The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India that governs foreign exchange transactions and the foreign exchange market in the country. It was enacted on December 29, 1999, and came into effect on June 1, 2000, with the objective of facilitating external trade and payments and promoting the orderly development of the foreign exchange market. FEMA replaced the highly restrictive Foreign Exchange Regulation Act, 1973 (FERA), which was created when India's foreign exchange reserves were critically low and its philosophy was one of strict control and conservation. The shift from FERA to FEMA marked a fundamental change in approach, moving from "regulation" to "management" to align with India's post-1991 economic liberalization.
The Act works by classifying all foreign exchange dealings into two categories: Current Account Transactions and Capital Account Transactions. Section 5 of FEMA allows for current account transactions, such as payments for trade, travel, education, and medical expenses, to be generally unrestricted, though the Central Government can impose reasonable restrictions in consultation with the Reserve Bank of India (RBI). Conversely, Section 6 grants the RBI the power to regulate capital account transactions, which involve the transfer of capital like investments or loans across borders. A key mechanism is that violations under FEMA are treated as civil offenses, resulting in monetary penalties, unlike FERA, where violations were criminal offenses that could lead to imprisonment.
The RBI is the primary regulatory authority for FEMA, issuing rules and regulations, while the Directorate of Enforcement (ED) is responsible for the investigation and enforcement of contraventions. A related concept is the Liberalised Remittance Scheme (LRS), which is a provision under FEMA that allows resident individuals to remit up to USD 250,000 per financial year for permitted current or capital account transactions. Recently, FEMA regulations have been continuously amended to further liberalize the regime, such as the Foreign Exchange Management (Overseas Investment) Rules, 2022, which simplified the framework for Indian residents investing abroad, and changes aimed at boosting the use of the Indian Rupee (INR) for cross-border transactions.