Foreign Exchange Management Act

Section 2 contains the definitional foundations of FEMA. The critical distinction is between "current account transactions" (trade, services, remittances — broadly permissible) and "capital account transactions" (investments, borrowings, assets abroad — regulated). "Person resident in India" is defined by physical presence (182 days in the preceding financial year) AND intent — a person who has gone abroad for employment or to carry on a business abroad is NOT resident in India even if they were present for more than 182 days. This definition is central to NRI/PIO transaction compliance. "Foreign exchange" is broadly defined to include not just currency but also cheques, drafts, and balances denominated in foreign currency. "Authorised Person" (typically an AD Category-I bank) is the only entity through which resident Indians can conduct most FEMA transactions.

Section 3 is the general prohibition provision — the foundational rule of FEMA. No person can deal in, transfer, or receive foreign exchange except through an Authorised Person (AD Category-I bank, money changers, etc.) or with specific RBI permission. Making a payment to a person outside India without using an Authorised Dealer is a FEMA violation. Receiving foreign payments outside the banking channel is also prohibited. This section has wide practical implications: hawala transactions, off-shore escrow arrangements not routed through AD banks, informal settlement of cross-border disputes — all are prohibited. The key defence to any FEMA charge is either a general permission (in a notification or regulation) or a specific RBI/government approval.

A person resident in India cannot hold, own, or transfer foreign exchange, foreign securities, or immovable property abroad without authorisation. This is the mirror image of S.3. In practice, general permissions (via RBI notifications) and the Liberalised Remittance Scheme (LRS — currently USD 250,000 per financial year per individual) create broad exceptions for individual residents. Companies can hold foreign exchange in permitted accounts (EEFC accounts). Foreign exchange earned through exports can be retained in EEFC accounts up to 100%. Prohibited: holding foreign bank accounts without disclosure, holding ESOP shares in foreign company without FEMA/RBI permission, undisclosed foreign assets. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 operates alongside FEMA for undisclosed foreign assets.

Current account transactions are broadly permissible — any person can sell or draw foreign exchange through an Authorised Person for current account purposes. Current account transactions include: payment for imports, receipt for exports, payment of services, payment of dividends/profits, personal remittances (medical, education, travel, maintenance of relatives abroad). However, the Central Government has prescribed certain restrictions: some current account transactions require RBI prior approval (Schedule I of FEMA Current Account Transaction Rules 2000), some require government approval (Schedule II), and some are subject to limits (Schedule III — like remittance of gifts, donations, travel allowance). This section is the gateway for most routine business foreign exchange transactions.

Capital account transactions — which change the structure of assets/liabilities between India and outside India — are regulated by the RBI. The RBI, in consultation with the Central Government, specifies which capital account transactions are permissible and sets limits. This section is the source of the entire FDI/ODI/ECB regulatory architecture. Key regulated categories: (a) FDI into India (Foreign Investment in Indian companies — sectoral caps, approval routes); (b) outward investment by Indian companies and individuals (OI Rules); (c) foreign borrowings by Indian companies (ECB regulations); (d) NRI property transactions; (e) guarantees given by residents to non-residents. The Non-debt Instruments Rules (FDI Rules) and the OI Rules 2022 are both made under this section.

Every Indian exporter of goods or services must: (a) declare the correct export value to the RBI (via the EDPMS — Export Data Processing and Monitoring System, routed through the AD bank); and (b) receive and repatriate the export proceeds within the prescribed time limit. Currently, export proceeds must be realised and repatriated to India within 9 months from the date of export (15 months for exports to warehouses abroad). For service exporters (including IT/software, consulting, professionals), proceeds must be repatriated within 9 months. Non-realisation of export proceeds is one of the most common FEMA violations and is compoundable before the Enforcement Directorate.

Any foreign exchange due to or earned by a resident Indian must be realised and repatriated to India. This is the general repatriation obligation — it applies to all foreign exchange income, not just exports. So dividend income earned from a foreign investment, interest on foreign deposits, proceeds from sale of foreign shares, or any other foreign exchange earning must be brought back to India within the RBI-prescribed timeframe (unless the RBI has specifically permitted retention abroad, e.g., in an EEFC account or a foreign currency account permitted under the OI Rules). This section is frequently engaged in FDI return transactions, ODI dividend repatriation compliance, and in NRI/OCI financial planning.

Authorised Persons (APs) are the gatekeepers of India's foreign exchange system — they are licensed by the RBI to deal in foreign exchange. Categories: Authorised Dealer Category-I (AD-I) banks — full-service; AD Category-II (forex non-bank entities, cooperative banks — limited purposes); Authorised Money Changers. APs must comply with all RBI master directions and circulars. Critically, APs have a due diligence obligation — they must be satisfied that transactions are not designed to evade FEMA. This means your bank can (and routinely will) question the purpose and legitimacy of large inward/outward remittances. Rejection by an AP is the first line of FEMA enforcement.

The penalty for any FEMA contravention (whether under the Act, or any RBI regulation, notification, or direction) is up to three times the amount involved. For non-quantifiable violations, the penalty is up to INR 2,00,000. Continuing contraventions attract an additional INR 5,000 per day after the first day. The adjudicating authority can also order confiscation of the foreign exchange/property involved and direct repatriation. FEMA is a civil law — not criminal — so there is no imprisonment for FEMA violations per se (unlike FERA, 1973). However, failure to pay the penalty or comply with an adjudication order can lead to arrest under S.19.

While FEMA itself is a civil statute, non-payment of penalty can result in civil imprisonment. If a person fails to pay the adjudicated penalty within 90 days of receiving the demand notice, and the Adjudicating Authority is satisfied that the person has concealed/transferred assets to evade payment, civil imprisonment can be ordered. Civil imprisonment is imprisonment for contempt of the adjudication order — it is a mechanism to enforce payment, not a criminal sentence. In practice, most FEMA matters are resolved either through compounding (voluntary settlement before adjudication under S.15) or through payment of the adjudicated penalty.

Compounding is the most practical route for resolving FEMA violations. Any person who has violated FEMA can voluntarily apply to the RBI (or Enforcement Directorate for certain categories) to compound the contravention — essentially a negotiated settlement. The compounding amount is based on the nature and quantum of the contravention. Once compounded, no further proceedings can be initiated for that specific contravention. The 3-year moratorium means if the same type of violation is repeated within 3 years of a previous compounding, the repeat cannot be compounded — it goes to full adjudication. Compounding is widely used by Indian companies to clear legacy FEMA violations discovered during due diligence for M&A transactions or public offerings.

The Enforcement Directorate (ED) is the primary enforcement agency under FEMA for large contraventions. The Central Government appoints ED officers as Adjudicating Authorities. The adjudication process is quasi-judicial: the accused is given a show-cause notice, an opportunity to be heard, and can contest the alleged contravention. The Adjudicating Authority has civil court powers — it can compel production of documents, enforce attendance, examine witnesses on oath. For FEMA matters not compounded, the ED adjudicates and imposes penalty. Appeals from ED adjudication orders go to the Appellate Tribunal for Foreign Exchange (FEMA AT) under S.17.

Appeals from ED adjudication orders go to the Appellate Tribunal for Foreign Exchange (FEMA AT) within 45 days of receiving the order. The FEMA AT is an independent appellate body constituted under S.18. The appeal can be filed by the aggrieved person or by the Central Government (if the ED's order was too lenient). The FEMA AT can confirm, modify, or set aside the ED's order. Further appeal from the FEMA AT goes to the relevant High Court within 60 days. The appeal hierarchy is: ED Adjudicating Authority → FEMA AT → High Court → Supreme Court (special leave). Depositing the penalty amount or a portion thereof may be required to file an appeal.

The Appellate Tribunal for Foreign Exchange (FEMA AT) is a statutory independent quasi-judicial body established by the Central Government. It is headed by a Chairperson who must be (or have been) a High Court Judge. The FEMA AT is the primary appellate forum for ED adjudication orders. The AT is currently operational in Delhi (with its principal bench) and has concurrent jurisdiction through the High Courts of various States. The AT is distinct from the Income Tax Appellate Tribunal (ITAT) — though FEMA and PMLA matters can intersect, the AT has exclusive FEMA appellate jurisdiction.

FEMA operates in parallel with, and does not override, other applicable laws. This is a critically important savings clause for practitioners: a transaction that violates FEMA may also violate the Income Tax Act (undisclosed foreign income — Black Money Act), PMLA (money laundering), SEBI regulations (foreign investment rules), or Companies Act (external commercial borrowing limits). Conversely, being permitted under FEMA does not override other regulatory requirements — for example, FDI in a regulated sector still requires SEBI/IRDAI/RBI sectoral approval in addition to FEMA compliance. Always assess multi-statute compliance for cross-border transactions.

The Enforcement Directorate has wide investigative powers — equivalent to those of Income Tax authorities under Chapter XIII of the IT Act. This includes: search of premises, seizure of documents and valuables, examination of persons on oath, summoning, and provisional attachment of assets. Officers of the ED not below the rank of Assistant Director can take cognizance of FEMA contraventions. Unlike income tax, FEMA search proceedings can run concurrently with PMLA investigations (often ED handles both). In practice, major FEMA search actions are combined FEMA+PMLA operations. Companies facing ED investigations must immediately engage qualified FEMA/PMLA counsel.

Customs and Central Excise officers (of Assistant Commissioner rank and above) can be directed by the Central Government to exercise ED powers under FEMA. This creates a joint enforcement framework — customs officers at ports and airports can act as FEMA enforcement officers when directed. This is relevant for export/import-related FEMA violations — over-invoicing, under-invoicing, hawala through trade, and round-tripping are typically investigated jointly by Customs and the ED. Transactions at land borders (particularly relevant for trade with Nepal, Bhutan, Bangladesh, Pakistan) are particularly susceptible to combined Customs-ED enforcement.