The Central Government of India formulated an act to encourage external payments and across the border trades in India known as the Foreign Exchange Management Act. FEMA (Foreign Exchange Management Act) was introduced in the year 1999 to replace an earlier act FERA (Foreign Exchange Regulation Act). FEMA was basically introduced to de-regularize and have a liberal economy in India.
Objectives of FEMA
The main objective for which FEMA was introduced in India was to facilitate external trade and payments. In addition to this, FEMA was also formulated to assist orderly development and maintenance of the Indian forex market.
FEMA outlines the formalities and procedures for the dealings of all foreign exchange transactions in India. These foreign exchange transactions have been classified into two categories — Capital Account Transactions and Current Account Transactions.
Under the FEMA Act, the balance of payment is the record of dealings between the citizen of different countries in goods, services and assets. It is mainly divided into two categories, i.e. Capital Account and Current Account.
Applicability of FEMA Act
FEMA (Foreign Exchange Management Act) is applicable to the whole of India and equally applicable to the agencies and offices located outside India
- Foreign exchange.
- Foreign security.
- Exportation of any commodity and/or service from India to a country outside India.
- Importation of any commodity and/or services from outside India.
- Securities as defined under Public Debt Act 1994.
- Purchase, sale and exchange of any kind (i.e. Transfer).
- Banking, financial and insurance services.
- Any overseas company owned by an NRI (Non-Resident Indian) and the owner is 60% or more.
- Any citizen of India, residing in the country or outside (NRI).
Penalties Under FEMA
If any person contravenes the provisions of FEMA or any rule, direction, regulation, order or notification issued under FEMA, he shall be liable to pay a penalty up to thrice the sum involved in such contravention or up to Rs.2 lakh. Where such contravention is a continuing one, he shall be liable to pay a further penalty which may extend to Rs.5,000 for every day during which the contravention continues.