FEMA Full Form

The Foreign Exchange Management Act was enacted by the Indian Central Government to facilitate foreign payments and cross-border commerce in India. FEMA (Foreign Exchange Management Act) was enacted in 1999 to replace FERA (Foreign Exchange Regulation Act) (Foreign Exchange Regulation Act). FEMA was created to address all of the flaws and shortcomings of FERA (Foreign Exchange Regulation Act), and as a result, it enacted a number of economic changes (major reforms). FEMA was created primarily to deregulate and liberalize India's economy.

FEMA was established in India with the primary goal of facilitating international commerce and payments. FEMA was also created to aid the growth and management of the Indian currency market in an orderly manner.

Types of Foreign Currency Transactions

Capital Account Transactions and Current Account Transactions are the two types of foreign currency transactions that have been categorized.

The Capital Account includes all capital transactions, whereas the Current Account includes merchandise commerce. Current Account transactions are those that include the entry and outflow of money to and from a nation or countries over the course of a year as a result of commodity, service, and income trading/rendering.

The current account is a measure of a country's economic health. As previously stated, the balance of payment is made up of current and capital accounts, with the capital account accounting for the flow of capital in the economy as a result of capital receipts and expenditures. Domestic investment in foreign assets and foreign investment in domestic assets are both recognised in the capital account.

FEMA (Foreign Exchange Management Act) applies to the entire country of India as well as agencies and offices operating outside of India (which are owned or managed by an Indian Citizen). 

Roles of FEMA

The main purpose of FEMA is to ease external trade. Its ongoing process followed by provision relating to procedures, formalities of a foreign exchange transactions in India. It (FEMA) is categorized into two parts: 

• Current account transaction 

• Capital account transaction 

FEMA is applicable across India and its agencies are spread across the world.    

Difference between Current Account Transaction and Capital Transaction

The current account depicts a country’s net income, while a capital account tracks the net change of assets and liabilities in a specific year. Current accounts allocate with the receipt and cash payments and non-capital items whereas capital account deals in sources and makes use of capital. The addition of the current account and capital account depicted in the payment balance will always be zero. It deals (current account) with short term transactions while the capital account records inward and outward which directly determines a country's assets and liabilities. It includes foreign investment banking, loans, and other forms of capital. 

Highlights on FEMA

• It bars foreign exchange dealings which take place other than the authorized persons. 

• In FEMA rules, there are seven types of current account transactions that are prohibited. It includes transactions like lotteries, football pools, etc. 

• FEMA rules provide the freedom to ROI (Resident of India) to hold, own, or transfer any kind of foreign commodity. 

FEMA Vs FERA

FEMA (Foreign Exchange Management Act) originated in 1999 whereas FERA (Foreign Exchange Regulation Act) is an older version that came much before FEMA i.e. in 1973. FEMA holds responsibility for foreign exchange i.e. forex while FERA deals in currencies part. FERA has a rigid approach towards forex transactions, on the other hand, FERA has flexibility. In case of violating rules, FEMA has imprisonment while FERA has a fine or imprisonment too (in case a fine has not been made on time).

Objectives of FEMA

The main objective of FEMA is to provide foreign trade to boost up development and maintenance of the forex market in the country. This act consists of seven chapters which are divided into 49 sections, out of which 12 sections deal with the operational part and the remaining other 37 sections take care of penalties, appeals, and so on. 

Features of FEMA

• Some activities such as any payments made to any person outside of India or any deals in foreign exchange is prohibited. 

• It deals in foreign exchange under the current account through an authorized person and can be prohibited by the central government.

• Residents of India are authorized to carry out transactions in foreign exchange, or to hold any fixed property out of India if the property, security or currency was owned when he/she is living outside of India.

Major Provisions Enclosed in FEMA

The provisions of FEMA, 1999 are as follows-

• Trading in foreign exchange, etc. 

• Current account transactions 

• Trading (export of goods and services) 

• RBI to inspect authorized persons. 

Penalties Pursuant to FEMA

If a person violates the terms of FEMA or any rule, instruction, regulation, order, or notification issued under FEMA, he may be fined up to three times the amount involved in the violation, or up to Rs.2 lakh. If the contravention persists, he will be subject to an additional penalty of Rs.5,000 for each day the contravention continues.

The FEMA Structure

• The Director of FEMA's Head Office, commonly known as the Enforcement Directorate, is based in New Delhi.

• Each of the five zones is further subdivided into seven sub-zonal offices led by Assistant Directors and five field units led by Chief Enforcement Officers.

• There were many other significant facts, such as: It did not apply to Indian people living outside of India. The number of days a person spent in India during the preceding fiscal year was used to determine eligibility (182 days or more to be a resident). It was highlighted that an office, branch, or agency might be considered a 'person' for the purposes of determining residence. So these were the usual requirements for a person to be recognised as a FEMA designated entity.

FEMA empowered the central government to place limitations on and regulate three things: payments to or receipts from persons outside India, currency, and foreign securities transactions.

It defined the areas surrounding the acquisition and keeping of foreign currency that required explicit authorisation from the Reserve Bank of India (RBI) or the government.

According to the legislation, foreign exchange transactions are classified into two types: capital account and current account. A capital account transaction changed the assets and liabilities of a person residing outside India or inside India but residing outside India. As a result, any transaction that modified an Indian resident's overseas assets and liabilities in a foreign nation, or vice versa, was categorized as a capital account transaction. Any other transaction was classified as a current account transaction.