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Foreign Exchange Management Act (FEMA)

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Last Updated on January 30, 2024 by Kanakkupillai

The FEMA Act of 1999 is also a well-recognized act that was passed in the Indian Parliament. It took effect on the 29th of December, 1999, to replace FERA. FEMA is constructed to comply with the guidelines of WTO, and RBI has rules on passing regulations permitting the government to establish policies regarding foreign exchange by Indian law. In this article we will discuss the essential functions of FEMA that help in the management of foreign exchange.

Main Features of the Foreign Exchange Management Act

a) Empowerment of the Central Government: FEMA empowers the central government to regulate transactions involving individuals residing in foreign countries.

b) Approval Requirement: No foreign transaction can take place without the approval of FEMA.

c) Restriction on Transactions: The government can restrict specific foreign transactions carried out by authorized individuals from their current accounts.

d) RBI’s Power: The RBI may limit transactions an authorised person in India can undertake for another individual living outside the country, even if the transaction is within his or her capital account.

e) Involvement in Foreign Exchange: Indian citizens have the freedom to enter into foreign exchange transactions, acquire foreign exchange securities, acquire property in foreign countries and inherit from persons in India as per government restriction under FEMA.

The Structure of FEMA

a) Enforcement Directorate: The head office of FEMA is known as the Enforcement Directorate and is located in New Delhi.

b) Zonal Offices: FEMA has five head offices in Kolkata, Mumbai, Chennai, and Jalandhar.

c) Zonal Office Structure: The head office comprises seven zonal offices.

Prohibitions on Withdrawal of Foreign Exchange

a) Lottery Winnings: Remittances for winning a lottery ticket are prohibited.

b) Racing and Riding: Remittances for racing and riding activities are not allowed.

c) Lottery Ticket Purchase: Remittances arising from purchasing a lottery ticket are prohibited.

d) Dividend Payments: Remittances arising from a company’s dividend are restricted.

e) Call Back Services: Payments related to call-back services or telephones are prohibited.

f) Travel to Nepal or Bhutan: Remittances for travel to Nepal or Bhutan are prohibited.

g) Transactions with Residents of Nepal or Bhutan: Transactions dealing with residents living in Nepal or Bhutan are restricted.

Penalties under FEMA

If any rules, regulations, orders or bylaws passed by FEMA are violated, there can be penalties. There is a penalty on the concerned person who must pay three times the value of the contravening amount or; alternatively, a penalty of up to 2 lakhs may be levied with an additional daily fine worth Rs.5000 until the infringement has been corrected.

Extra Territorial Jurisdiction of FEMA

The powers of FEMA extend to extraterritorial jurisdiction, meaning the act applies to Indian citizens conducting business activities in India. This power helps FEMA safeguard the country from foreign dominance and protect India’s identity. To understand the jurisdictional powers of FEMA, let’s consider a simple case law, British India Steams Co. Ltd vs Shanmugha Vilas Cashewnut (1990). In this case, the court held that FERA rules do not apply to ships unless they touch an Indian port or territorial waters.

Suspension of the Act in Extraordinary Situations

In extraordinary situations, according to Section 40 of FEMA, the central government may suspend the FEMA act in the public’s general interest. However, a copy of the application must be placed before the parliament at least thirty days prior to the central government passing the order.

Conclusion

The Foreign Exchange Management Act plays a crucial role in regulating foreign transactions and exchange. It serves as a powerful mechanism for protecting India from foreign threats and dominance. With its extraterritorial jurisdictional powers, FEMA empowers the country to safeguard itself from foreign invaders.

G.Durghasree B.A.B.L (Hons)

G Durghasree B.A.B.L (Hons) is a registered trademark attorney with extensive experience as an Advocate for a period of 8 years. She possesses expertise in trademark law, including trademark filing and trademark hearings. Additionally, she is skilled in contract drafting and reviewing, providing legal advice and opinions, particularly in the areas of Company Law, Insolvency and Bankruptcy Code (IBC), and Goods and Service Tax Law (GST). Her experience encompasses both litigation and non-litigation aspects of these laws.