BBA 3 SEM Section G – Business Laws

By- CS Priyanka Mathur

Module 3 - Foreign Exchange Management Act 1999

Introduction of the Act
The Foreign Exchange Management Act, 1999 (FEMA) has been in force from 2000, thus
replacing the old Foreign Exchange Regulation Act (FERA) 1973.

Purpose of the Act OR How FEMA replaced FERA?

Foreign exchange in India has been regulated in one form or the other since Independence. The
Foreign Exchange Regulation Act (1947) was enacted as a temporary measure to deal with an
acute foreign exchange crunch in the post-World War II period. Since the foreign exchange
position continued to remain precarious, this temporary measure was made permanent in 1957. In
1973, this Act was repealed and replaced by the Foreign Exchange Regulation Act (FERA), 1973.
Its objective was to conserve foreign exchange resources and ensure their proper utilization.

The dreaded FERA was a rigid piece of legislation that made contravention of the provisions of the
Act a criminal offence, and gave sweeping powers for search and seizure under which the person
suspected of having broken any rule had to prove his innocence beyond reasonable doubt. It
governed foreign exchange activities of the country up to 1999.

In the light of the LPG (liberalization, privatization, and globalization) efforts undertaken since
1991, it was felt that FERA (1973) was a draconian piece of legislation whose focus was not in
keeping with the new direction given to the economy. After much deliberation, it was replaced by
the Foreign Exchange Management Act (1999) or FEMA. At present, all foreign exchange
activities in India are governed by FEMA.

FEMA came into effect in June 2000 and its provisions are available on the RBI’s website. FEMA
differs from FERA (1973) in several aspects. The most important is in its intent. FEMA does not
view foreign exchange as a scarce resource that must be conserved and hoarded, but as a
mechanism through which external trade can be promoted. It is interested in the orderly
development and maintenance of the foreign exchange market in India.

With these twin objectives FEMA seeks to regulate the Indian foreign exchange market. FEMA is a
marked departure from FERA because the latter was focused on punitive measures on violation of
its provisions, and created an atmosphere of fear, stealth and secrecy when it came to foreign
exchange activities of Indian citizens. In contrast, FEMA is much more benign in its approach. It
accepts the cross-border movement of funds as a necessity in an era of increased integration of
world financial markets, up surge in foreign direct investment, and liberalization of trade under the
aegis of the World Trade Organization (WTO).

It does not view outflows of foreign exchange as an evil that must be checked, but rather as a
reality that must be factored into the foreign exchange management process. Thus, it places
greater importance management of foreign exchange than on conservation of foreign exchange.

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This is in keeping with the general rules regarding any asset management decision taken by
business firms on a daily basis.

Difference between FEMA (Foreign Exchange Management Act) & FERA

(Foreign Exchange Regulation Act)

BASIS FOR
FERA FEMA
COMPARISON

Meaning An act promulgated, to FEMA an act initiated to facilitate external

regulate payments and trade and payments and to promote
foreign exchange in India, is orderly management of the forex market
FERA. in the country.

Enactment Old New

Number of sections 81 49

Introduced when Foreign exchange reserves Foreign exchange position was

were low. satisfactory.

Approach towards Rigid Flexible

forex transactions

Basis for Citizenship More than 6 months stay in India

determining
residential status

Violation Criminal offence Civil offence

Punishment for Imprisonment Fine or imprisonment (if fine not paid in

contravention the stipulated time)

Purpose/Objective of FERA and FEMA

The primary difference between FERA and FEMA is that FERA was enacted to facilitate all the

payments and other foreign exchange activities in India.

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On the other hand, despite being an improvement of FERA, which means that it also covers

payments and facilitation of foreign exchange activities, FEMA has a specific role of ensuring that

external trade and payments are correctly executed.

FEMA has the responsibility of ensuring that there is the orderly management of foreign exchange

market in the country.

Residential Status of FERA and FEMA

The basis for determining residential status in both acts shows significant levels of differences. For

FERA, the citizenship of a person is the basis for deciding the residential status of the person. This

means that any person who is citizenship is subjected to all the provisions of the foreign exchange

regulation act.

For a person to be subjected to the provisions of foreign exchange management act, he or she

must stay in India for more than six months. This means that any person performing foreign

exchange transactions for less than six months is not subjected to foreign exchange management

act.

Foreign Exchange Reserve of FERA and FEMA

Foreign Exchange Regulation Act was formulated and implemented when the country was

experiencing challenges in its foreign exchange reserves. This means that FERA was a

countermeasure that came into force to liberate the country from foreign exchange challenges.

The Foreign Exchange Management Act was formulated and implemented when the foreign

exchange reserve of India was satisfactory. It was expressed to increase effectiveness and

efficiency of the existing Foreign Exchange Regulation Act (FERA).

Approach/Methodology if FERA and FEMA

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FERA executes and controls foreign exchange transactions quietly and conservatively, which do

many foreign exchange experts as restrictive consider. The act has a large number of sections

(81), which portrays how detailed and exhaustive the law is.

FEMA is considered to be a flexible act that incorporates other measures towards the

management and control of the foreign exchange market. Additionally, FEMA is short with 49

sections, which are not detailed or restrictive.

Violation and Punishment

FERA is a non-compoundable offense, which means that the complainant cannot enter into a

compromise and drop the case against the accused. However, FEMA is a compoundable violation

where the accused can choose to agree with the accused and drop the charges.

Any attempt to act against the provisions of FEMA attracts a monetary penalty, which may change

to imprisonment if the accused fails to pay the financial penalty on time. On the other hand,

contravening the provisions of FERA results to jail term with no requirement of monetary charges.

Origin/Year of Enactment

The Foreign Exchange Regulation Act (FERA) is the older of the two provisions enacted to control

and facilitate foreign exchange in India. The act was formulated and implemented in 1973.

The Foreign Exchange Management Act is an extension of the earlier foreign exchange regulation

act. It was formulated and implemented to increase efficiency and effectiveness in the foreign

exchange market. This statute was enacted in 1999.

The Main Features of the FEMA

The following are some of the important features of Foreign Exchange Management Act:

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i. It is consistent with full current account convertibility and contains provisions for progressive

liberalisation of capital account transactions.

ii. It is more transparent in its application as it lays down the areas requiring specific permissions

of the Reserve Bank/Government of India on acquisition/holding of foreign exchange.

iii. It classified the foreign exchange transactions in two categories, viz. capital account and current

account transactions.

iv. It provides power to the Reserve Bank for specifying, in , consultation with the central

government, the classes of capital account transactions and limits to which exchange is

admissible for such transactions.

v. It gives full freedom to a person resident in India, who was earlier resident outside India, to

hold/own/transfer any foreign security/immovable property situated outside India and acquired

when s/he was resident.

vi. This act is a civil law and the contraventions of the Act provide for arrest only in exceptional

cases.

vii. FEMA does not apply to Indian citizen’s resident outside India.

APPLICABILITY OF FEMA

The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend the law

relating to foreign exchange with the objective of facilitating external trade and for promoting the

orderly development and maintenance of foreign exchange market in India. FEMA extends to the

whole of India. The Act also applies to all branches, offices and agencies outside India owned or

controlled by a person resident in India and also to any contravention committed there under

outside India by any person to whom this Act is applies.

Broadly speaking FEMA covers3 different types of categories:

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 1. Person

2. Person resident in India

3. Person resident outside India

Important terms and definitions under FEMA 1999 are given below:

Foreign exchange includes:

i. Foreign currency (defined as any currency other than Indian currency)

ii. Deposits, credits and balances payable in foreign currency

iii. Drafts, travellers’ cheques, letters of credit, bills of exchange, either expressed or drawn in
Indian currency but payable in a foreign currency

iv. Drafts, travellers cheques, letters of credit, bills of exchange, drawn by banks, institutions or
persons outside India but payable in Indian currency

Foreign security includes:

i. Any security in the form of shares, stocks, bonds, and any other instruments denominated and
expressed in foreign currency

ii. Any security in the form of shares, stocks, bonds, and any other instruments denominated and
expressed in foreign currency, on which return (in the form of interest or dividend) is payable in
Indian currency

iii. Any security in the form of shares, stocks, bonds, and any other instruments denominated and
expressed in foreign currency, in which the redemption proceeds are payable in Indian currency

A person resident in India includes:

i. A person residing in India for more than 182 days in the preceding financial year. Thus with
regard to an individual, FEMA focuses on resident status, while FERA focused on citizenship.

ii. Anybody corporate registered or incorporated in India

iii. An office, branch or agency located in India, and owned and controlled by a person residing
outside India

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iv. An office, branch or agency located outside India, and owned and controlled by a person
residing in India.

FEMA divides all cross-border transactions by persons resident in India into two categories –
capital account transactions and current account transactions.

Under Section 2 (e) of the FEMA, a capital account transaction is defined as:
i. Any transaction that the RBI specifies as being a capital account transaction.

ii. A transaction that alters the assets and liabilities (including contingent liabilities) outside India, of
persons residing in India

iii. A transaction that alters the assets and liabilities (including contingent liabilities) in India, of
persons residing outside India

Under Section 2(j) of the FEMA, a current account transaction is one that is not a capital account
transaction.

Therefore, current account transactions include:

i. Payments made for foreign trade in goods and services, current business, short-term banking
and credit facilities, in the ordinary course of business

ii. Payments made for expenses incurred due to foreign travel, education, or medical needs of
spouse, children and parents

iii. Remittances overseas for living expenses of spouse, children and parents

iv. Payments due as interest on a loan, or net income from investments

Under FEMA, a person resident in India is free to buy and sell foreign exchange from an
authorized person, that is, a person authorized by the RBI to undertake foreign exchange
transactions. An authorized person’ under FEMA includes authorized dealers, money changers
and offshore banking units. An offshore banking unit is a unit located overseas that conducts
banking operations with non-residents.

Many Indian banks such as State Bank of India and Bank of Baroda have offshore banking units in
Bahrain, Hong Kong and Cayman Islands. By including offshore banking units, FEMA has a wider
scope as FERA included only authorized dealers and moneychangers.

REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE

Provisions of FEMA are grouped under four heads. Important provisions under each of the four
heads, having a bearing on promoting economic development through foreign investment with
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enabling provisions to ensure the curtailing of inflationary trends from such transactions, are
outlined below.

Regulation for Current Account Transaction:

Any person can sell or draw foreign exchange to or from an authorised dealer (if such sale or

withdrawal is a current account transaction) except for certain prohibited transactions like

remittance of lottery winnings, remittance of interest income on funds held in Non-Resident

Special Rupee (NRSR) account scheme, etc.

Besides these cases, there are certain other transactions, for which specific RBI approval will be

required. For instance, Reserve Bank approval is required for importers availing of Supplier’s

Credit beyond 180 days and Buyer’s Credit irrespective of the period of credit.

Authorised dealers are permitted remittance of surplus freight/passage collections by

shipping/airline companies or their agents, multimodal transport operators, etc. after verification of

documentary evidence in support of the remittance.

Regulations Relating to Capital Account Transactions:

i. Foreign nationals are not allowed to invest in any company or partnership firm or proprietary

concern, which is engaged in the business of Chit Fund or in Agricultural or Plantation activates or

in Real Estate business (other than development of township, construction of

residential/commercial premises, roads or bridges) or construction of farm houses or trading in

Transferable Development Rights (TDRs). Listing of permissible classes of Capital account

transaction for a person resident in India and also by a person resident outside India has been

provided in the regulations.

ii. Detailed rules and regulations are provided on borrowing and lending in Foreign Currency as

well as India Rupee by a person resident in India form/to a person resident outside India either on

non-repatriation or repatriation basis.

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iii. Authorised dealers are now permitted to grant rupee loans to NRIs against security of shares or

immovable property in India, subject to certain terms and conditions. Authorised dealers or

housing finance institutions approved by National Housing Bank can also grant rupee loans to

NRIs for acquisition of residential accommodations subject to certain terms and conditions.

iv. General permission has been granted to Indian company (including Non-Banking Finance

Company) registered with Reserve Bank to accept deposits from NRIs on repatriation basis

subject to the terms and conditions specified in the schedule.

Indian proprietorship concern/firm or a company (including Non-Banking Finance Company)

registered with Reserve Bank can also accept deposits from NRIs on non-repatriation basis

subject to the terms and conditions specified in the schedule.

Regulations relating to export of goods and services:

Export proceeds are required to be realised within a period of 6 months from the date of shipment.

In the case of exports to a warehouse established abroad with the approval of Reserve Bank, the

proceeds have to be realised within 15 months from the date of shipment.

An enabling provision has been made in this regulation to delegate powers to authorised dealers

to allow extension of time. Export of goods on elongated credit terms beyond six months requires

prior approval of Reserve Bank.

Other Regulations:

i. A person resident in India to whom any foreign exchange is due or has accrued is obligated to

take reasonable steps to realise and repatriate to India such foreign exchange unless an

exemption has been provided in the Act or regulations made under the general or special

permission of Reserve Bank.

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ii. Any foreign exchange due or accrued as remuneration for services rendered or in settlement of

any lawful obligation or an income on assets held outside India or as inheritance, settlement or gift

to a person resident in India should be sold to an authorised person within a period of seven days

of its receipt and in all other cases within 90 days of its receipt.

iii. Any person who has drawn exchange for any purpose but has not utilised it for the same or any

other purpose permissible under the provisions of the Act should surrender such foreign exchange

or un-utilised foreign exchange to an authorised person within a period of 60 days from the date of

acquisition.

Where, however, exchange was drawn for travel abroad, the un-utilised exchange in excess of the

limit up to which foreign exchange is permitted to be retained, should be surrendered to an

authorised person within 90 days from the date of return of the’ traveller to India if unspent

exchange is in the form of travellers cheques.

iv. The Reserve Bank has specified the limit for possession and retention of foreign currency by a

person resident in India. There is no restriction on possession of foreign coins by any person. Any

person resident in India is permitted to retain in aggregate foreign currency not exceeding US$

2000 or its equivalent in the form of currency notes/bank notes or travellers cheques acquired by

him from approved sources.

v. The Reserve Bank has granted general permission to any person to receive any

payment:

(a) made in rupees by order or on behalf of a person resident outside India during his stay in India

by converting the foreign exchange into rupees by sale to an authorised person;

(b) made by means of a cheque drawn on a bank outside India or a bank draft or travellers

cheques issued outside India or made in foreign currency notes directly, provided the cheques,

drafts or foreign currency is sold to an authorised person within seven days of its receipt;

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(c) by means of a postal order or money order issued by a post office outside India.

vi. Reserve bank has also granted general permission to a person resident in India to make

payment in rupees;

(a) for extending hospitality’ to a person resident outside India;

(b) to a person resident outside India for purchase of gold or silver imported by such person in

accordance with the provisions of any order issued by Central Government under the Foreign

Trade (Development and Regulation) Act, 1992 or under any law or rules or regulations in force.

FEMA prohibits:
 Dealing in or transfer of Foreign Exchange or Foreign Security to any person other than
Authorised Person
 Make any payment otherwise through an authorized person to or for the credit of any
person resident outside India in any manner
 receive otherwise through an authorized person, any payment by order or on behalf of any
person resident outside India in any manner.
 enter into any financial transaction in India as consideration for or in association with
acquisition or creation or transfer of a right to acquire, any asset outside India by any
person

Manner of receipt in Foreign Exchange

Payment for Export can be received:

 in form of Draft, cheque, foreign currency notes/travelers cheque etc. provided the foreign
currency so received is surrendered within the specified time period
 by debit to FCNR /NRE Account
 In rupees from the credit card servicing bank in India where payment is made via credit
card
 From a rupee account held in the name of exchange house with an authorised dealer if the
amount does not exceed Rs 2 lacs
 In the form of precious metals
 Payment can be received in cash from Foreign Travelers in India if the same foreign
exchange is duly surrendered
 RBI also permits offsetting of export proceeds against import payables etc. after obtaining
prescribed certificate from CA/Cost Accountant in this regard
 Payment shall be made in a currency appropriate to the country of shipment of goods
 Drawal of Foreign Currency means drawal from an authorised person and includes opening
of letter of credit, use of international credit card etc. which has an effect of creating foreign
exchange liability

Repatriation of Foreign Exchange

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“Repatriate to India” means bringing into India the realized foreign exchange and-

 the selling of such foreign exchange to an authorized person in India in exchange for
rupees, or
 the holding of realized amount in an account with an authorized person in India to the
extent notified by the Reserve Bank,
 It includes use of the realized amount for discharge of a debt or liability denominated in
foreign exchange

Manner of Repatriation -It can be done in the following manner:

 Sell it to Authorised Person in India in exchange for Rupees

 Retain in an account with an authorised dealer
 Use it for discharge of a debt or liability denominated in foreign exchange in the manner
specified by RBI

Surrender of Foreign Exchange

 Any Foreign Exchange earned by a person other than person resident in India not used for
permissible purposes should be surrendered within 60 days of such acquisition / purchase
 However if acquired for Foreign Travel within 90 days if the exchange is in currency and
coins and 180 days if it is in traveler’s cheque or if the same is acquired by person resident
in India

These provisions are not applicable to Foreign Currencies of Nepal and Bhutan

TRANSACTIONS COVERED UNDER FEMA

As stated earlier all transactions between a resident and a non-resident is covered in FEMA, these
transaction can be broadly classified in two groups current account transactions and capital
account transactions.

1. Current Account Transactions

As per Sec 2 (e) “Capital account transaction” means a transaction which alters the assets or
liabilities, including contingent liabilities, outside India of persons resident in India or assets or
liabilities in India of persons resident outside India, and includes transactions referred to in Sec
6(3). Any person may sell or draw foreign exchange to or from an authorized person if such sale or
drawal is a current account transaction.

The Central Government may, in public interest and in consultation with the Reserve Bank,
impose such reasonable restrictions for current account transactions as may be required from time
to time.

The definition is inclusive and any expenditure which is not a capital account transaction will be
current account transaction. It includes:

 payments due in connection with foreign trade, other current business, services, and short-
term banking and credit facilities in the ordinary course of business
 payments due as interest on loans and as net income from investments
 remittances for living expenses of parents, spouse and children residing abroad, and

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  expenses in connection with foreign travel, education and medical care of parents, spouse
and children

The following transactions are therefore regarded as Capital Account Transaction[8]

(a) Transfer or issue of any foreign security by a person resident in India;

(b) Transfer or issue of any security by a person resident outside India;

(c) Transfer or issue of any security or foreign security by any branch, office or agency in India of a
person resident outside India;

(d) Any borrowing or lending in foreign exchange in whatever form or by whatever name called;

(e) Any borrowing or lending in rupees in whatever form or by whatever name called between a
person resident in India and a person resident outside India;

(f) Deposits between persons resident in India and persons resident outside India;

(g) Export, import or holding of currency or currency notes;

(h) Transfer of immovable property outside India, other than a lease not exceeding five years, by a
person resident in India;

(i) Acquisition or transfer of immovable property in India, other than a lease not exceeding five
years, by a person resident outside India;

(j) Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred,-

(i) By a person resident in India and owed to a person resident outside India; or

(ii) By a person resident outside India.

Though the norms of Capital Account Transactions have been considerably relaxed, as a general
rule all capital account are prohibited unless specifically allowed. Permissible capital account
transactions are governed by the Foreign Exchange Management (Permissible Capital Account
Transactions) Regulations, 2000 (Notification FEMA 1/2000-RB).

2. Capital Account Transactions

Section 2 (j) of FEMA defines “capital account transaction” as a transaction which alters the assets
or liabilities, including contingent liabilities, outside India of persons resident in India or assets or
liabilities in India of persons resident outside India, and includes transactions like:

 Changes in Assets/ Liabilities

 Transfer/ issue of security
 Borrowing/ Lending
 Export, import or holding of currency or currency notes
 Giving guarantee

Who can make FDI?

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  Person Resident outside India except for Pakistan
 Entity incorporated outside except Pakistan & Bangladesh
 Person Resident of Bangladesh & entities incorporated there can make investment in India
in form of shares and convertible Debentures with prior approval of RBI

RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect
of proposals approved by the Government. Indian companies getting foreign investment approval
through FIPB route do not require any further clearance from RBI for the purpose of receiving
inward remittance and issue of shares to the foreign investors.
The companies are however required to notify the concerned Regional office of the RBI about
receipt of inward remittances within 30 days of such receipt and to file the required documents
with the concerned Regional offices of the RBI within 30 days after issue of shares to the foreign
investors or NRIs.[12]

Industrial Policy towards Foreign Investment

FDI in shares is permitted 100% in all industries except the following:

 Proposals requiring Industrial License

 Investment exceeding 24% inn SSI reserved items
 Investment in Defense sector upto 26%
 Foreign collaborator having previous tie up
 Acquisition in shares of existing Company
 Prohibited Sectors – Prohibited Sectors include
 Retail Trading (except single brand retailing)
 Atomic Energy
 Lottery Business
 Gambling Betting etc.
 Activity /sector not opened for private sector investment
 Agriculture except few prescribed
 Plantation except tea plantation
 Real Estate Business except few prescribed
 Manufacture of Cigars, cigarettes etc.

Activities requiring Government Approval – Activities that require government approval include
Petroleum Sector, Investing Companies in Infrastructure and Service Sector, Defense & Strategic
Industries ,Atomic Minerals, Print Media, Broadcasting, Postal Services, Courier Services
,Establishment & operation of Satellite , Development of Integrated Township.

The Reserve Bank of India (RBI) has recently come out with notifications under the FEMA to
operationalise foreign direct investment (FDI) policy in multi-brand retailing, telecom and others. It
has also widened the definition of the term ‘control’ under the Act which would have repercussions
on downstream investment by an entity controlled by foreigners. The government had relaxed
norms for 51 per cent multi-brand retail trading and eased the mandatory 30 per cent local
sourcing norms for companies.[13] The cap in telecom was increased to 100 per cent from 74 per
cent. FDI of up to 49 per cent can come through the automatic route.[14]

Meaning of Authorised Person & Provisions related Authorised Person

Authorized Person

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An "Authorized Person" under FEMA, is a person who is authorized by Reserve Bank to deal in
Foreign Exchange.
For being registered as an "Authorized Person", necessary application along with relevant
documents has to be furnished to Reserve Bank.
An "Authorized Person" is also, not given a free hand to deal in foreign Exchange. He has to
furnish details and information, to Reserve Bank from time to time as may be required by it.

Duties of an authorised person

1. To comply with RBI directions
2. Not to engage in un authorized transactions
3. Ensure compliance of FEMA provisions
4. To produce books, accounts etc…

Powers of an authorised person

1. To deal in or transfer any foreign exchange
2. Receive payments by order
3. To open NRO, NRE, FCNR, NRNR, NRSR accounts
4. To sell or purchase foreign exchange for current account transactions.
5. To sell or purchase foreign exchange for permissible capital account transactions.

Provisions related to Authorised Person:

Section 10. (1) The Reserve Bank may, on an application made to it in this behalf, authorise any
person to be known as authorised person to deal in foreign exchange or in foreign securities as an
authorised dealer, money changer or off-shore banking unit or in any other manner as it deems fit.

(2) An authorisation under this section shall be in writing and shall be subject to the conditions laid
down therein.

(3) An authorisation granted under sub-section (1) may be revoked by the Reserve Bank at any
time if the Reserve Bank is satisfied that†”

(a) it is in public interest so to do; or

(b) the authorised person has failed to comply with the condition subject to which the authorisation
was granted or has contravened any of the provisions of the Act or any rule, regulation,
notification, direction or order made thereunder:

Provided that no such authorisation shall be revoked on any ground referred to in clause (b)
unless the authorised person has been given a reasonable opportunity of making a representation
in the matter.

(4) An authorised person shall, in all his dealings in foreign exchange or foreign security, comply
with such general or special directions or orders as the Reserve Bank may, from time to time, think
fit to give, and, except with the previous permission of the Reserve Bank, an authorised person
shall not engage in any transaction involving any foreign exchange or foreign security which is not
in conformity with the terms of his authorisation under this section.

(5) An authorised person shall, before undertaking any transaction in foreign exchange on behalf
of any person, require that person to make such declaration and to give such information as will
reasonably satisfy him that the transaction will not involve, and is not designed for the purpose of

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any contravention or evasion of the provisions of this Act or of any rule, regulation, notification,
direction or order made thereunder, and where the said person refuses to comply with any such
requirement or makes only unsatisfactory compliance therewith, the authorised person shall refuse
in writing to undertake the transaction and shall, if he has reason to believe that any such
contravention or evasion as aforesaid is contemplated by the person, report the matter to the
Reserve Bank.

(6) Any person, other than an authorised person, who has acquired or purchased foreign
exchange for any purpose mentioned in the declaration made by him to authorised person under
sub-section (5) does not use it for such purpose or does not surrender it to authorised person
within the specified period or uses the foreign exchange so acquired or purchased for any other
purpose for which purchase or acquisition of foreign exchange is not permissible under the
provisions of the Act or the rules or regulations or direction or order made thereunder shall be
deemed to have committed contravention of the provisions of the Act for the purpose of this
section.

Reserve Bank’s powers to issue directions to authorised person.

Section 11. (1) The Reserve Bank may, for the purpose of securing compliance with the provisions
of this Act and of any rules, regulations, notifications or directions made thereunder, give to the
authorised persons any direction in regard to making of payment or the doing or desist from doing
any act relating to foreign exchange or foreign security.

(2) The Reserve Bank may, for the purpose of ensuring the compliance with the provisions of this
Act or of any rule, regulation, notification, direction or order made thereunder, direct any
authorised person to furnish such information, in such manner, as it deems fit.

(3) Where any authorised person contravenes any direction given by the Reserve Bank under this
Act or fails to file any return as directed by the Reserve Bank, the Reserve Bank may, after giving
reasonable opportunity of being heard, impose on the authorised person a penalty which may
extend to ten thousand rupees and in the case of continuing contravention with an additional
penalty which may extend to two thousand rupees for every day during which such contravention
continues.

Power of Reserve Bank to inspect authorised person.

Section 12. (1) The Reserve Bank may, at any time, cause an inspection to be made, by any
officer of the Reserve Bank specially authorised in writing by the Reserve Bank in this behalf, of
the business of any authorised person as may appear to it to be necessary or expedient for the
purpose of†”

(a) verifying the correctness of any statement, information or particulars furnished to the Reserve
Bank;

(b) obtaining any information or particulars which such authorised person has failed to furnish on
being called upon to do so;

(c) securing compliance with the provisions of this Act or of any rules, regulations, directions or
orders made thereunder.

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(2) It shall be the duty of every authorised person, and where such person is a company or a firm,
every director, partner or other officer of such company or firm, as the case may be, to produce to
any officer making an inspection under sub-section (1), such books, accounts and other
documents in his custody or power and to furnish any statement or information relating to the
affairs of such person, company or firm as the said officer may require within such time and in
such manner as the said officer may direct.

Functions of RBI under FEMA

a) Controlling dealings in foreign exchange by giving general or special permission for dealing in
foreign exchange, excluding those cases where specific provisions have been made in Act, Rules
or Regulations – Section 3.

b) RBI cannot impose any restrictions on current account transactions. These can be imposed
only by Central Government in consultation with RBI – Section 5. However, in certain cases, prior
approval of RBI is required for current account transactions as provided in Foreign Exchange
Management (Current Account Transactions) Rules, 2000.

c) Specifying conditions for payment in respect of capital account transaction – Section 6(2).
d) Regulate/prohibit/restrict the following, by issuing Regulations:

• Transfer or issue of foreign security to resident and Indian security to non-resident;

• Borrowing and lending in foreign exchange or to a foreign person;

• Export/import of currency or currency notes;

• Transfer of immovable property outside India;

• Giving guarantee or surety where foreign exchange transaction is involved – Section 6(3)

e) Specify (by regulation) period and manner in which foreign exchange due from export of goods
and services should be received – Section 8.

f) To grant exemption from realisation and repatriation in cases specified under Section 9.

g) Granting authorisation to ‘Authorised Person’ to deal in foreign exchange, to give directions to

them and to inspect the authorised person – Sections 10, 11 & 12.

Contraventions and Penalties under FEMA

Amount of Penalty
Any contravention, under FEMA, may invite following kinds of penalties:
 If, the amount against which offence is quantities, then penalty will be "THRICE" the sum
involved in contravention.
 Where the amount cannot be quantified the penalty may be imposed upto two lakh rupees.
 If, the contravention is continuing everyday, then Rs. Five Thousand for every day after the
first day during which the contravention continues.

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Further in addition to the penalty, any currency, security or other money or property involved in the
contravention may also be confiscated.
Penalties under section 13 of the Foreign Exchange Management Act, 1999

 If any person contravenes any provision of this Act, or contravenes any rule, regulation,
notification, direction or order issued in exercise of the powers under this Act, or
contravenes any condition subject to which an authorisation is issued by the Reserve Bank,
he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such
contravention which has quantifiable amount or up to ₹ 2 lakhs which includes not
quantifiable amount and where such contravention is a continuing one, further penalty
which may extend to five thousand rupees for every day after the first day during which the
contravention continues.

 If any person contravenes any provision of this Act or contravenes any rule, regulation,
notification, direction or order issued in exercise of the powers under this Act, or
contravenes any condition subject to which an authorisation is issued by the Reserve Bank
of India, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in
such contravention where such amount is quantifiable, or up to two lakh rupees where the
amount is not quantifiable, and where such contravention is a continuing one, further
penalty which may extend to five thousand rupees for every day after the first day during
which the contravention continues.”

 Any Adjudicating Authority adjudging any contravention under sub-section (1), may, if he
thinks fit in addition to any penalty which he may impose for such contravention direct that
any money, safety or any other money or property in respect of which the contravention has
taken place shall be confiscated to the Central Government and further direct that the
foreign exchange holdings, if any, of the persons committing the contraventions or any part
thereof, shall be brought back into India or shall be retained outside India in accordance
with the directions made in this behalf.

DIRECTORATE OF ENFORCEMENT

Sections 36 to 38 provide for establishment, functions and powers of Directorate of Enforcement.

Establishment of Directorate of Enforcement. (Section 36)

(1) The Central Government shall establish a Directorate of Enforcement with a Director and such
other officers or class of officers as it thinks fit, who shall be called officers of Enforcement, for the
purposes of this Act. —(1) The Central Government shall establish a Directorate of Enforcement
with a Director and such other officers or class of officers as it thinks fit, who shall be called
officers of Enforcement, for the purposes of this Act."
(2) Without prejudice to provisions of sub-section (1), the Central Government may authorise the
Director of Enforcement or an Additional Director of Enforcement or a Special Director of
Enforcement or a Deputy Director of Enforcement to appoint officers of Enforcement below the
rank of an Assistant Director of Enforcement.
(3) Subject to such conditions and limitations as the Central Government may impose, an officer of
Enforcement may exercise the powers and discharge the duties conferred or imposed on him
under this Act.

Power of search, seizure, etc. (Section 37)

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(1) The Director of Enforcement and other officers of Enforcement, not below the rank of an
Assistant Director, shall take up for investigation the contravention referred to in section 13. —(1)
The Director of Enforcement and other officers of Enforcement, not below the rank of an Assistant
Director, shall take up for investigation the contravention referred to in section 13."
(2) Without prejudice to the provisions of sub-section (1), the Central Government may also, by
notification, authorise any officer or class of officers in the Central Government, State Government
or the Reserve Bank, not below the rank of an Under Secretary to the Government of India to
investigate any contravention referred to in section 13.
(3) The officers referred to in sub-section (1) shall exercise the like powers which are conferred on
income-tax authorities under the Income-tax Act, 1961 (43 of 1961) and shall exercise such
powers, subject to such limitations laid down under that Act.

Empowering other officers. (Section 38)

(1) The Central Government may, by order and subject to such conditions and limitations as it
thinks fit to impose, authorise any officer of customs or any central excise officer or any police
officer or any other officer of the Central Government or a State Government to exercise such of
the powers and discharge such of the duties of the Director of Enforcement or any other officer of
Enforcement under this Act as may be stated in the order. —(1) The Central Government may, by
order and subject to such conditions and limitations as it thinks fit to impose, authorise any officer
of customs or any central excise officer or any police officer or any other officer of the Central
Government or a State Government to exercise such of the powers and discharge such of the
duties of the Director of Enforcement or any other officer of Enforcement under this Act as may be
stated in the order."
(2) The officers referred to in sub-section (1) shall exercise the like powers which are conferred on
the income-tax authorities under the Income-tax Act, 1961 (43 of 1961), subject to such conditions
and limitations as the Central Government may impose.

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