Foreign Exchange Management Act, 1999 (FEMA): How It Regulates Foreign Exchange in India

The Foreign Exchange Management Act (FEMA) is a legislation enacted by Government of India in the year 1999 to manage foreign exchange of India. It replaced the Foreign Exchange Regulation Act (FERA) which was a strict legislation that made all the violations a criminal offense. However FEMA is very simple legislation which makes rules for foreign exchange transactions whether it is cross border transaction or foreign investment in India or remittance out of India. With the introduction of this legislation, India has become a globalized economy, a transparent economy and also very investor friendly economy.

FEMA

Ease of Trade

FEMA has made it very easy for both, the Citizens of India as well as Foreign Citizens to carry out any transactions whether of a personal in nature or of a commercial nature and also to carry out any trade whether within India or from India to any other part of the world. This would include a case of a traveler repatriating his / her funds, a student paying his / her fees for studying abroad, etc.

Money Flow Control

The flow of foreign currency or currency (including securities) leaving the country or entering India would be regulated by FEMA so that the value of the Indian rupee does not depreciate.

Reserve Management

Foreign currency not to be used for prohibited purposes, reserve to be maintained for such purposes as may be required for making payments in foreign currency for purposes for which such currency is permitted to be brought into or sent out of India and for such other purposes for which reserve is required to be held by a person in foreign currency.
Boost to the Economy

With the help of Foreign exchange that is invested in India and Indians can start up businesses across the globe provided and more importantly it is done in a transparent and legal manner.

Global Alignment

In international trade, all countries of the world are governed by the rules of international trade. They are governed by some global organizations too. The main aim of the Foreign Exchange Management Act i.e. FEMA is to bring global alignment in foreign exchange management and foreign trade for the country and its people and therefore the Foreign Exchange rules of India are also being governed by the same rules as are being governed by rest of the world.

Applicability of FEMA Act

The Act FEMA (Foreign Exchange Management Act) is used for the purpose of Foreign exchange/Foreign security to prohibit their use for Anti money laundering and to regulate the same in the territory of and outside India applies equally to all offices / agencies in India and outside owned / managed by persons resident in India. Its headquarters is in New Delhi and is known as Enforcement Directorate. It applies to all of the following.

• Foreign exchange.
• Foreign security.
• Exportation of any commodity and/or service from India to a country outside India.
• Importation of any commodity and/or services from outside India.
• Securities as defined under Public Debt Act 1994.
• Transfer (of any kind) i.e. Purchase/sale/exchange etc. of any kind.
• Banking, financial and insurance services.
• An overseas company in which an NRI is a shareholder up to a maximum of 60%.
• A citizen of India, residing in or outside of India.
• Current Account transactions under FEMA Act has been classified in three categories as under-
• Transactions prohibited by FEMA,
• The transaction requires Central Government’s permission,
• The transaction requires RBI’s permission.

Authorised Dealers under FEMA Act

Category	Entities Covered	Permitted Activities
Authorized Dealer – Category I	Commercial Banks State Co-operative BanksUrban Co-operative Banks	All current and capital account transactions as permitted by the RBI guidelines
Authorized Dealer – Category II	Upgraded Full Fledged Money Changers (FFMCs)Co-operative BanksRegional Rural Banks (RRBs) and others	All FFMC activitiesSpecified non-trade related current account transactions
Authorized Dealer – Category III	Select financial and other institutions	Foreign exchange transactions as permitted by RBI
Full Fledged Money Changers (FFMCs)	Department of PostUrban Co-operative BanksOther licensed FFMCs	Purchase and sale of foreign exchange for private and business visits abroad

Route for Drawal of Foreign Exchange

According to the Reserve Bank of India, Foreign Exchange can be drawn from any authorized dealer by the Prior Approval Route or General Permission Route.

S.No.	Particulars	Limitations
1	Visiting privarely to any country (except Bhutan and Nepal)	10,000 US dollars or its equivalents for one or more private visits in one year.
2	Donations/Gift per donor	Remittance should not exceed 1,25,000 US dollar during a Financial Year
3	Corporate Donations	1 percent of the forex earnings during the preceeding three Financial Year or 5 million US dollar, whichever is less, for a specified purpose
4	Going out of India for the purpose of employment	1,00,000 US dollar one time only
5	Remittance facility for emigrations	1,00,000 US dollar or the prescribed amount by country of emigration not exceeding 1,00,000 US dollar one time only.
6	Remittance for maintenance of relatives (only close relative) outside India	salary (after the deduction of income tax, Provident Fund and other deduction) of a person not being a permanent resident in India and a citizen of foreign state other than Pakistan. Or 1,00,000 US dollar a year per recipient in all other cases
7	Business Travel Abroad	25000 US dollar per trip respective of stay
8	Attending specialized training or conference	25000 US Dollar
9	For Medical treatment	1,00,000 US Dollar
10	Maintenance of a patient going for medical check-up or medical treatment abroad	25000 US Dollar
11	For Studying in Abroad	1,00,000 US Dollar per academic Year or the Institution’s estimation whichever is higher.
12	Meeting the expenses of a person accompanying as attendance to a patient going medical check-up or for medical treatment abroad	25000 US Dollar
13	Payment of commission to an agent outside India for selling of commercial or residential plot or flats in India	25000 US Dollar or 5 % of inward remittance per transactions whichever is higher
14	Consultancy services from abroad	1 million US Dollar per project to 10 million US Dollar per project (for infrastructure project) 1 million US Dollar In all other cases.
15	Pre-incorporation’s expenses reimbursement	100,000 US Dollar or 5 percent of the investment brought into India whichever is higher,
16	Remittance for purchase and/or use of Trade mark	Allowed without any approval of Reserve Bank of India
17	Remittance for securing Health Insurance for from a foreign company	Freely allow
18	Remittance of royalty and payment of lump sum fee under the technical collaboration agreement	Freely allow without any prior approval of RBI
19	Release of exchange for medical treatment outside India when a person has fallen sick after proceeding abroad	Extent of USD 1,00,000 without any hassles and any loss of time on the basis of self declarations
20	Small Value Remittance	Up to USD 25000 (form A2)

Foreign Exchange Transactions Needing Central Government Approval

• Cultural tours.
• Advertisement in print media of a foreign country for any purpose other than promoting tourism, international bidding and foreign investments (exceeding 10000 US Dollar) by a State Government and its Public Sector Units.
• Payment of importation by a Public Sector Unit or a department of government on c.i.f. basis only for importation through ocean transport.
• Remittance of freight of vessels chartered.
• Remittance of detention charges of container exceeding the DGS’s (Director General of Shipping) prescribed rate.
• Remittance of Prize money/sponsorship of any activity of sport outside India by a person other than national/ international/street level sports bodies, if the amount of the prize money/sponsorship exceeds 1,00,000 US Dollars.
• Remittance of hiring charges of transponders.
• Internet Service Providers.
• TV channels.
• Remittance for P&I Club ministry’s membership.
• Remittance by Multi-model transport operators to their agents in abroad.

Penalties Under FEMA

FEMA establishes a clear framework for dealing with contraventions, which means violations or breaches of its provisions, rules, or regulations. The penalties imposed under FEMA are primarily monetary, but can also involve confiscation of property and, in severe cases or for non-payment, even imprisonment.

1. General Monetary Penalties:

• Quantifiable Contravention: If the amount involved in the contravention can be determined, the penalty may be up to three times the sum involved.
• Non-Quantifiable Contravention: If the amount cannot be ascertained, a fixed penalty of up to ₹2,00,000 can be imposed.
• Continuing Contravention: For ongoing violations, an additional penalty of up to ₹5,000 per day may be levied for each day the contravention continues beyond the first day.

2. Penalties for Illegal Acquisition of Foreign Assets:

• If a person acquires foreign exchange, foreign security, or immovable property outside India exceeding ₹1 crore in contravention of FEMA, they are liable to:
  • A penalty of up to three times the sum involved.
  • Confiscation of the equivalent value of property situated in India.
  • Imprisonment for a term extending up to five years, along with a fine.

3. Confiscation of Property Involved in Contravention:

• The Adjudicating Authority has the power to confiscate any currency, security, or other property directly linked to the contravention.

4. Civil Imprisonment for Non-Payment of Penalty:

• If a person fails to pay the penalty within 90 days of receiving the payment notice, they may be subjected to civil imprisonment. The duration depends on the penalty amount:
  • For penalties exceeding ₹1 crore: Up to three years.
  • In all other cases: Up to six months.
• It’s important to note that civil imprisonment does not relieve a person from liability to pay the original penalty.

5. Right to Appeal:

• An appeal against an order passed by the Adjudicating Authority can be made to the Special Director (Appeals) within 45 days of receiving the order.
• Further appeals can be made to the Appellate Tribunal for Foreign Exchange, and subsequently, on questions of law, to the High Court.
• Throughout this appeal process, a person can seek assistance from a Chartered Accountant or a Legal Practitioner.

FAQs on Compounding of Contraventions under FEMA, 1999

FAQs attempt to put in place the common queries that users have on the subject in easy-to-understand language. However, for the purposes of compounding, the provisions under Foreign Exchange Management Act, 1999 (FEMA), the Foreign Exchange (Compounding Proceedings) Rules, 2024 and Directions – Compounding of Contraventions under FEMA, 1999, ‘may be referred to.

Q.1. What is meant by contravention and compounding of contravention?

Ans. Contravention is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued thereunder. Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. The Reserve Bank is empowered to compound any contravention as defined under section 13 of FEMA, 1999 except the contravention under section 3(a) ibid, for a specified sum after offering an opportunity of personal hearing to the contravener. It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention. It provides comfort to any person who contravenes any provisions of FEMA, 1999 by minimizing transaction costs. Further, cases falling under Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2024, shall not be eligible for compounding by the Reserve Bank.

Q.2. Who can apply for compounding?

Ans. Any person who contravenes any provision of the FEMA, 1999 [except section 3(a)] or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act or contravenes any condition subject to which an authorization is issued by the Reserve Bank, can apply for compounding to the Reserve Bank. Applications seeking compounding of contraventions under section 3(a) of FEMA, 1999 may be submitted to the Directorate of Enforcement (DOE).

Q.3 When should one apply for compounding?

Ans. When a person is made aware of the contravention of the provisions of FEMA, 1999 by the Reserve Bank or any other statutory authority or the auditors or by any other means, such person may apply for compounding either suo moto or based on a Memorandum of Contraventions issued by the Reserve Bank.

Q.4. What is the procedure for applying for compounding?

Ans. A contravener may submit a compounding application form, physically or through PRAVAAH Portal of the Reserve Bank along with the documents/formats provided as Annexure I, Annexure II and Annexure III of the Directions – Compounding of contraventions under FEMA, 1999.

Q.5. Are any fees required to be paid for seeking compounding?

Ans. Yes. All compounding applications shall be submitted along with the prescribed fee of ₹10,000/- (plus applicable GST, which at present is 18%) by way of demand draft in favour of “Reserve Bank of India” and payable at the concerned Regional Office/ CO Cell, New Delhi/ Central Office or through National Electronic Fund Transfer (NEFT), or other permissible electronic or online modes of payment. The necessary details for making the payment through electronic mode is provided in Annexure I in Directions – Compounding of contraventions under FEMA, 1999. In case application fee is paid through NEFT or other permissible electronic mode of payment, it may be ensured that intimation of payment of applications fee, to respective RO, CO Cell, or Central Office, as case may be, shall be made as soon as possible but not later than 2 hours from time of payment, through an email as per the template provided in Para B of Annexure I of Directions – Compounding of contraventions under FEMA, 1999.

It may further be noted that in case compounding application is returned for any reason, The application fee, if paid, shall not be returned in case of return of the compounding application. However, in case such applications are re-submitted, then the application fee need not be paid again.

Q.6. What are the details required to be filled in the application form?

Ans. Along with the application in the prescribed format, the applicant may also furnish the details as per the Annexures – relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as applicable, (Annexures available in the Directions – Compounding of contraventions under FEMA, 1999, as mentioned in answer to Q. 4 above) along with an undertaking that they are not under investigation of DOE,., a cancelled cheque copy, a copy of the Memorandum of Association while applying for compounding of contraventions under FEMA, 1999. Application submitted to the Reserve Bank must contain contact details i.e., name of the applicant / authorised official or representative of the applicant, telephone/ mobile number and email ID.

Q.7. Where should one apply for compounding?

Ans. A contravener may submit compounding application form along with relevant documents/ Annexures to the Reserve Bank as provided in paragraphs 2.1, 2.2, 2.3 and 2.4 of Directions – Compounding of contraventions under FEMA, 1999.

Q.8. Can an application for compounding be sent to the Reserve Bank pending fulfillment of certain obligations?

Ans. No. All requisite approvals should be obtained, and compliances should be completed before seeking compounding of contravention. Compounding can be done only after all the necessary administrative action is complete as mentioned in Paragraph 4.2 of Directions – Compounding of contraventions under FEMA, 1999, Copies of approvals and other compliances should be enclosed along with the application.

Q. 9. What are sensitive contraventions?

Ans. Cases involving serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation are categorized as sensitive contraventions. These contraventions shall not be compounded by the Reserve Bank of India.

Q. 10. Is it mandatory to appear for the personal hearing?

Ans. Personal Hearing can either be on physical basis or through virtual mode. However, it is not mandatory to attend/opt for the personal hearing. In case a person opts not to attend the personal hearing he//she may indicate his/her preference in writing. The application would be disposed of on the basis of documents submitted to the Compounding Authority. It may be noted that appearing for, or opting out of the personal hearing does not have any bearing, whatsoever, on the compounding amount that may be mentioned in the compounding order, as the compounding amount is calculated based on the Para 5.4 of Guidance note on computation matrix as contained in the Directions – compounding of contraventions under FEMA, 1999.

Q.11. Can the applicant authorise another person to attend the personal hearing?

Ans. Yes, another person may be authorised by the applicant to attend the personal hearing on his behalf but only with proper written authority. It has to be ensured that the person appearing on behalf of the applicant is conversant with the nature of contravention applied for. However, the Reserve Bank encourages the applicant to appear directly for the personal hearing rather than being represented/ accompanied by legal experts/consultants, etc. as the compounding is only for admitted contraventions.

Q.12. How is the compounding process brought to conclusion?

Ans. The Compounding Authority passes an order indicating details of the contravention and the provisions of FEMA, 1999 that have been contravened. The compounding amount is indicated in the compounding order. The process of compounding is brought to a conclusion by payment of the compounding amount indicated in the compounding order.

Q.13. What is the criteria for calculation of compounding amount?

Ans. The guidance structure for calculating the amount to be imposed on compounding is available at paragraph 5.4 of Directions – Compounding of Contraventions under FEMA, 1999. It may, however, be noted that the guidance structure is only for the purpose of broadly standardizing the amount imposed by the compounding authorities across offices and the actual amount imposed may vary, depending on the circumstances of the case taking into account the factors given in paragraph 5.3 of Directions – Compounding of Contraventions under FEMA, 1999.

Q.14. When should the amount indicated in the order be paid?

Ans. The compounding amount as specified in the compounding order shall be paid by way of demand draft in favour of the “Reserve Bank of India” or National Electronic Fund Transfer (NEFT), or Real Time Gross Settlement (RTGS), or such other permissible electronic or online modes of payment within 15 days from the date of the order of compounding of such contravention. The manner in which the demand draft has to be drawn and deposited/ details of bank account for transferring through electronic mode of payment shall be indicated in the compounding order.

Q.15. How does the application for compounding finally get disposed of?

Ans. On realization of the sum for which contravention is compounded, a certificate shall be issued by the Reserve Bank, indicating that, the applicant has complied with the order passed by the Compounding Authority.

Q.16. What happens if the amount is not paid within 15 days of the order?

Ans. In case of non-payment of the amount indicated in the compounding order within 15 days of the order, it will be treated as if the applicant has not made any compounding application to the Reserve Bank and the other provisions of FEMA, 1999 regarding contraventions will apply. Such cases will be referred to the DoE for necessary action.

Q.17. Can there be an appeal against the order of the Compounding Authority?

Ans. As compounding is based on voluntary admissions and disclosures, there is no provision under the of Foreign Exchange (Compounding Proceedings) Rules, 2024, for an appeal against the order of the Compounding Authority or for a request for reduction of amount imposed or extension of period for payment of the amount imposed.

Q.18. What is the timeframe for completing the compounding process?

Ans. The compounding process is completed within 180 days from the date of receipt of the application complete in all aspects, by the Reserve Bank.

Q.19. Where can one get more details about compounding?

Ans. One can refer to Directions – Compounding of contraventions under FEMA, 1999, available on Reserve Bank’s website.

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