Foreign Exchange Management

Foreign Exchange (also known as Forex) refers to conversion or exchange of one currency for another currency. These financial transactions take place in foreign exchange market, one of the largest financial markets. Economic trends like globalisation has lead to trading of currencies in large volumes, which in turn facilitates exporting and importing of goods and services smoothly. Since forex market binds all the economies together, some kind of rules and regulations are needed for its smooth functioning. In India, Foreign Exchange Management Act (FEMA), 1999 fulfils this purpose. Prior to FEMA, the forex market was taken care of by Foreign Exchange Regulations Act (FERA), 1973.

All the provisions of FEMA have been laid down by RBI (Reserve Bank Of India), in cordination with the Central Government. RBI also looks into the matters concerning the same. The Act allows only authorised individuals to undertake any foreign exchange transaction. It deals with two categories of transactions, namely, capital account and current account. Capital account transactions include transactions of capital nature. Borrowing or lending of funds, transfering financial securities and tangible assets (properties)  are such transactions. Current account transactions include cash flows relating to trading of goods and services, interest payments on borrowed funds and transfer payments.

Moving from FERA to FEMA involved amendments that simplified the Act and widened the scope of foreign exchange. The jargons used in the Act have been explained in detail. It also has captured the essence of various Acts prevailing, majorly, the Income Tax Act. Any kind of offence will be considered to be a civil offence rather than a criminal one, reducing the penalty as compared to the one prescribed in FERA. Not only this, the power vested with the authorities has also been challenged relatively in FEMA. These changes and many more have been included in the ACT with a view to upgrade and improve the quantity and quality of transactions in the market, in accordance with the nature and structure of our economy.

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