Foreign Exchange Management Act (FEMA)

The Foreign Exchange Management Act (FEMA) is an Act of the Parliament of India that regulates the inflow and outflow of foreign exchange. The Act was enacted on December 29, 1999, and came into force on June 1, 2000.

The FEMA gives the Reserve Bank of India (RBI) the power to regulate the foreign exchange market in India. The Act covers a wide range of matters related to foreign exchange, including:

  • The definition of foreign exchange
  • The regulation of foreign exchange transactions
  • The powers of the RBI to impose restrictions on foreign exchange transactions
  • The penalties for violating the provisions of the Act

Who is covered by the Foreign Exchange Management Act (FEMA)?

The FEMA applies to all persons in India, including:

  • Residents of India
  • Non-residents of India
  • Companies incorporated in India
  • Companies incorporated outside India

What are the key provisions of the Foreign Exchange Management Act (FEMA)?

Some of the key provisions of the FEMA include:

  • The requirement for all foreign exchange transactions to be routed through authorized dealers
  • The restriction on residents from acquiring foreign exchange without the approval of the RBI
  • The power of the RBI to impose restrictions on the export and import of goods and services
  • The power of the RBI to impose restrictions on the investment of foreign exchange by residents
  • The penalties for violating the provisions of the Act

Multiple Choice Questions (MCQs) on the Foreign Exchange Management Act (FEMA)

  1. Which of the following is not a resident of India under the Foreign Exchange Management Act (FEMA)?
    • A person who is domiciled in India
    • A person who has been staying in India for more than 180 days in the preceding financial year
    • A person who has a valid visa to stay in India
    • A person who is a citizen of India
    • A person who is a permanent resident of India

The answer is (c). A person who has a valid visa to stay in India is not a resident of India under the FEMA.

  1. Which of the following is not a current account transaction under the Foreign Exchange Management Act (FEMA)?
    • The import of goods for personal use
    • The export of goods for business purposes
    • The payment of tuition fees for studies abroad
    • The payment of medical expenses abroad
    • The investment in shares of a foreign company

The answer is (d). The investment in shares of a foreign company is not a current account transaction under the FEMA.

  1. The RBI can impose restrictions on foreign exchange transactions under the Foreign Exchange Management Act (FEMA) if:
    • It is necessary in the interest of the country’s balance of payments
    • It is necessary to prevent money laundering or terrorism financing
    • It is necessary to protect the interests of investors
    • All of the above

The answer is (e). All of the above are grounds for the RBI to impose restrictions on foreign exchange transactions under the FEMA.