Foreign Exchange Management Act: Basics for Students

The Foreign Exchange Management Act, 1999 (FEMA, Act 42 of 1999) is the law that controls how people in India buy, hold, send and receive foreign exchange. It came into force on 1 June 2000, replaced the Foreign Exchange Regulation Act, 1973 (FERA), and treats most breaches as civil contraventions punished with money penalties rather than as crimes. For a student, the core is a handful of sections: 3 to 8 (what you may and may not do), 13 (penalty), 15 (compounding), 16 to 19 and 35 (adjudication and appeals).

This explainer is written for B.A. LL.B. and LL.B. students preparing for banking law, economic offences or corporate law papers, and for families who send money abroad for a child's studies or receive money from relatives working in the Gulf. If you understand the structure set out below, the RBI master directions and circulars that sit on top of the Act will make much more sense.

Why did FEMA replace FERA?

FERA was a control statute. Contraventions under it could lead to both adjudication for penalty and criminal prosecution, a point the Supreme Court confirmed in Standard Chartered Bank v. Directorate of Enforcement, (2006) 4 SCC 278. FEMA changed the approach. Its title speaks of "management", not "regulation", and the penalty chapter is built around money penalties fixed by an adjudicating authority.

Section 49 repeals FERA. Section 49(3) also says that no court may take cognizance of an offence under the repealed Act, and no adjudicating officer may take notice of a FERA contravention, after two years from the commencement of FEMA. That is why most FERA proceedings you read about today are old cases still working their way through appeals.

What are the core sections a student must know?

• Section 1: the Act extends to the whole of India and also applies to branches, offices and agencies outside India owned or controlled by a person resident in India.
• Section 2: definitions. The 182 day residence test (residing in India for more than 182 days in the preceding financial year) is the starting point for deciding who is a "person resident in India". Read the full definition from the current text, because it has detailed exceptions.
• Section 3: no person shall deal in or transfer foreign exchange to anyone who is not an authorised person, or make payments to a person resident outside India, except as the Act, rules or RBI permit.
• Section 4: a person resident in India shall not acquire, hold, own, possess or transfer any foreign exchange, except as the Act provides.
• Section 5: current account transactions. Any person may sell or draw foreign exchange from an authorised person for a current account transaction, subject to reasonable restrictions the Central Government may impose.
• Section 6: capital account transactions, which are permitted only within the classes and limits specified.
• Sections 7 and 8: exporters must declare exports, and a resident to whom foreign exchange is due must take reasonable steps to realise and repatriate it within the period the RBI specifies.
• Section 36: the Central Government establishes the Directorate of Enforcement, which investigates contraventions.

How does FEMA affect an ordinary family?

Take a student from Nagercoil who has an offer from a university abroad. The fees and living costs her parents send are covered by the Foreign Exchange Management (Current Account Transactions) Rules, 2000, made under section 5 and in force from 1 June 2000. Schedule I of those rules lists prohibited remittances (for example, remittance out of lottery winnings), Schedule II lists those needing Central Government approval, and Schedule III lists purposes (studies abroad among them) where an individual needs RBI approval only above USD 2,50,000 a financial year, the same ceiling used by the Liberalised Remittance Scheme (LRS).

According to the RBI's LRS FAQs, a resident individual, including a minor, may remit up to USD 2,50,000 per financial year (April to March) for permitted purposes, and "studies abroad" is one of them. A few practical points from the same FAQs:

1. PAN is mandatory for LRS remittances made through an authorised dealer bank.
2. For a minor, the LRS declaration must be countersigned by the natural guardian.
3. The scheme is not available to companies, partnership firms, HUFs or trusts.
4. Remittance for trading in foreign exchange abroad is not permitted.
5. Unspent foreign exchange must be brought back and surrendered to an authorised person within 180 days.

The CAT Rules also allow an individual to exceed the limit for studies where the university requires a higher amount. The RBI states that its notifications and master directions prevail over its FAQs, so always check the current direction with your bank before relying on a figure.

What happens when someone breaks FEMA?

Under section 13(1), a person who contravenes the Act, rules, regulations or RBI directions is liable to a penalty of up to three times the sum involved where the amount is quantifiable, or up to two lakh rupees where it is not. For a continuing contravention there is a further penalty of up to five thousand rupees for every day after the first day. Check the current official text of section 13 before you quote it in a professional opinion, because the Act has been amended since 1999.

Section 14 explains why FEMA still has teeth. If the penalty under section 13 is not paid in full within ninety days, the person can be detained in civil prison: up to three years where the amount exceeds one crore rupees, and up to six months in other cases.

What is compounding and how does it work?

Compounding means voluntarily admitting the contravention and settling it by paying an amount, instead of facing adjudication. Section 15 allows it, and the procedure is now in the Foreign Exchange (Compounding Proceedings) Rules, 2024 (G.S.R. 566(E), dated 12 September 2024), which superseded the 2000 rules. Key points from the rules and the RBI FAQs:

• The RBI compounds most contraventions. Contraventions of section 3(a) go to the Directorate of Enforcement.
• The application fee is ten thousand rupees plus GST, paid by demand draft, NEFT or another permitted electronic mode.
• The compounding order must be passed within 180 days of receiving a complete application, and the amount must be paid within 15 days of the order.
• If the amount is not paid, the person is treated as never having applied.
• A similar contravention repeated within three years of an earlier compounding cannot be compounded. After three years it is treated as a first contravention.
• If the matter is compounded before adjudication, no inquiry is started or continued against that person for it. If a complaint has already been filed under section 16(3), the adjudicating authority is told in writing and the person is discharged.

Who decides and where do appeals go?

Adjudicating authorities appointed under section 16 hold the inquiry and impose penalties, and under section 16(6) must try to dispose of a complaint within one year, recording reasons in writing if they cannot. The appeal route is:

1. Appeal to the Special Director (Appeals) under section 17, within 45 days (section 17(3)). A late appeal can be admitted for sufficient cause.
2. Appeal to the Appellate Tribunal under section 19, within 45 days (section 19(2)). Under the provisos to section 19(1), the appellant must deposit the penalty, though the Tribunal may dispense with or reduce the deposit to prevent undue hardship. Section 19(5) asks the Tribunal to try to decide within 180 days.
3. Appeal to the High Court under section 35, only on a question of law, within 60 days of communication of the decision, extendable by a further 60 days for sufficient cause.

How have the courts read it?

Standard Chartered Bank v. Directorate of Enforcement (2006): under FERA, adjudication and criminal prosecution are independent, can run at the same time, and the finding in one is not conclusive in the other.

Radheshyam Kejriwal v. State of West Bengal (18 February 2011), (2011) 3 SCC 581: the Supreme Court built on Standard Chartered. Where a person is exonerated in adjudication on the merits, on the same allegations, a criminal prosecution cannot continue. Exoneration on a technical ground does not bar prosecution. The Court also held that ED adjudication is not a prosecution by a court, so the double jeopardy protection in Article 20(2) and section 300 CrPC (now section 337 of the Bharatiya Nagarik Suraksha Sanhita, 2023) did not apply. The bar in that case came from the merits exoneration and the higher standard of proof in criminal trials. Both are FERA cases, but they are still cited when students compare the two regimes.

Thomas Cook India Ltd. v. Additional Director (Madras High Court, 17 April 2025): the Tribunal had cut the pre-deposit to 20 per cent of penalties of Rs 3 crore on the company and Rs 1.50 crore on an individual. A Division Bench dismissed the section 35 appeals. It read the first proviso to section 19(1) as making pre-deposit mandatory, treated the second proviso as the only source of discretion, and held that the Tribunal's view on undue hardship could not be reopened by the High Court sitting in appeal. The lesson for students: a pre-deposit order that is already reduced is very hard to attack.

How should you write about FEMA in an exam?

• Open with the purpose: FEMA replaced FERA from 1 June 2000 and moved from control to management, with civil penalties.
• Classify the transaction: current account (section 5) or capital account (section 6). Most problem questions turn on this.
• State the penalty under section 13 and the civil prison consequence under section 14.
• Explain compounding under section 15 and the 2024 Rules, and the appeal chain under sections 17, 19 and 35.
• Close with Standard Chartered and Radheshyam Kejriwal to show you understand the adjudication and prosecution debate.

Students who want to see foreign remittance questions as they arise in real life can volunteer at the college legal aid clinic, where families often bring questions about money sent from abroad.

Sources

• The Foreign Exchange Management Act, 1999 (Indian Kanoon): text of the Act used for sections 1 to 49. Check the official India Code version for later amendments.
• Foreign Exchange (Compounding Proceedings) Rules, 2024 (RBI): notification G.S.R. 566(E) dated 12 September 2024.
• RBI FAQs on the Liberalised Remittance Scheme: limits, purposes and conditions for individual remittances.
• Foreign Exchange Management (Current Account Transactions) Rules, 2000 (RBI): Schedules I, II and III.
• Radheshyam Kejriwal v. State of West Bengal (2011): Supreme Court on adjudication and prosecution.
• Thomas Cook India Ltd. v. Additional Director (Madras High Court, 2025): section 35 appeal and pre-deposit under section 19.