The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India that regulates foreign exchange transactions and manages the flow of foreign currency into and out of the country. It was enacted on December 29, 1999, and came into force on June 1, 2000. FEMA was created to replace the highly restrictive Foreign Exchange Regulation Act, 1973 (FERA). The problem it solved was replacing FERA's focus on "regulation" and "control," which treated foreign exchange as a scarce resource and violations as criminal offenses, with a new framework focused on "management" and "facilitation". This shift was necessary to align India's laws with the post-1991 economic liberalisation and the emerging framework of the World Trade Organization (WTO).
FEMA's main objective is to consolidate and amend the law to facilitate external trade and payments and promote the orderly development and maintenance of the foreign exchange market in India. The Act works by classifying all foreign exchange transactions into two categories: Current Account Transactions and Capital Account Transactions. Section 3 prohibits dealing in foreign exchange except through an authorised person, while Section 4 restricts a person resident in India from acquiring or holding foreign exchange or property outside India, except as specifically provided. Section 6 deals with Capital Account Transactions, giving the Reserve Bank of India (RBI) the power to issue regulations in consultation with the Central Government. Violations under FEMA are treated as civil offenses, unlike the criminal offenses under FERA.
FEMA is closely connected to the Reserve Bank of India (RBI), which issues regulations and monitors compliance, and the Enforcement Directorate (ED), which is entrusted with the investigation of offenses under the Act. The Act also paved the way for the introduction of the Prevention of Money Laundering Act, 2002 (PMLA). Recently, the framework has seen changes, such as the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, which are set to be superseded by the draft Foreign Exchange Management (Foreign Investment) Rules, 2026. These recent amendments, including those related to the Liberalised Remittance Scheme (LRS) and investments by Non-Resident Indians (NRIs), generally aim to simplify processes and make the regulatory framework more transparent and investor-friendly.