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Markets & Regulators

FEMA, 1999

The Foreign Exchange Management Act, 1999 governs all forex dealings in India; exams ask how it differs from FERA, the current vs capital account rule, and the roles of the RBI and ED.

Pareto Academy · updated 26 October 2026

At a glance

The Foreign Exchange Management Act, 1999 (FEMA) is India's law on foreign exchange: who may deal in it, for what purposes, and on what terms. It replaced the restrictive FERA, 1973 and treats forex violations as civil wrongs punished with penalties rather than as crimes. The RBI writes the detailed rules for the forex market and Authorised Dealer banks, while the Enforcement Directorate investigates contraventions.

Key facts

  • Act number: Act No. 42 of 1999; assented 29 December 1999
  • In force: 1 June 2000
  • Replaced: Foreign Exchange Regulation Act (FERA), 1973
  • Nature: civil law; contraventions attract monetary penalties, not imprisonment (except for failing to pay a penalty)
  • Objective (preamble): to facilitate external trade and payments and promote the orderly development of India's forex market
  • Section 5: current account transactions are free unless restricted by the Centre
  • Section 6: capital account transactions are allowed only as permitted by the RBI (with the Centre for some classes)
  • Section 10: RBI authorises "Authorised Persons" (Authorised Dealer banks, money changers) to deal in forex
  • Section 11: RBI can give directions to Authorised Persons
  • Enforcement: Directorate of Enforcement (ED), Department of Revenue, Ministry of Finance
  • Liberalised Remittance Scheme (LRS): introduced 2004; resident individuals may remit up to USD 250,000 per financial year

How it works

Point FERA, 1973 FEMA, 1999
Approach Regulate and conserve scarce forex Manage and facilitate forex flows
Offences Criminal Civil
Presumption Everything banned unless permitted Current account free; capital account as permitted
Burden of proof On the accused On the authority

Current vs capital account. Current account transactions are day-to-day payments that do not change a person's foreign assets or liabilities: trade, travel, education fees, gifts, interest. Capital account transactions change assets or liabilities across borders: buying foreign property or shares, foreign direct investment, external commercial borrowing. India has full current account convertibility (since 1994) but only partial capital account convertibility.

Who does what:

  • Central government: makes rules, especially on current account transactions.
  • RBI: frames regulations and Master Directions, licenses Authorised Dealers, sets hedging rules for forex derivatives and compounds (settles) contraventions on application.
  • ED: investigates and adjudicates serious contraventions; appeals go to the Appellate Tribunal and then the High Court.

Recent developments

  • 23 Oct 2026: RBI delegated compounding of certain FEMA contraventions (overseas investment, borrowing and lending, guarantees) to its Regional Offices (A.P. (DIR Series) Circular No. 28).
  • 15 Oct 2026: RBI issued FAQs on the new Foreign Exchange Risk Reserve.
  • 10 Oct 2026: Under Sections 10(4) and 11(1) of FEMA, the RBI barred rebooking of cancelled INR forex derivative contracts and cut the limit for hedging without proof of underlying exposure from USD 100 million to USD 5 million (Circular No. 25). It also created the Foreign Exchange Risk Reserve: Authorised Dealers must keep 20% of the notional value of dollar-buying current-account hedges above USD 2 million as cash with the RBI (Circular No. 26).
  • 7 Oct 2026: RBI announced a Technical Consultative Committee for Financial Markets covering the money, G-sec and forex markets.

Exam traps

  • FEMA replaced FERA; PMLA (2002) is a separate, criminal law, though the ED enforces both.
  • FEMA was passed in 1999 but came into force on 1 June 2000.
  • Current account = free unless restricted; capital account = restricted unless permitted.
  • A.P. (DIR Series) circulars are RBI instructions to Authorised Dealers under FEMA, not SEBI circulars.
  • Compounding (voluntary settlement of a contravention) is done by the RBI, not by the ED.

Quick check

  • Q: Which law did FEMA replace? A: FERA, 1973.
  • Q: Are FEMA violations civil or criminal? A: Civil.
  • Q: What is the annual LRS limit for a resident individual? A: USD 250,000.

Further reading

Sources

In the news

Every time this topic has appeared in our current affairs, newest first:

  1. Week of 15–21 October 2026RBI issues FAQs on the new Foreign Exchange Risk Reserve
  2. Week of 8–14 October 2026RBI curbs forex derivatives: no rebooking, and the "no-proof" limit cut from USD 100 million to USD 5 million
  3. Week of 8–14 October 2026New Foreign Exchange Risk Reserve (FERR): 20% cash with the RBI on large dollar-buying hedges
  4. Week of 1–7 October 2026RBI to set up a Technical Consultative Committee for Financial Markets