, either indefinitely or for a specified period. If suspended or relaxed, it can be removed by notification. Notifications must be laid before each House of Parliament for thirty days.(section40)

A company committing a contravention of any Act or rule is liable to be punished if the person responsible for the contravention was in charge of the company's business. If the contravention was unintentional or due to due diligence, the person is not liable. If the contravention was with the consent or connivance of a director, manager, secretary, or other officer, they are also liable for the contravention and punishment.(section42)

Section 44 states: The Central Government, Reserve Bank, or any officer under this Act shall not face legal proceedings for any good faith actions or rules made under this Act.

The Reserve Bank's powers under this Act do not apply to an International Financial Services Centre established under the Special Economic Zones Act, 2005. Instead, they are exercisable by the International Financial Services Centres Authority established under the International Financial Services Centres Authority Act, 2019, for the regulation of financial products, services, and institutions. (section 44A)

Central Government's Power to Make Rules(section 46).
These rules may include restrictions on current account transactions, debt instruments, permissible capital account transactions, contravention compounding, inquiry holding by the Adjudicating Authority, appeal forms and fees, salaries and allowances of Special Director (Appeals) and officers, additional powers of the Appellate Tribunal and Special Director (Appeals), aggregate value of foreign exchange, and document authentication.

Reserve Bank's Regulation Power (section 47):
Regulations may cover permissible classes of capital account transactions, declaration forms, repatriation of foreign exchange, possession limits, account holding and operation limits, exemptions retention of foreign exchange, export, import, and currency holding.

All regulations made before the notification date on capital account transactions, now with Central Government's regulation-making power, remain valid until amended or rescinded

This Act requires rules and regulations to be presented to each House of Parliament for thirty days during their session. If both Houses agree to modify or annul the rule or regulation, it will have modified or no effect, without affecting previous actions under the rule or regulation.(section 48)

In today's interconnected global landscape, the Foreign Exchange Management Act (FEMA) is an essential legislative framework for India. FEMA protects India's economic sovereignty and advances accountability and transparency in financial transactions by regulating foreign exchange transactions and maintaining stability in currency markets.

Its importance in establishing India as a strong player in the global economy is highlighted by its role in promoting investment and trade internationally. FEMA continues to be essential in maintaining economic resilience and promoting sustainable growth in the global arena as India continues to negotiate the complexities of international finance.