Foreign Exchange Management Act
Module VII: Important Provisions
• Foreign exchange management Act regarding
holding, handling and transfer of foreign
exchange.
• Money laundering meaning
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FEMA 1999
In India, Foreign trade was regulated by
a)The Foreign trade (Development and Regulation) Act,
1992 which replaced the Imports and exports(Control)
Act, 1947
b) Foreign Exchange Regulations Act 1973.
With the liberlaisation and globalisation, the outlook
changed. Now it is the question of management and
not regulation. However, certain activities are still
being regulated in the interest of sovereignty of the
nation.
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FEMA 1999
• FEMA Act 1999 came in the backdrop of the stringent
regulatory provisions of FERA which were described as
draconian and obnoxious in the wake of economic
liberalisation.
• FERA served the country to tide over the foreign
exchange crisis and the controlled economic regime.
Then, conservation and proper utilisation of foreign
exchange was the motto.
• FEMA came into effect from Jan 1,2000 extends to the
whole of India and applies to all branches, offices, and
agencies outside India, owned or controlled by a
person resident in India.
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FEMA 1999
• FEMA 1999 has repealed the FERA 1973.
• FEMA came into force from 1st June 2000
• FEMA is liberal with the objective of facilitating
external trade and payments and promoting orderly
development and maintenance of foreign exchange
market in India.
• The act applies to the whole of India and also to
branches, offices and agencies outside India owned or
controlled by a person resident in India. It also applieds
to any contravention committed outside India by any
person to whom this Act applies.
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FEMA 1999
Objectives of FEMA:
• Facilitating external trade and payments
• Promoting the orderly development and maintenance
of foreign exchange market
• FEMA deals with both Current Account and Capital
Account Transactions of the BOP
• Sec 3 of the FEMA imposes restrictions on dealings in
foreign exchange and foreign securities and payments
to and receipts from any person outside India. The Act
provides certain conditions.
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FERA and FEMA compared
• FERA
• Regulatory in nature;
preventing misuse; control
regime.
• Lengthy Act with 81 sections
• Stipulations were rigid which
included imprisonment
• Many conditions were
imposed in the
export/import, blocked
accounts, movement of
human resources
• FEMA
• Management, Facilitating
trade and payments, and flow
of exchange; economic
liberalisation
• Smaller enactment with 49
sections
• Rigidity is withdrawn. Penalty
and no imprisonment.
• Now the conditions are highly
liberal and provides a
congenial climate for export
/import of goods, services,
human capital etc
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FEMA 1999
Important Definitions under the Act:
• Capital Account Transaction: It means—a) a transaction
which alters the assets or liabilities, including contingent
liabilities, outside India of persons resident in India OR
b)assets and liabilities in India of persons resident outside
India OR c) Prohibitions as per Sec 6(3) (RBI may regulate or
restrict certain transactions
• Currency: Currency includes all: a) currency notes; b) Postal
Notes; c) Postal Orders; d) Money Orders; e) Cheques; f)
Travellers’ cheques; g) Letters of Credit; h) Bills of Exchange
and promissory notes and i) Credit Cards. It also includes
which the RBI may notify from time to time
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FEMA 1999
• Current Account Transactions: it means a transaction other
than the capital transaction. It includes—a) payments in
connections with foreign trade, other current business,
services, and short term banking and credit facilities in the
ordinary course of business; b) payments due as interest on
loans and as net income from investments; c) remittances
for living expenses of parents, spouse and children residing
abroad; d) expenses in connection with foreign travel,
education, medical care of parents, spouse and children.
• Export: --a) taking out of India to a place outside India any
goods; b) Provision of services from India to any person
outside India;
• Foreign Currency—Means currency other than Indian
Curency
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FEMA 1999
• Foreign Exchange: It means foreign currency and
includes—a) deposits, credits and balances payable in
any foreign currency; b)drafts, traveller’s cheques,
letters of credit or bills of exchange, expressed or
drawn in Indian currency but payable in any foreign
currency; c) drafts, travellers’ cheques, letters of credit
or bills of exchange drawn by banks, institutions or
persons outside India but payable in Indian currency
• Foreign Security: Securities denominated or expressed
in foreign currency
• Import: Bringing into India any goods or services
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FEMA 1999
• Resident: 182 days except where outside India stay for taking up
employment, or carrying out business or for permanent settlement
or where the stay in India is uncertain.
• Non-resident: Not satisfying the Resident definition
• Repatriation: Crossing the foreign exchange into India from other
countries or sending from India outside India
• Security: Shares, stocks, Bonds and Debentures, Government
securities (Public Debts), Savings Certificates of the Government,
deposit receipts and units of Unit Trust of India or any Mutual Fund
but it does not include the Bills of Exchange or Promissory notes
other than the Government Promissory Notes or other securities
notified by the RBI
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FEMA 1999
• Service: Service of any description which is made
available to potential users. It also includes the
provision of facilities in connection with banking,
financing, insurance, medical assistance, legal
assistance, chit fund, real estate, transport,
processing, supply of electrical or other energy,
boarding or lodging or both, entertainment,
amusement or the purveying of news or other
information. (Exception—personal service
rendered free of charge)
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FEMA 1999
Salient features of FEMA:
• All receipts and payments shall be through authorised persons (RBI
is authority to decide about authorised persons)
• Holding of Foreign Exchange:-A resident in India cannot acquire,
hold , own, possess or transfer any foreign exchange, foreign
security or any immovable property situated outside India.(except
where specifically permitted)
• Current Account Transaction: Any person is free to sell or buy
foreign exchange to or from an authorised person for a current
account transaction.
• Capital Account Transaction:-Any person is free to sell or buy
foreign exchange to or from an authorised person for a capital
transaction with certain exceptions ( RBI can fix up limits or the
class of transaction which are permissible or not)
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FEMA 1999
Prohibition of certain transactions:
RBI has powers to regulate, prohibit, or restrict the following:
• Transfer or issue of any foreign security by a resident in India
• Transfer or issue of any security by a person resident outside India.
• Borrowing or lending in foreign exchange
• Borrowing or lending in Rupees outside India
• Export or import of currency or currency notes
• Transfer of immovable property in India and Outside India involving
foreign exchange.
• Giving of a guarantee or surety by resident to a resident or person
outside India
• And such other transactions which involve foreign exchange
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FEMA 1999
• Export of goods and services: Exporter of goods and
services shall furnish a declaration giving full particulars
and ensure that the value of the goods are realised within
the stipulated time.
• Realisation and Repatriation (exemptions thereon): Steps
shall be taken to ensure realisation or repatriation. Certain
exemptions are provided Eg possession of foreign currency
or foreign coins with certain limits
• Authorised Person: RBI authorises persons as: “authorised
dealers(including banks), money changer or off-shore
banking unit.” RBI has powers to inspect these offices who
have to maintain proper books of accounts.
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FEMA 1999
• Contravention and Penalties: Where the contravention amount is
quantifiable, the penalty is thrice the amount involved. In other
cases, the penalty is upto Rs 2 lakh. Continuing contravention –
Rs5000 per day. Failure to pay the penalty may land the person for
civil imprisonment (subject to appeal). Warrant of arrest can be
made in case the person is likely to abscond or leave the local limits.
IN case of contravention by Companies, every person in charge of
such an act shall be deemed guilty of contravention.
• Provision for adjudication and appeal: FEMA Provides for
adjudication and appeals. The Central Government appoints the
adjudicating authority, who has powers to conduct judicial
proceedings as per Indian Penal Code. A special director is the
appellate authority.
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Money Laundering
Money laundering
• Acquiring, Owning, possessing or transferring any money for crime
related purposes directly or indirectly is known as money
laundering. Also referred to in terrorism related activities.
• Money laundering involves disguising financial assets so that they
can be used without detection of the illegal activity that let to its
production. Through the process of “money laundering” a person
converts illegal money into a legal entity. Whosoever directly or
indirectly attempts to indulge or knowingly assists or knowingly is a
party or is actually involved in any process or activity connected
with the proceeds of crime and projecting it as untainted property
shall be held guilty of the offence of money laundering.
• Every country make legislations for anti-money laundering. In India,
the Prevention of Money Laundering Act (henceforth, PMLA) was
enacted w.e.f 2003
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Money Laundering
• The UN General Assembly, in its Special Session (1999), came up
with a political declaration that required the Member-States to
adopt money laundering legislation and programme.
• Moreover with the changed economic scenario and the dynamic
process of liberalization laws like Foreign Exchange Management
Bill in place of earlier FERA was felt to be much static and harsh.
• Prevention of Money Laundering Act was passed in the year 2002
effective from Jan 17, 2003
• With the PMLA coming into force, banks, financial institutions and
financial intermediaries will have to mandatorily report to
Government all suspicious transactions and those over Rs.10 Lakh.
• Financial institutions, including chit funds, cooperative banks and
intermediaries like stock brokers, share transfer agents,
underwriters and investment advisers were to be registered with
SEBI.
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Money Laundering
• The Financial Intelligence Unit (FIU-IND) was set up as a multidisciplinary unit for establishing links between suspicious or
unusual financial transactions and criminal activities.
• Legislations In Consonance With PMLA :1. Banking Regulation Act, 1949.
2. Chit Funds Act, 1982.
3. deposit Insurance and Credit Guarantee Corporation Act,
1961
4. NABARD Act, 1981.
5. National Housing Bank Act, 1987.
6. Reserve Bank of India Act,1934.
7. Securities and Exchange Board of India act,1992.
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Money Laundering
• The Schedule to the Prevention of Money Laundering Act (henceforth,
PMLA), 2002, lists some of the offences under the following Legislations:
Offences under the India Penal Code (part A) - eg. Waging or attempting to
wage war, or abetting waging of war against the Government of India,
Conspiring to commit offences punishable by s.121 against the state
1. Offences under the Narcotic Drugs and Psychotropic Substances Act,
1985- eg. Contravention in relation to opium poppy and opium.
2. Offences under India Penal Code (part B) - eg. Murder, kidnapping for
ransom, counterfeiting currency notes or bank notes.
3. Offences under the Arms Act, 1959- eg. Knowingly purchasing arms
from unlicensed person not entitled to purchase the same.
4. Offences under the Wildlife (Protection) Act, 1972- eg. Contravention
of provisions of s.48 relating to purchase of animals etc by license.
5. Offence under the Immoral Traffic (Prevention) Act, 1956- eg. Seducing
or soliciting for purpose of prostitution.
6. Offences under the Prevention of Corruption Act, 1988- eg. Taking
gratification for exercise of personal influence, with public servant
• The innumerate under the afore stated Acts generate huge sums. The
launderer converts these sums into untainted money by investing them
into shares or banks and thereby converts the essential character of the
money.
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Money Laundering
• RBI, SEBI and IRDA are under the purview of PMLA. It allows search
and seizure of suspected properties by officials and stipulates
punishment of minimum three years’ imprisonment for the Guilty.
• Money laundering can be checked by monitoring illegal forex
transactions, real estate, gems and jewellery and high value
purchases.
• In India, however, PMLA regulates only banking companies,
financial institutions and intermediaries to maintain records, furnish
information and verify identity of the customers. It does not deal
with tapping of information within the ambit of informal economy
as in case of forex transactions, because lot of dealing in this
avenue is done through informal channels.
• The PMLA makes it illegal to enter into a transaction related to
funds derived from criminal activities as also to possess or transfer
such funds.
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Money Laundering
• Apart from the banking and other financial institutions and
intermediaries the Act also extends upon the working of
International Payment gateways such as Visa and Mastercard
along with money transfer providers. However, it is strongly
felt that PMLA should incorporate within its ambit the
casinos, because a huge amount of money, in form of informal
transactions, is being operated upon through such places.
• The menace of money laundering hits not only at the root of
a country’s financial structure but also kills its social structure
by financing anti-social activities. There is a growing need to
catch hold of the increasing threat of money laundering by
legislating and implementing amendments in the present law
of Anti- money Laundering.
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