What Is The Foreign Exchange Management Act

FEMA acts as a watchdog over India’s external commerce and payments, attempting to facilitate and regulate them properly. The passage of this Act was a strategic step to adjust to the changing international economic situation, in which globalization was becoming a defining feature. The Act recognizes the importance of foreign exchange reserves and seeks to ensure their orderly development and management.

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What is the Foreign Exchange Management Act

A set of regulations permits the Reserve Bank of India to establish regulations and allows the Government of India to pass foreign exchange rules that are consistent with India’s foreign trade policy.

FEMA’s objectives

FEMA was created in India with the primary goal of facilitating external trade and payments. Furthermore, FEMA was created to help the Indian forex market develop and maintain itself systematically.

FEMA specifies the processes and procedures for dealing with all foreign exchange transactions in India. These foreign exchange transactions were divided into two categories: capital account transactions and current account transactions.

According to the FEMA Act, the balance of payment is the record of transactions between citizens of other countries in commodities, services, and assets. It is separated into two categories: capital account and current account.

Capital Account encompasses all capital transactions, whereas Current Account encompasses merchandise trading. Current account transactions are those that include the inflow and outflow of money to and from the country/countries during a year, due to the trading/rendering of commodities and services, and income.

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The current account is a measure of an economy’s state. As previously indicated, the balance of payment is comprised of both current and capital accounts. The Capital Account is the remainder of the balance of payment and represents the movement of capital in the economy as a result of capital receipts and expenditures. The capital account accounts for both domestic and foreign investment in domestic assets.

Relevance of the FEMA Act

FEMA (Foreign Exchange Management Act) applies to all of India as well as agencies and offices outside of India that are owned or controlled by an Indian citizen. FEMA’s headquarters are in New Delhi and known as the Enforcement Directorate. FEMA applies to:

Foreign currency exchange.
International security.
Export of any commodity or service from India to a country other than India.
Importation of goods and/or services from outside India.
Securities are defined in the Public Debt Act of 1994.
Purchase, selling, and exchange of any type (also known as transfer).
Services include banking, finance, and insurance.
Any overseas corporation held by a non-resident Indian (NRI) who owns 60% or more.
Any Indian citizen living in India or abroad (NRI).
The FEMA Act categorizes the current account transactions into these components, which are:
Transactions forbidden by FEMA
This transaction requires clearance from both the Central Government and the RBI.

Main Features of the Foreign Exchange Management Act of 1999 (FEMA Act)

It empowers the Central Government to manage the flow of funds to and from individuals located outside the country.
All financial transactions involving foreign securities or exchanges require FEMA permission. All transactions must be done through “Authorised Persons.”
In the public interest, the Government of India has the authority to prohibit an authorized individual from doing foreign exchange transactions on the current account.
Allows the RBI to set limits on transactions from the capital account, even if an authorized individual carries them out.
According to this act, Indians residing in India are permitted to conduct foreign exchange, foreign security transactions, or the right to hold or own immovable property in a foreign country if the security, property, or currency was acquired or owned while the individual was based outside of the country, or if they inherit the property from an individual residing outside the country.