# Key Definitions under FEMA, 1999

FEMA is the gateway law for all cross-border money movement in India. Before deciding whether a transaction is permitted, prohibited, or needs approval, you must classify the money, the instrument, and the person involved. These definitions are the building blocks for every other rule in the Act.

## 1. Currency

Currency is not limited to physical notes and coins. It includes any instrument carrying monetary value that can settle a payment.

Includes: Notes, Coins, Cheques, Postal Orders, Traveller's cheques, Money Orders, ATM cards, Debit cards, Credit cards.

## 2. Foreign Currency

> Foreign currency = any currency other than Indian currency.

This is a residual definition. If it is not INR, it is foreign currency.

## 3. Foreign Exchange

Foreign exchange is wider than foreign currency. It covers three categories:

Category	Example	Test
(a) BoE / Promissory Note drawn in India, payable outside India	Cheque issued in Mumbai, payable in New York	Destination test
(b) BoE / Promissory Note drawn outside India, payable in India	Cheque issued in London, payable in Delhi	Source test
(c) Bank balance maintained by a Non-Resident in India	NRO/NRE deposit of a US resident	Ownership test

Memory aid: Destination, Source, Ownership.

## 4. Person

The term "Person" is intentionally broad so no entity escapes the Act.

Person includes: Individual, HUF, Company, Partnership Firm, AOP, BOI, LLP, Artificial juridical person, and any branch, agency or office of the above.

Branches/agencies/offices are treated as a separate "person" — this becomes critical for residential status.

## 5. Foreign Security

> Any security expressed in foreign currency is a foreign security.

The currency of denomination — not the place of issue — decides whether a security is "foreign".

## Why these definitions matter

1. Sec. 3 restrictions apply only when foreign exchange is involved.

2. Sec. 4 restrictions apply to foreign security and foreign currency.

3. Capital vs Current Account classification turns on whether the person is a Resident or Non-Resident.

Worked example

### Example 1

Example 1 — Cheque drawn in India, payable abroad

Mr. A issues a cheque from his Mumbai bank account in favour of his sister in New York. Classify the cheque.

Answer: It is a cheque drawn in India and payable outside India — falls under category (a) of foreign exchange (Destination test).

### Example 2

Example 2 — Bank balance of a non-resident

Mr. B, a US resident, holds ₹5,00,000 in an NRO account with SBI Mumbai.

Answer: This qualifies as foreign exchange under category (c) (Ownership test), even though the balance is in INR.

### Example 3

Example 3 — USD-denominated bond issued in India

XYZ Ltd. (Indian company) issues a USD-denominated bond on BSE.

Answer: Since the security is expressed in foreign currency, it is a Foreign Security — regardless of place of issue or trade.

⚠️ Common exam mistakes

Treating 'foreign currency' and 'foreign exchange' as synonyms — foreign exchange is wider.
Forgetting that a bank balance held in India by a Non-Resident is foreign exchange.
Classifying a security by its place of issue rather than its currency of denomination.
Excluding 'branch, agency or office' from the definition of Person.

Bare-Act text Section 2(h), 2(m), 2(n), 2(o) · FEMA, 1999 · click to expand

"Currency" includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank. "Foreign currency" means any currency other than Indian currency. "Foreign exchange" means foreign currency and includes (i) deposits, credits and balances payable in any foreign currency, (ii) drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, (iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency. "Foreign security" means any security, in the form of shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency, including securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency.

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