What Is FEMA, 1999? Key Provisions Every APO and Judiciary Aspirant Must Know
Date Published
India's approach to regulating foreign exchange has changed dramatically since independence. The Foreign Exchange Regulation Act, 1973 (FERA) was a punitive law that treated all foreign exchange violations as criminal offences and gave enforcement agencies sweeping powers of arrest and detention. It was replaced by the Foreign Exchange Management Act, 1999 (FEMA), which takes a fundamentally different approach: most violations under FEMA are civil offences, not criminal ones. FEMA aims to facilitate external trade and payments and promote the orderly development and maintenance of the foreign exchange market in India.
For the APO exam and the PCS J exam, FEMA is a frequently examined special legislation. Here is the complete picture.
FEMA vs. FERA: The Fundamental Difference
Under FERA, 1973, violations were treated as criminal offences. The burden of proof was on the accused, powers of arrest without warrant were wide, and the presumption was against the accused. FERA was described as draconian.
FEMA, 1999 made a paradigm shift:
● Violations are civil offences, not criminal offences (except in specified circumstances).
● The burden of proof is on the enforcement agency.
● Arrest and detention powers are significantly narrowed.
● Penalties are primarily monetary. Criminal prosecution is the exception, not the rule.
● Compounding of offences is available — violators can admit the contravention, pay a compounding fee, and avoid prosecution.
The Two Types of Transactions: Current Account and Capital Account
FEMA divides all foreign exchange transactions into two categories:
● Current account transactions — transactions for payments relating to trade (imports and exports), services, remittances, and personal transactions. These are generally permitted, subject to a negative list of prohibited or restricted transactions under Section 5 and the rules made thereunder.
● Capital account transactions — transactions that alter the assets or liabilities of Indian residents abroad or of foreigners in India. These include investment, borrowing and lending of money across borders, acquisition of foreign immovable property, and transfer of capital assets. Capital account transactions require prior permission from the RBI under Section 6.
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Who Enforces FEMA?
The Directorate of Enforcement (ED), under the Ministry of Finance, is the primary enforcement agency for FEMA. The RBI also has regulatory and enforcement powers over forex transactions. The Adjudicating Authority under FEMA (separate from the ED) adjudicates penalties.
Contraventions and Penalties: Section 13
Section 13(1) makes it an offence to contravene any provision of FEMA or any rule, regulation, notification, direction, or order under FEMA. The penalties are:
● If the contravention involves a quantifiable amount: penalty up to three times the sum involved in the contravention.
● If the amount is not quantifiable: penalty up to Rs. 2 lakh.
● For a continuing contravention: an additional penalty of up to Rs. 5,000 per day from the date of first contravention.
Section 13(2): The Adjudicating Authority may also direct confiscation of currency, securities, or property involved in the contravention.
Section 14: Civil Imprisonment for Non-Payment of Penalty
If a person fails to pay the penalty within 90 days of the notice, they can be subjected to civil imprisonment. This is not a criminal conviction — it is civil imprisonment for default in payment.
Section 15: Compounding of Offences
Compounding allows a FEMA contravener to approach the RBI (for most violations) or the ED (for more serious cases), admit the contravention, and pay a compounding fee — settling the matter without going through adjudication proceedings. Compounding is not available for all violations — particularly where imprisonment is mandatorily prescribed or where the contravention is deemed serious.
Section 17A: Foreign Assets and the FEMA Amendment Act, 2015
The FEMA (Amendment) Act, 2015 added Section 37A, which targets persons who have acquired foreign exchange, foreign securities, or immovable property abroad in violation of FEMA where the value exceeds Rs. 1 crore. In such cases, the authorities can confiscate the equivalent value of assets in India. This was a significant strengthening to address offshore tax evasion and undisclosed foreign assets.
The Appellate Structure
● Adjudicating Authority: Adjudicates contraventions and imposes penalties under Section 13.
● Section 17: Appeals against Adjudicating Authority orders go to the Special Director (Appeals).
● Section 19: Appeals to the Appellate Tribunal for Foreign Exchange (ATFE).
● Section 35: Appeals to the High Court on questions of law arising from ATFE orders.
Criminal Prosecution Under FEMA
FEMA is primarily a civil law statute. Criminal prosecution is an exception reserved for cases where the Directorate of Enforcement is satisfied that a person has committed a violation and civil penalties are inadequate. The Director of Enforcement can direct prosecution through a criminal complaint, with the case to be tried by a court of session or magistrate. The prescribed criminal penalty is imprisonment up to 5 years where the violation relates to financing activities listed in the Second Schedule.
Exam Relevance
● FEMA vs FERA — civil vs criminal law; burden of proof.
● Current account (generally free) vs capital account (prior permission required) transactions.
● Section 13 penalties — 3 times the sum, or Rs. 2 lakh if non-quantifiable, plus Rs. 5,000 per day continuing.
● Section 15 — compounding of offences.
● Section 37A — confiscation of equivalent Indian assets for undisclosed foreign assets above Rs. 1 crore.
● Appellate structure — Adjudicating Authority → Special Director (Appeals) → ATFE → High Court (law questions).
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Frequently Asked Questions
Q1. What is FEMA, 1999?
The Foreign Exchange Management Act, 1999 is India's statute for managing foreign exchange. It replaced FERA, 1973 with a civil enforcement framework that facilitates external trade and payments while regulating capital account transactions through the RBI.
Q2. What is the key difference between FEMA and FERA?
FERA treated violations as criminal offences with heavy burden on the accused. FEMA treats most violations as civil offences — penalties are monetary, burden of proof is on the agency, compounding is available, and criminal prosecution is the exception for serious violations.
Q3. What are current account transactions under FEMA?
Current account transactions are those related to trade, services, remittances, and personal payments — transactions that do not alter the capital position. They are generally permitted under FEMA, subject to a negative list of prohibited or restricted transactions under Section 5.
Q4. What are capital account transactions?
Capital account transactions are those that alter the assets or liabilities of an Indian resident abroad or of a foreigner in India — investment, borrowing, acquisition of foreign property, etc. These generally require prior RBI permission under Section 6 unless permitted under a specific regulation.
Q5. What are the penalties under Section 13 of FEMA?
For a quantifiable violation: up to three times the amount involved. For a non-quantifiable violation: up to Rs. 2 lakh. For a continuing violation: up to Rs. 5,000 per day from the date of the first contravention. Confiscation of the currency or property involved may also be ordered.
Q6. What is compounding of offences under FEMA?
Section 15 allows a person who has violated FEMA to approach the RBI or ED, admit the contravention, and pay a compounding fee — ending the matter without formal adjudication or prosecution. Compounding is not available for very serious violations or where criminal imprisonment is mandatorily prescribed.
Q7. What is Section 37A of FEMA?
Section 37A, added by the 2015 amendment, allows the ED to attach and confiscate equivalent assets in India where a person is found to hold undisclosed foreign exchange, securities, or immovable property abroad in contravention of FEMA, where the value exceeds Rs. 1 crore. This provision targets offshore tax evasion.
Q8. What is the role of the Directorate of Enforcement under FEMA?
The Directorate of Enforcement (ED) investigates and enforces violations of FEMA. It has powers to search, seize, arrest (in limited circumstances), and summon persons. The ED also handles cases under the Prevention of Money Laundering Act, 2002 (PMLA) — a related statute.
Q9. What is the appellate structure under FEMA?
Adjudicating Authority → Special Director (Appeals) under Section 17 → Appellate Tribunal for Foreign Exchange (ATFE) under Section 19 → High Court on questions of law under Section 35.
Q10. Is FEMA relevant for the APO exam?
Yes. FEMA is within the special legislation syllabus of most APO examinations. Key examinable points are: civil vs criminal nature of violations, Section 13 penalties, compounding, the distinction between current and capital account transactions, and the appellate structure.
Conclusion
FEMA, 1999 is not just a regulation of foreign exchange flows — it is a statement of India's economic philosophy: open trade, regulated investment, and civil enforcement with criminal prosecution reserved for the most serious violations. For any law enforcement officer (APO), civil judge, or lawyer working in India's commercial and financial law space, FEMA is unavoidable. Know it well.
At Aashayein Judiciary, Nitesh Sir covers FEMA, PMLA, and all major economic and financial legislation as part of APO exam preparation. Explore our Judiciary Notes, Online Judiciary Coaching, and Mock Test series to build comprehensive command over every examinable statute.