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Powers and functions of National law FEMA

Corporate law (also known as business law or enterprise law or sometimes company law) is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.

While the minute nature of corporate governance as personified by share ownership, capital market, and business culture rules differ, similar legal characteristics - and legal problems - exist across many jurisdictions. In some cases, this may include matters relating to corporate governance or financial law. When used as a substitute for corporate law, business law means the law relating to the business corporation (or business enterprises), i.e. capital raising (through equity or debt), company formation, registration, etc.

Overview of FEMA

The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. In fact it is the central legislation that deals with inbound investments into India and outbound investments from India and trade and business between India and the other countries.

It was passed in the winter session of Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA). This act makes offences related to foreign exchange civil offenses. It extends to the whole of India, replacing FERA, which had become incompatible with the pro-liberalization policies of the Government of India. It enabled a new foreign exchange management regime consistent with the emerging framework of the World Trade Organization (WTO). It also paved the way for the introduction of the Prevention of Money Laundering Act, 2002, which came into effect from 1 July 2005.

The FEMA Provides

  • Free transactions on current account subject to reasonable restrictions that may be imposed. RBI control over Capital Account Transactions.
  • Control over realization of export proceeds.
  • Dealings in Foreign Exchange through Authorised Person ( e.g. Authorised Dealer/ Money Changer/ Off-shore Banking Unit). Adjudication of Offences.
  • Appeal provisions including Special Director (Appeals) and Appellate Tribunal.
  • Directorate of Enforcement.

Main Features of FEMA

  • Acceptance of Payment: Activities such as payments made to any person outside India or receipts from them, along with the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the central government the power to impose the restrictions.
  • Free transactions: Free transactions on current account subject to a reasonable restriction that may be imposed.
  • Specific permission: Without general or specific permission of FEMA, MA restricts the transactions involving foreign exchange or foreign security and payments from outside the country to India – the transactions should be made only through an authorized person.
  • Authorised person: Deals in foreign exchange under the current account by an authorized person can be restricted by the Central Government, based on public interest generally.
  • Restrictions: Although selling or drawing of foreign exchange is done through an authorized person, the RBI is empowered by this Act to subject the capital account transactions to a number of restrictions.
  • Permitted: Residents of India will be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immovable property abroad if the currency, security or property was owned or acquired when he/she was living outside India, or when it was inherited by him/her from someone living outside India.
  • Categories: It classified the foreign exchange transactions in two categories, viz. capital account and current account transactions.
  • Powers to RBI: It gives full freedom to a person resident in India, who was earlier resident outside India, to hold/own/transfer any foreign security or immovable property situated outside India and acquired when s/he was resident.

Powers of FEMA

Accept currency

  1. Deposits, credits and balances payable in any foreign currency.
  2. Drafts, traveller’s cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency.
  3. Drafts, traveller’s cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.

Prohibit following transactions

  1. Dealing in or transfer of Foreign Exchange or Foreign Security to any person other than Authorised Person.
  2. Make any payment otherwise through an authorized person to or for the credit of any person resident outside India in any manner.

Dealing through Authorised person

All financial transactions concerning foreign securities or exchange cannot be carried out without the approval of FEMA. All transactions must be carried out through “Authorised Persons.”


Under FEMA, the adjudicator (an officer with the ED) can impose a penalty three times the size of the contravention involved where the sum is quantifiable. In case the contravention is not quantifiable, the penalty is set at Rs 2 lakh. Further, where the violation is a continuing one, an additional penalty of Rs 5,000 per day of contravention can be imposed.


Specific provision had been done in act to deal with foreign exchange, holding of foreign exchange, Current account transactions Capital account transactions Export of goods and services etc. It helps in better function and keep a flow of money within and outside the country.

Functions of FEMA

Powers to Central Government

It gives powers to the Central Government to regulate the flow of payments to and from a person situated outside the country.

Transaction through authorised person

All financial transactions concerning foreign securities or exchange cannot be carried out without the approval of FEMA. All transactions must be carried out through “Authorised Persons.” It is more transparent in its application as it lays down the areas requiring specific permissions of the Reserve Bank/Government of India on acquisition/holding of foreign exchange.

Public interest

In the general interest of the public, the Government of India can restrict an authorized individual from carrying out foreign exchange deals within the current account.

Restriction on transaction

Empowers RBI to place restrictions on transactions from capital Account even if it is carried out via an authorized individual.

Restriction to people

As per this act, Indians residing in India, have the permission to conduct a foreign exchange, foreign security transactions or the right to hold or own immovable property in a foreign country in case security, property, or currency was acquired, or owned when the individual was based outside of the country, or when they inherit the property from individual staying outside the country.

Nature of Law

This act is a civil law and the contraventions of the Act provide for arrest only in exceptional cases.


The act is applicable to all branches, offices, branches outside India own and control by person resident in India.


Indeed, FEMA was drafted to create a more liberal foreign exchange market in India. The Act encouraged deregulation of foreign exchange and smooth international trade. FEMA also has a distinct administrative difference from FERA, which sought to impose sweeping regulations on every aspect of India forex transaction. On the other hand, FEMA aimed to manage only certain forex transactions that might have an impact on national security and the wider national economy, and opened up individual forex transactions to the free market.

About the Author

Tukaram Shrirang Lad of MGM Law College Nerul.

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