# The Foreign Exchange Management Act, 1999 — Background, Need and Features
## Why a foreign exchange law at all?
A country's foreign exchange reserves are a strategic resource — needed for imports, debt servicing and stabilising the currency. In the era of globalisation, with free movement of capital and trade, an orderly framework is required to:
- Channel cross-border trade through proper banking channels.
- Monitor cross-border capital flows.
- Prevent illegal outflow and unaccounted holdings of foreign exchange.
## Evolution of foreign exchange law in India
| Year | Event |
|---|---|
| 1939 | British rulers introduced exchange control through Defence of India Rules — wartime measure. |
| 1947 | Foreign Exchange Regulation Act (FERA), 1947 enacted — first independent India statute. |
| 1973 | Replaced by the Foreign Exchange Regulation Act, 1973 (FERA) — highly restrictive, criminal in approach. |
| 1991 | Economic liberalisation — Government permitted free movement of forex for trade and selected foreign investment. |
| 1999 | FERA repealed and replaced by Foreign Exchange Management Act, 1999 (FEMA) — civil in approach; the word changed from 'Regulation' to 'Management'. |
| 1 June 2000 | FEMA came into force. |
## Salient features of FEMA, 1999
FEMA provides for:
1. Regulation of transactions between residents and non-residents.
2. Investments in India by non-residents and overseas investments by Indian residents.
3. Freely permissible transactions on current account subject to reasonable restrictions.
4. RBI and Central Government control over capital account transactions.
5. Realisation of export proceeds and their repatriation to India.
6. Dealing in foreign exchange through 'Authorised Persons' — Authorised Dealers / Money Changers / Off-shore banking units.
7. Adjudication and Compounding of Offences.
8. Investigation of offences by the Directorate of Enforcement.
9. Appeal provisions — Special Director (Appeals) and Appellate Tribunal.
## Enforcement of FEMA
- RBI exercises overall control over foreign exchange transactions.
- Directorate of Enforcement (ED) is the separate body entrusted with enforcement under Section 36 of FEMA.
Note the division of labour: RBI = regulator; ED = enforcer.
## Broad structure of FEMA — 7 chapters, 49 sections
| Chapter | Subject Matter | Sections |
|---|---|---|
| I | Preliminary | 1 – 2 |
| II | Regulation and Management of Foreign Exchange | 3 – 9 |
| III | Authorised Person | 10 – 12 |
| IV | Contravention and Penalties | 13 – 15 |
| V | Adjudication and Appeal | 16 – 35 |
| VI | Directorate of Enforcement | 36 – 38 |
| VII | Miscellaneous | 39 – 49 |
## FERA vs FEMA — the conceptual shift
| Feature | FERA, 1973 | FEMA, 1999 |
|---|---|---|
| Approach | Regulation (restrictive) | Management (facilitative) |
| Nature of offences | Criminal | Civil |
| Burden of proof | On accused | On enforcement agency |
| Object | Conservation of forex | Facilitate trade & maintain forex market |
| Penalty | Heavy, including imprisonment | Monetary, with compounding option |