The Foreign Exchange Management Act, 1999: formula sheet

Key formulas

Object of FEMA

Facilitate external trade and payments + promote orderly development and maintenance of the foreign exchange market in India

Use these words in a descriptive answer on objectives.

Nature of the Act

FERA 1973 = regulation and control (criminal consequences); FEMA 1999 = management and facilitation (civil liability for contravention)

Core of the FERA vs FEMA comparison. Under FEMA, contraventions attract civil penalties, not arrest by default.

Extent and applicability

Whole of India + branches, offices and agencies outside India owned or controlled by a person resident in India + contraventions outside India by persons to whom the Act applies

Mention all three limbs.

Person resident in India (individual)

s.2(v)(i): A person residing in India for more than 182 days during the preceding financial year, but not including (A) a person who has gone out of India or stays outside India (a) for or on taking up employment outside India, (b) for carrying on outside India a business or vocation, or (c) for any other purpose indicating an intention to stay outside India for an uncertain period; or (B) a person who has come to or stays in India otherwise than (a) for or on taking up employment in India, (b) for carrying on in India a business or vocation, or (c) for any other purpose indicating an intention to stay in India for an uncertain period.

The test combines the length of stay in the preceding financial year with the purpose of stay or departure. Citizenship does not decide residence.

Person resident in India (entities)

s.2(v)(ii): a person or body corporate registered or incorporated in India; s.2(v)(iii): an office, branch or agency in India owned or controlled by a person resident outside India; s.2(v)(iv): an office, branch or agency outside India owned or controlled by a person resident in India

Mention each limb separately in a written answer.

Person resident outside India

s.2(w): A person who is not resident in India

Defined by exclusion.

Current account transaction

s.2(j): A transaction other than a capital account transaction; it includes payments due in connection with foreign trade, other current business, services and short-term banking and credit facilities in the ordinary course of business

It also includes payments due as interest on loans and as net income from investments, remittances for living expenses of parents, spouse and children residing abroad, and expenses on foreign travel, education and medical care of parents, spouse and children. Under s.5, any person may sell or draw foreign exchange for a current account transaction, but the Central Government may, in public interest and in consultation with the Reserve Bank, impose reasonable restrictions as prescribed.

Capital account transaction

s.2(e): A transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India, or assets or liabilities in India of persons resident outside India

Section 6 governs these transactions. The Reserve Bank (for debt instruments) and the Central Government (for other transactions) specify the permissible classes, limits and conditions. Typical examples are a resident borrowing from, lending to, or investing in shares or property outside India.

Section 3 prohibition

No dealing in foreign exchange or foreign security except through an authorised person

Also no payment to or from a person outside India except through an authorised person, unless the Act, rules or regulations allow otherwise.

Section 4 restriction

Except as otherwise provided in the Act, a person resident in India may not acquire, hold, own, possess or transfer foreign exchange, foreign security or immovable property outside India

Section 6(4) lets a resident hold such assets if acquired or held when resident outside India, or inherited from a person resident outside India. Section 9 and the rules and regulations also carve out cases.

Authorised person (section 2(c))

Authorised dealer + money changer + offshore banking unit + any other person authorised under section 10(1)

Authority is given by the RBI in writing, with conditions. The RBI may revoke it in public interest or for non-compliance or contravention. For the non-compliance or contravention ground, a reasonable opportunity of making a representation must be given first.

Current account transaction (section 2(j))

Transaction that does not alter the assets or liabilities, including contingent liabilities, outside India of a person resident in India, or in India of a person resident outside India

Examples: foreign trade payments, interest, living expenses, travel, education and medical expenses.

Capital account transaction (section 2(e))

Transaction that alters assets or liabilities outside India of a resident, or in India of a non-resident

Examples: borrowing, lending, investment, guarantees. Allowed only as permitted under section 6 by the RBI or the Central Government.

Section 5 rule

Current account: free, subject to reasonable restrictions imposed by the Central Government in consultation with the RBI

Restrictions are set through rules. Schedules to the Current Account Transactions Rules, 2000 list prohibited and permission-linked items, so check the facts for the item.

Section 6 rule

Capital account: only as permitted. Debt instruments: classes and limits specified by the RBI in consultation with the Central Government. Other transactions: prescribed by the Central Government in consultation with the RBI

The default for capital account is permission, not freedom.

Section 7 and 8 duties

Section 7: every exporter furnishes a declaration and information to the RBI or specified authority. Section 8: any resident in India to whom foreign exchange is due or has accrued takes all reasonable steps to realise and repatriate it within the period and manner specified by the RBI

Export proceeds are one application of section 8, which is wider than exporters. Save as otherwise provided in the Act. The period and manner are set by RBI regulations.

Section 9 exemption

Sections 4 and 8 do not apply to the specified cases

Section 9 exempts only the specified cases from sections 4 and 8, and the limits are as specified by the RBI. Do not list the cases or quote limits from memory. State that the exemption applies only to cases specified under the section.

RBI powers over authorised persons (not checked against the supplied text)

RBI → authorises dealer / money changer / other person to deal in foreign exchange; issues directions; inspects their business

These powers come from sections of FEMA outside the text this page was checked against. Learn the general rule and confirm section numbers, penalty amounts and conditions from your study material.

Adjudicating Authority (section 16)

Appointed by Central Government → written complaint by authorised officer → inquiry → hearing → order (contravention and penalty)

Hearing before an order is a must. The person may appear in person or through a legal practitioner or chartered accountant.

First appeal (section 17)

Order of an Adjudicating Authority who is an Assistant Director or Deputy Director of Enforcement → Special Director (Appeals) within 45 days of receiving the order copy

The Special Director (Appeals) may entertain a late appeal if there was sufficient cause for the delay.

Second appeal (section 19)

Order of the Special Director (Appeals), or of an Adjudicating Authority not covered by section 17 → Appellate Tribunal within 45 days of receiving the order copy

The Central Government or any aggrieved person may appeal. The Tribunal may entertain a late appeal for sufficient cause.

High Court appeal (not checked against the supplied text)

Appellate Tribunal decision → High Court, on a question of law only

This stage is outside the supplied official text. Confirm the section number and the time limit from your study material before quoting them.

Pre-deposit rule (proviso to section 19(1))

Appeal to the Appellate Tribunal against an order levying a penalty → deposit the penalty amount while filing the appeal, with the authority notified by the Central Government

The Appellate Tribunal may dispense with the deposit if it thinks the deposit would cause undue hardship, subject to conditions to safeguard realisation of the penalty. Section 17 has no such deposit proviso.

Penalty under section 13 (quantifiable)

Maximum penalty = 3 × sum involved in the contravention

'Up to' three times. The authority fixes the actual amount after a hearing.

Penalty under section 13 (not quantifiable)

Maximum penalty = ₹2,00,000

Applies only where the sum involved cannot be quantified.

Continuing contravention

Further penalty up to ₹5,000 × number of days after the first day

Count days after the first day only. This is in addition to the main penalty.

Confiscation (section 13)

Adjudicating authority may confiscate currency, security or property involved and direct repatriation or retention of foreign exchange holdings

Given in addition to the penalty, not instead of it.

Foreign assets above threshold (section 13(1A) to 13(1D))

Foreign exchange, foreign security or immovable property outside India acquired, aggregate value above the threshold under the proviso to section 37A(1) → penalty up to 3 × sum involved + confiscation of equivalent value in India (13(1A)); prosecution on recommendation and direction (13(1B)); imprisonment up to 5 years and fine (13(1C)); cognizance only on written complaint of an officer not below Assistant Director (13(1D))

This is the exception to the general civil nature of FEMA. The imprisonment is in addition to the penalty under section 13(1A).

Compounding (section 15)

Application by the person committing the contravention → compounded by the Director of Enforcement or other officers of the Directorate of Enforcement, and officers of the Reserve Bank, as authorised by the Central Government in the prescribed manner → within 180 days from receipt of the application; no further proceedings after compounding

The contravention must be one under section 13. Compounding is not available where a contravention is repeated within 3 years, or in cases barred by the Compounding Rules, such as cases suspected to involve money laundering, terror financing or a threat to national security. The 180 days runs from receipt of the application. It is the time for compounding, not for filing the application.

Civil imprisonment (section 14)

Penalty unpaid for 90 days from the date of notice for payment → after hearing, civil prison up to 3 years if penalty exceeds ₹1 crore; up to 6 months in other cases

Only after the person is given an opportunity to be heard. It is civil imprisonment and follows failure to pay the penalty. It is different from the imprisonment of up to 5 years under section 13(1C).

Contraventions by companies (section 42)

Person in charge of and responsible for the company's business, plus any director, manager, secretary or other officer with consent, connivance or neglect, is deemed guilty

A person who proves the contravention happened without his knowledge or that he exercised all due diligence is not liable.

Seizure of equivalent assets (section 37A)

Authorised Officer has reason to believe foreign assets are suspected to be held in contravention of section 4, records reasons in writing and, by his own order, seizes equivalent value in India → places the order before the Competent Authority (not below Joint Secretary) within 30 days of seizure → Competent Authority confirms or sets aside within 180 days of seizure, after hearing both sides

Applies where foreign exchange, security or immovable property outside India is suspected to be held in contravention of section 4. No seizure is made where the aggregate value of the foreign assets is less than the prescribed value. The 30 days is the deadline for placing the order before the Competent Authority, not for confirmation.

Appeals

Adjudicating Authority → Special Director (Appeals) → Appellate Tribunal → High Court (question of law)

Time limits are short, so state the forum order in answers.

FDI vs FPI test

Unlisted company: any investment = FDI. Listed company: 10% or more of post-issue paid-up equity capital (fully diluted) = FDI; below 10% = FPI

State the 10% test with the words 'fully diluted' and 'post-issue'.

Automatic route

Sector permitted + within cap + conditions met = no prior approval

Reporting after investment is still required.

Government route

Sector needs approval, or above the automatic cap, or land-border country investor in a permitted sector = prior Government approval

Approval is processed through the administrative ministry or department concerned. A prohibited sector is never permitted, even under the government route.

Non-debt instruments

Equity shares (including partly paid equity shares) + preference shares and debentures that are fully, compulsorily and mandatorily convertible + units of certain investment vehicles + others notified

The conversion test decides preference shares and debentures: optionally convertible or not fully convertible ones are treated as debt, outside these rules. Partly paid status is not a separate debt test; partly paid equity shares remain non-debt.

Overseas investment forms

ODI = unlisted equity, or 10% or more of listed, or control; OPI = investment in foreign securities other than ODI, excluding unlisted debt instruments, security receipts and other items specified in the Rules. Financial commitment by an Indian entity is subject to the limits in the Overseas Investment Rules, 2022 and Regulations

Governed by the Overseas Investment Rules, 2022. ODI is prohibited in real estate activity and gambling; banking and financial services only under conditions. Check your ICAI study material for the exact OPI exclusions and the financial commitment limit.

Prohibited FDI sectors

Lottery, gambling and betting, chit funds, Nidhi companies, real estate business, TDR trading, agricultural or plantation activity (other than specified permitted activities such as floriculture, horticulture and tea plantation), manufacture of cigars, cheroots, cigarillos and cigarettes of tobacco or tobacco substitutes

This list is drawn from the Non-debt Instruments Rules, 2019 (Schedule I notes), not from the FEMA Act text. Exceptions exist for some entries, such as the NRI/OCI non-repatriation exception for chit funds, construction development under real estate and the permitted agricultural and plantation activities. Verify the list and exceptions against your ICAI study material.

Quick revision

• FEMA 1999 is a civil law that facilitates external trade and payments and orderly development of the foreign exchange market.
• Residency under FEMA depends on the person's stay and intention, not citizenship. Check the exact definition in your study material.
• A person resident outside India is anyone who is not a person resident in India.
• Current account transactions are generally free, subject to restrictions the Central Government may impose in consultation with the RBI.
• Capital account transactions: the RBI specifies by regulation the permissible classes and limits, in consultation with the Central Government. The Central Government makes rules (for example, the Non-debt Instruments Rules, 2019) on the classes of transactions and on prohibited or restricted matters.
• Only an authorised person may deal in foreign exchange or foreign securities.
• The Central Government makes rules, and the RBI issues regulations, directions and permissions.
• Contraventions mainly attract monetary penalties decided by an adjudicating authority.
• Compounding of contraventions is available and is handled under the prescribed rules.
• Always classify the investor and the route before applying a foreign investment condition.
• Overseas investment by residents follows the prescribed rules and regulations, so check limits and conditions in the latest material.
• In written answers, name the provision, apply it to the facts, and end with a clear conclusion.

Common mistakes

• Saying FEMA is a criminal law like FERA. Fix: Write that FEMA contraventions attract civil liability, with monetary penalties, unlike the criminal approach of FERA.
• Deciding residence by citizenship. Fix: FEMA residence depends on stay, purpose and, for entities, registration or incorporation. A foreign citizen living in India can be a resident.
• Saying current account transactions are completely free. Fix: Write 'free, subject to reasonable restrictions imposed by the Central Government in consultation with the RBI'.
• Treating any loan or investment as current account. Fix: Apply the statutory test: does it alter assets or liabilities outside India of a resident, or in India of a non-resident? If yes, it is capital account.
• Saying the RBI adjudicates contraventions of FEMA. Fix: The RBI regulates and authorises. The Adjudicating Authority, appointed by the Central Government, holds the inquiry and decides the penalty for contraventions under section 13. The RBI's own penalty power relates to its directions to authorised persons; confirm the details from your study material.
• Sending every first appeal to the Special Director (Appeals), or every appeal straight to the Appellate Tribunal. Fix: Check who passed the order. If the Adjudicating Authority is an Assistant Director or Deputy Director of Enforcement, the appeal goes to the Special Director (Appeals). Other Adjudicating Authorities' orders and the Special Director (Appeals)'s orders go to the Appellate Tribunal.
• Writing that the penalty is exactly three times the sum involved. Fix: Say the penalty is up to three times. The authority decides the actual amount after hearing the person.
• Counting the daily penalty from the first day of contravention. Fix: Subtract one day. A contravention that lasts 21 days gives 20 days of daily penalty.
• Saying automatic route means no compliance at all. Fix: Say that prior approval is not needed, but sectoral conditions apply and reporting to the RBI through the authorised dealer is mandatory.
• Treating all investment above 10% in a listed company as portfolio investment. Fix: Remember that 10% or more of post-issue paid-up equity (fully diluted) is FDI. Below 10% is FPI.

Exam tips

• Learn the objective, extent and FERA vs FEMA points as short, numbered lists. They are common 4 to 5 mark theory questions.
• For residence cases, always write the rule first, then the facts, then the conclusion. Do not just write 'resident' or 'non-resident'.
• In case studies, state the date of each transaction and the person's residence status on that date before you classify the transaction.
• Practise MCQs that give a company, a branch, or an NRI and ask for residence status. Use the registration or incorporation test for entities.
• Memorise two or three examples of current account and capital account transactions each. Examples make a definition answer complete.
• Quote section numbers only when you are certain of them. Otherwise quote the definition in words.
• Learn the definitions of current account and capital account transaction word for word. The test of altering assets or liabilities is the most examined idea.
• In scenario questions, name the section first. Marks often depend on citing sections 3, 5, 6, 8 or 10 correctly, and only when you are certain of the number.