Law Relating to Foreign Exchange Management- Features, Roles, And Significance

The law relating to foreign exchange management is a crucial component of India's international trade strategies as it oversees all foreign exchange-related matters for the country. To manage international finance by ensuring that all foreign exchange operations in India are carried out lawfully and efficiently, the Foreign Exchange Management Act (FEMA) was introduced in 1999, implementing some crucial regulations.

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Law Relating to Foreign Exchange Management

Features of Foreign Exchange Management Act (FEMA)

• It authorizes the central government to regulate money flow to and from an individual living abroad.
• Every transaction must be completed through Authorized Dealers (AD) approved by the Reserve Bank of India.
• The Indian government can prevent an authorized dealer from handling foreign exchange transactions using the current account.
• The act gives RBI the authority to limit transactions from capital accounts, even when those transactions are carried out through an authorized person.
• An individual who once resided in India can retain shares, securities, and properties acquired during their stay in India. It also allows an NRI to own property inherited from an Indian resident.
• According to FEMA, each exporter of goods and services must provide the RBI with all relevant information, including the value of the products and services, and guarantee that export revenues are realized and distributed following RBI's guidelines for timing and format.

The Significance of Foreign Exchange Management Act (FEMA)

• Streamlining Transactions: India's foreign exchange transactions are regulated and streamlined by FEMA, which provides a clear structure that guarantees seamless and lawful foreign exchange transactions.
• Safeguarding National Interests : By establishing regulations on foreign investments, FEMA ensures that money movements into and out of the economy have a positive impact on the economy.
• Attracting Foreign Investment : The clarity in laws provided by FEMA promotes increased investment by foreign investors.
• Economic Stability : FEMA helps stabilize the economy by controlling foreign transactions and investments and avoiding significant capital transfers that could cause instability.
• Promoting the Open market : The FEMA focuses more on managing foreign exchange than being conservative and restrictive with stringent regulations. This approach facilitates foreign investments and capital flow, leading to a more open and liberal market.

Role of FEMA in Empowering Authorities and Individuals

Prohibition on Withdrawal of Foreign Exchange

• Payments from a lottery win.
• Payments from earnings from racing, cycling, etc.
• Doing business with someone who lives in Nepal or Bhutan is forbidden.
• Traveling expenses in Nepal and Bhutan.
• Any money sent in exchanger purchasing football pools, lottery tickets, prohibited or restricted documents, etc.
• The commission paid to Indian companies on their exports toward equity investment.
• Dividend payments from any business as long as the dividend balance criteria are met.