The Foreign Exchange Management Act (FEMA), 1999, is an Act of the Parliament of India that governs foreign exchange transactions and cross-border payments. It was enacted on December 29, 1999, and came into force on June 1, 2000, replacing the much stricter Foreign Exchange Regulation Act (FERA), 1973. The problem it solved was FERA's restrictive nature, which was incompatible with India's post-1991 economic liberalization and its goal of promoting foreign trade and investment. The shift from "Regulation" to "Management" signaled a change from a control-based philosophy to a facilitative one, viewing foreign exchange as an asset to be managed rather than a scarce resource to be conserved.
FEMA consists of 49 Sections divided into 7 Chapters. Its core mechanism is the classification of foreign exchange dealings into two categories: Current Account Transactions and Capital Account Transactions. Section 5 makes Current Account Transactions, such as trade-related payments and remittances, generally permissible, subject only to reasonable restrictions by the Central Government. Conversely, Section 6 states that Capital Account Transactions, which involve creating or transferring foreign assets or liabilities (like foreign direct investment), are only permitted to the extent specified by the Reserve Bank of India (RBI). The RBI is the key institution connected to FEMA, as it is empowered to pass regulations and monitor compliance. A major change from FERA is that violations under FEMA are treated as civil offenses, resulting in monetary penalties, whereas FERA violations were criminal offenses that could lead to imprisonment. A recent amendment, introduced by the RBI in January 2025, aims to enhance the use of the Indian Rupee (INR) in cross-border transactions, promoting its internationalization.