Foreign Exchange Management Act 2000 (FEMA) Framework
1. Genesis & Historical Background: FERA vs. FEMA
Post-independence, India faced severe foreign exchange shortages. In response, Parliament enacted the Foreign Exchange Regulation Act 1973 (FERA) with a conservationist, rigid mindset:
- Every foreign exchange transaction was presumed illegal unless expressly permitted.
- Violations were treated as criminal offences with arrest, custodial interrogation, and presumption of guilty mind.
With the 1991 economic liberalization, India transitioned to a market-driven economy with high forex reserves. FERA was repealed and replaced by the Foreign Exchange Management Act 1999 (FEMA - Act No. 42 of 1999), effective 1st June 2000.
Paradigm Shift: FERA 1973 vs. FEMA 2000
FERA 1973 (Regulatory & Draconian)
- Mindset: Conservation of scarce foreign exchange.
- Nature of Breach: Criminal offence with arrest powers.
- Presumption: Presumption of mens rea (guilty mind) placed on accused.
- Philosophy: Prohibition with rare exceptions.
FEMA 2000 (Facilitative & Modern)
- Mindset: Facilitating external trade, remittances, and FDI.
- Nature of Breach: Civil contravention; monetary penalty only.
- Presumption: Burden of proof on regulatory enforcement.
- Philosophy: Freedom of transactions with regulatory guardrails.
2. Core Legal Concepts under FEMA
- Person Resident in India (PRI) [Section 2(v)]: A person residing in India for more than 182 days during the course of the preceding financial year, with exceptions for persons going abroad for employment, business, or indefinite stay.
- Authorized Person [Section 10]: An authorized dealer (banks), money changer, offshore banking unit, or any other person authorized by the Reserve Bank of India to deal in foreign exchange or foreign securities.
3. Dual Classification of Forex Transactions
The Two Pillars of Transactions under FEMA
Current Account Transactions (Sec 5)
Transactions that do NOT alter the assets or liabilities (including contingent liabilities) outside India of a resident, or in India of a non-resident:
- Payments due in connection with foreign trade, services, short-term banking.
- Payments due as interest on loans and net income from investments.
- Remittances for living expenses of parents, spouse, and children abroad.
- Expenses in connection with foreign travel, education, and medical care (Liberalized Remittance Scheme - LRS up to USD 250,000/year).
Capital Account Transactions (Sec 6)
Transactions that alter the assets or liabilities (including contingent liabilities) outside India of a resident, or in India of a non-resident:
- Foreign Direct Investment (FDI) and Overseas Direct Investment (ODI).
- External Commercial Borrowings (ECB) and foreign currency loans.
- Acquisition or transfer of immovable property in or outside India.
- Export/import of currency notes.