Foreign Exchange Management Act

The Foreign Exchange Management Act, 1999
Foreign Exchange Management Act
An Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
Citation Act No. 42 of 1999
Enacted by Parliament of India
Date enacted 29 December 2000
Repealing legislation
Foreign Exchange Regulation Act
Status: In force

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India "to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India".[1] It was passed in the winter session of Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA). This act makes offences related to foreign exchange civil offenses. It extends to the whole of India.,[2] replacing FERA, which had become incompatible with the pro-liberalisation policies of the Government of India. It enabled a new foreign exchange management regime consistent with the emerging framework of the World Trade Organisation (WTO). It also paved the way for the introduction of the Prevention of Money Laundering Act, 2002, which came into effect from 1 July 2005.

Description

Unlike other laws where everything is permitted unless specifically prohibited, under the Foreign Exchange Regulation Act (FERA) of 1973 (predecessor to FEMA) everything was prohibited unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It required imprisonment even for minor offences. Under FERA, a person was presumed guilty unless he proved himself innocent, whereas under other laws a person is presumed innocent unless he is proven guilty.[3]

FEMA is a regulatory mechanism that enables the Reserve Bank of India and the Central Government to pass regulations and rules relating to foreign exchange in tune with the Foreign Trade policy of India.

Switch from FERA

FERA, in place since 1974, did not succeed in restricting activities such as the expansion of Multinational Corporations. The concessions made to FERA in 1991-1993 showed that FERA was on the verge of becoming redundant. After the amendment of FERA in 1993, it was decided that the act would become the FEMA. This was done in order to relax the controls on foreign exchange in India, as a result of. FEMA served to make transactions for external trade and easier – transactions involving current account for external trade no longer required RBI’s permission. The deals in Foreign Exchange were to be ‘managed’ instead of ‘regulated’. The switch to FEMA shows the change on the part of the government in terms of for the capital.[4]

Coca-Cola was India's leading soft drink until 1977 when it left India after a new government ordered the company to turn over its secret formula for Coca-Cola and dilute its stake in its Indian unit as required by the Foreign Exchange Regulation Act (FERA). In 1993, the company (along with PepsiCo) returned after the introduction of India's Liberalization policy.[5]

FERA was repealed in 1998 by the government of Atal Bihari Vajpayee and replaced by the Foreign Exchange Management Act, which liberalised foreign exchange controls and restrictions on foreign investment.[6][7]

The buying and selling of foreign currency and other debt instruments by businesses, individuals and governments happens in the foreign exchange market. Apart from being very competitive, this market is also the largest and most liquid market in the world as well as in India.It constantly undergoes changes and innovations, which can either be beneficial to a country or expose them to greater risks. The management of foreign exchange market becomes necessary in order to mitigate and avoid the risks. Central banks would work towards an orderly functioning of the transactions which can also develop their foreign exchange market. Foreign Exchange Market Whether under FERA or FEMA’s control, the need for the management of foreign exchange is important. It is necessary to keep adequate amount of foreign exchange from Import Substitution to Export Promotion.

Main Features

Regulations/Rules under FEMA

See also

References

Notes

  1. "THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999" (PDF).
  2. "FEMA, 1999". Dept of Revenue, Govt of India. Archived from the original (PDF) on 9 September 2012. Retrieved 9 September 2012.
  3. AC Fernando. Business Environment. Pearson Education. p. 427.
  4. "Main Features of the Foreign Exchange Management Act (FEMA)". YourArticleLibrary.com: The Next Generation Library. Retrieved 2016-04-03.
  5. "FERA: The end of an era", India Today, 5 October 2013
  6. "The Crucial difference", The Economic Times, 27 November 2005
  7. "FERA: Businessman's POTA", India Today, 18 August 2003
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