FEMA (Foreign Exchange Management Act) is India's primary legislation governing foreign exchange transactions, regulating all dealings in foreign exchange, external trade payments, and cross-border capital flows with the objective of facilitating external trade and payments while maintaining the orderly development of the foreign exchange market. Under Indian law, FEMA was enacted as Act No. 42 of 1999, replacing the Foreign Exchange Regulation Act, 1973 (FERA), and is administered by the Reserve Bank of India with enforcement by the Directorate of Enforcement.
Legal definition
The Foreign Exchange Management Act, 1999 establishes the regulatory framework for foreign exchange transactions:
Section 3(a): "Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall — deal in or transfer any foreign exchange or foreign security to any person not being an authorised person."
Section 3(b): No person shall "make any payment to or for the credit of any person resident outside India in any manner."
Section 3(c): No person shall "receive otherwise than through an authorised person, any payment by order or on behalf of any person resident outside India in any manner."
The Act creates a fundamental distinction between two categories of transactions:
Section 5 — Current account transactions: "Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction." Current account transactions (trade in goods and services, travel, education, medical expenses) are generally permitted, subject to certain reasonable restrictions the Central Government may impose.
Section 6 — Capital account transactions: "Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction." Capital account transactions (investment, lending, borrowing, transfer of immovable property) are regulated by the RBI through FEMA regulations, with some transactions permitted on the "automatic route" and others requiring specific approval.
Key definitions:
Section 2(e): "'capital account transaction' means 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 2(j): "'current account transaction' means a transaction other than a capital account transaction."
The distinction between "person resident in India" (Section 2(v)) and "person resident outside India" (Section 2(w)) is central to FEMA's regulatory framework. Residency is determined by the period of stay in India — generally, a person who has been in India for more than 182 days during the preceding financial year is considered resident.
How courts have interpreted this term
Union of India v. Cyanamid India Ltd. [(1987) 2 SCC 720]
While this case was decided under the predecessor legislation (FERA, 1973), it remains relevant to understanding the regulatory philosophy. The Supreme Court held that foreign exchange regulation serves a vital public interest in conserving and managing foreign exchange resources, and that regulatory restrictions on foreign exchange transactions must be interpreted in light of this objective. The Court upheld the power of the regulatory authority to require prior approval for certain categories of capital account transactions.
Vodafone International Holdings BV v. Union of India [(2012) 6 SCC 613]
Though primarily a tax case, the Supreme Court examined FEMA implications of cross-border transactions. The case involved Vodafone's acquisition of Hutchison's Indian telecom business through a transaction structured offshore (in the Cayman Islands). The Court held that Indian tax authorities could not impose tax on an offshore transaction between two non-resident entities, but acknowledged that FEMA compliance is mandatory for any transaction that involves the transfer of shares in an Indian company, whether directly or indirectly. The judgment reinforced the principle that FEMA's substance-over-form approach requires examination of the real nature of the transaction.
Directorate of Enforcement v. Deepak Mahajan [(1994) 3 SCC 440]
The Supreme Court (under FERA) held that foreign exchange offences are economic offences that affect the economic health of the nation, and courts must take a serious view of violations. The Court clarified that the burden of proof in FEMA adjudication proceedings is the preponderance of probability, not beyond reasonable doubt. This principle continues to apply under FEMA proceedings.
Why this matters
FEMA governs every foreign exchange transaction involving Indian residents and businesses. In an increasingly globalised economy — where Indian companies invest abroad, foreign companies invest in India, individuals remit money for education and travel, and tech startups receive foreign venture capital — FEMA compliance is a universal requirement.
For businesses, FEMA compliance arises in multiple contexts: receiving foreign direct investment (governed by the FDI Policy read with FEMA regulations), making outbound investments (Overseas Direct Investment regulations), borrowing from foreign sources (External Commercial Borrowing guidelines), establishing overseas subsidiaries, executing cross-border mergers and acquisitions, and importing or exporting goods and services. Each category has specific regulations governing pricing, reporting, approval requirements, and end-use restrictions.
For individuals, FEMA regulates outward remittances under the Liberalised Remittance Scheme (LRS), which permits resident individuals to remit up to USD 250,000 per financial year for permissible current and capital account transactions, including overseas education, travel, investment in foreign securities, and property purchase. Exceeding LRS limits or using remittances for prohibited purposes (such as margin trading or lottery purchases) constitutes a FEMA contravention.
A critical distinction from the predecessor FERA is that FEMA contraventions are civil offences, not criminal ones. The shift from FERA (which treated foreign exchange violations as criminal offences with imprisonment) to FEMA (which imposes monetary penalties through adjudication proceedings) reflected India's post-liberalisation approach of facilitating rather than criminalising foreign exchange transactions. However, FEMA contraventions can trigger proceedings under the Prevention of Money Laundering Act, 2002 (PMLA) if the foreign exchange violation constitutes a "scheduled offence" — blurring the civil-criminal boundary.
For practitioners, FEMA advisory is a specialised and technically demanding area. The framework consists of over 30 FEMA regulations issued by the RBI, supplemented by numerous circulars, master directions, and the Consolidated FDI Policy issued by DPIIT. The interplay between FEMA, the Companies Act (for corporate transactions), SEBI regulations (for listed company transactions), and the Income Tax Act (for tax implications) requires multi-disciplinary expertise.
Related terms
Administering authority:
Related framework:
Sibling regulators:
Frequently asked questions
What is the difference between FEMA and FERA?
FERA (Foreign Exchange Regulation Act, 1973) treated foreign exchange violations as criminal offences with imprisonment up to 7 years. FEMA (1999) replaced FERA and shifted to a civil penalty regime — contraventions result in monetary penalties (up to three times the amount involved) adjudicated through quasi-judicial proceedings, not criminal prosecution. FEMA also liberalised current account transactions, making them generally permissible, whereas FERA had restricted both current and capital account transactions. The philosophical shift reflected India's 1991 economic liberalisation.
What is the penalty for FEMA violations?
Under Section 13 of FEMA, a person who contravenes any provision of the Act, rule, regulation, notification, direction, or order is liable to a penalty up to three times the sum involved in the contravention, or up to Rs 2 lakh where the amount is not quantifiable. Where the contravention is a continuing one, an additional penalty of up to Rs 5,000 per day may be imposed. Adjudication is conducted by officers appointed under Section 16. Appeals lie to the Appellate Tribunal for Foreign Exchange under Section 17, and further to the High Court under Section 35.
Can an individual send money abroad freely under FEMA?
Individuals can remit up to USD 250,000 per financial year under the Liberalised Remittance Scheme (LRS) for permissible purposes including overseas education, travel, medical treatment, investment in foreign securities, purchase of immovable property, gifts, and maintenance of relatives abroad. Certain transactions are prohibited under LRS — including margin trading, lottery tickets, and remittances to countries identified as non-cooperative. Remittances exceeding USD 250,000 or for non-permissible purposes require specific RBI approval.
Does FEMA apply to NRIs and foreign companies?
Yes. FEMA applies to all persons dealing in foreign exchange in India and to all transactions involving foreign exchange by persons resident in India. It also applies to branches, offices, and agencies in India of persons resident outside India. NRIs (Non-Resident Indians) are subject to specific FEMA regulations governing their bank accounts (NRE, NRO, FCNR), investments in Indian securities, and acquisition of immovable property. Foreign companies operating in India through subsidiaries, branches, or liaison offices must comply with FEMA's FDI regulations and reporting requirements.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.