Foreign Exchange Management Act (FEMA):

  • FEMA (1999) has been introduced as a replacement for earlier FERA (Foreign Exchange Regulatory Act). It came into effect on 1st June 2000.
  • RBI has given the responsibility to implement it
  • The amendments to the FEMA are advised by RBI through circulars namely AP (DIR)
  • FEMA aims the managing the foreign exchange resources for the economic development of the country.
  • FERA was more on regulation whereas of FEMA on monitoring
  • Under FERA everything was prohibited unless specifically permitted.
  • Under FEMA everything is permitted except what is prohibited.
  • FEMA contains only 49 sections whereas FERA contained 81 sections.
  • FEMA authorizes following categories of Banks, Financial Institutions, & Other organizations to deal in foreign exchange.
  • No individual / organization is allowed to deal in foreign exchange unless it holds a valid license to do so under FEMA.

These authorized persons are classified into 4 categories, as under

AD Category-1:

It compromises of all the commercial banks & other banks. All the current and capital account transactions, according to RBI directions.

AD Category-2:

It compromises of upgraded FFMC’s (Full fledge Money Changers), Cooperative Bank, RRB’s (Regional Rural Bank) & Others. e.g. student paying fees for foreign education, foreginer paying in foreign exchange for the servie provided.

AD Cateogry-3:

It compromises of selected financial & other institutions. Transaction incidental to the foreign exchange activites undertaken by these institution. e.g. Traveler cheques / DD

AD Category-4:

It compromises of Dept of Post, Urban Cooperative Bank & Other FFMC’s. e.g. Money changer shops under Airport