Foreign Exchange Management Act – FEMA

Why was Foreign Exchange Management Act 1999 introduced?

The Foreign Exchange Management Act (FEMA) of 1999 was introduced in India to replace the Foreign Exchange Regulation Act (FERA) of 1973. There were two main reasons for this change:

• India's Economic Liberalization: FERA was enacted when India had very limited foreign exchange reserves and a closed economy. By the late 1990s, India had embarked on economic reforms and embraced globalization. FERA's strict controls were seen as hindering this progress. FEMA introduced a more liberalized approach, facilitating international trade and investment.
• Shift from Criminal to Civil Offenses: FERA treated many foreign exchange violations as criminal offenses. FEMA shifted the focus to civil offenses, with penalties like fines and restrictions on future transactions. This aimed to create a more business-friendly environment.
  In essence, FEMA was introduced to modernize India's foreign exchange management system and align it with the country's evolving economic goals.

What are the Objectives of FEMA?

The world of finance, particularly international finance, is vast and complex. As the Indian economy continues to burgeon, accelerating its growth necessitates effective regulation and simplification of foreign transactions.

• Facilitate External Trade and Payments: FEMA aims to smoothen cross-border business activities. This includes simplifying currency exchange and payments for imports, exports, and other international transactions.
• Promote Orderly Development of the Forex Market: FEMA fosters a stable and efficient foreign exchange market in India. It establishes clear rules and regulations for buying and selling foreign currencies, ensuring fair competition and preventing manipulation.
• Regulate Foreign Exchange Transactions: FEMA keeps an eye on all foreign exchange activities to prevent illegal practices like money laundering or unauthorized currency movement. It defines the types of transactions allowed and sets limits on certain activities.

Categorization of FEMA Authorized Dealers

Here is the list of authorized dealers under the FEMA Act:

Classification of Foreign Exchange Transactions under FEMA

FEMA classifies foreign exchange transactions into two broad categories:

• Current Account Transactions: These transactions involve the import and export of goods and services. Examples include payments for imports, receipts from exports, travel expenses, and foreign currency earned through tourism.
• Capital Account Transactions: These transactions deal with investments and the movement of capital. Examples include foreign direct investment, portfolio investment, loans, and borrowings.

Role of RBI in FEMA Administration

The Reserve Bank of India (RBI) is the primary authority responsible for administering FEMA. Here's how the RBI plays a crucial role:

• Issuing Guidelines and Regulations: The RBI frames detailed guidelines and regulations for complying with FEMA. These guidelines explain the types of transactions allowed, the documentation required, and the reporting procedures.
• Monitoring Transactions: The RBI closely monitors foreign exchange transactions to ensure adherence to FEMA regulations. This helps prevent illegal activities and maintain a stable foreign exchange market.
• Authorizations and Permissions: Under FEMA, certain transactions may require specific permissions from the RBI. The RBI assesses these requests and grants permission based on the regulations.
• Managing Foreign Exchange Reserves: The RBI manages India's foreign exchange reserves, which are the stock of foreign currencies held by the central bank. This reserve is used to maintain exchange rate stability and meet international payment obligations.

Impact of FEMA on Indian Economy

FERA's replacement by FEMA has been a boon for the Indian economy, here is how FEMA transformed the indian economy:

• Easier International Trade and Business Partnerships: FEMA's streamlined regulations and simplified procedures make it easier for Indian businesses to engage in international trade. This includes faster clearances for import and export payments, encouraging companies to participate in the global market. Additionally, FEMA allows for more open collaboration with foreign businesses. Setting up joint ventures or foreign subsidiaries becomes more feasible, fostering innovation and technology transfer.
• More Liberalized Approach: Compared to FERA's strict controls, FEMA's liberalized approach has attracted much-needed foreign investment. This includes Foreign Direct Investment (FDI) in various sectors, allowing foreign companies to set up shop in India. It also allows for easier Portfolio Investment, where foreign investors can buy stocks and bonds in Indian companies. This inflow of foreign capital boosts economic growth, creates jobs, and helps develop crucial infrastructure.