Foreign exchange (FEMA)

The Foreign Exchange Management Act, 1999 governs how money and assets cross India's border: payments for trade and services, investment into Indian companies, borrowing from abroad, holdings of Indians abroad and the accounts and property of non-resident Indians. Its method is a general restriction followed by permissions, and its enforcement is mainly by civil penalty. Transactions themselves are dealt with in the notes on non-residents' property and on foreign investment routes, and parallel criminal proceedings on the page on white-collar and cyber defence.

Current account and capital account

The Act's organising line is between two kinds of transaction. A current account transaction, broadly a payment for trade, services, interest, travel, education or maintenance, is permitted unless the Central Government restricts it, and the restrictions sit in the Foreign Exchange Management (Current Account Transactions) Rules, 2000. A capital account transaction alters an asset or liability outside India of a resident, or in India of a non-resident, and is permitted only to the extent the rules and regulations allow.

Dealing in foreign exchange other than through an authorised person is itself a contravention under section 3. A resident individual's remittances abroad are governed by the Liberalised Remittance Scheme, which allows up to USD 250,000 in a financial year for permitted current or capital account purposes.

Residence has its own test under section 2(v) and is not the income tax test. An individual is resident in India if he or she has resided here for more than 182 days in the preceding financial year, subject to the exceptions in the section, and a body corporate registered or incorporated in India is resident.

Foreign investment, overseas investment and reporting

Since 15 October 2019, when the amendments made to section 6 by the Finance Act, 2015 took effect, the rules on non-debt instruments, which is where most investment in an Indian company's equity sits, are made by the Central Government, and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 are those rules. Debt instruments stay with the Reserve Bank. Investment by an Indian entity in a foreign entity is governed separately, by the Foreign Exchange Management (Overseas Investment) Rules, 2022 and the Reserve Bank's regulations under them, and external borrowing by the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

Reporting follows the transaction. Under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, the Indian company or limited liability partnership reports an issue of shares to a non-resident, and the parties report a transfer between a resident and a non-resident, on the Reserve Bank's online reporting portal and within the periods the Regulations fix. A late or missing report is a contravention even where the underlying transaction was permitted.

For a non-resident Indian or Overseas Citizen of India, the accounts maintained in India, the acquisition and sale of immovable property, and the repatriation of sale proceeds and inherited assets each sit under their own rules. Under the Foreign Exchange Management (Remittance of Assets) Regulations, 2016, a bank may allow a non-resident Indian or a person of Indian origin to remit up to USD 1 million in a financial year from a non-resident ordinary account, sale proceeds or inherited assets; a larger sum needs the Reserve Bank's approval.

Contraventions and penalty

Under section 13, a person who contravenes the Act, or a rule, regulation, notification, direction or order made under it, or a condition of an authorisation, is liable on adjudication to a penalty of up to three times the sum involved where it is quantifiable, or up to two lakh rupees where it is not, with a further penalty of up to five thousand rupees for each day a continuing contravention lasts. For most contraventions the question is the amount of the penalty and whether the matter can be compounded. The exception is section 13(1C): acquiring foreign exchange, securities or property outside India above the threshold under section 37A is punishable with imprisonment of up to five years and fine.

Can a contravention be compounded?

Section 15 allows a contravention under section 13 to be compounded on the application of the person who committed it. The Foreign Exchange (Compounding Proceedings) Rules, 2024, notified by G.S.R. 566(E) on 12 September 2024, replaced the 2000 Rules, and the Reserve Bank's Master Direction on compounding of contraventions dated 22 April 2025 sets out the procedure. The Reserve Bank has 180 days from receipt of the application to compound.

The Master Direction states several limits. The Reserve Bank does not compound a contravention of section 3(a), a matter where the amount is not quantifiable, one that attracts section 37A, one on which the adjudicating authority has already imposed a penalty, or one that the Directorate of Enforcement regards as serious, such as suspected money laundering or terror financing. A contravention repeated within three years of a similar one that was compounded is not compounded either. The applicant must first complete the administrative action, meaning the corrective steps that bring the transaction into compliance. The application carries a prescribed fee, the Reserve Bank gives the applicant an opportunity of being heard, the amount is fixed by a guidance note in the Master Direction on the factors it lists, and payment falls due within fifteen days of the order. Once a contravention is compounded, section 15(2) bars further proceedings on it under section 13.

Adjudication and appeal

A contravention that is not compounded is investigated by the Directorate of Enforcement under section 37 and adjudicated by an adjudicating authority appointed under the Act, on a show cause notice and after a hearing. An appeal against an order of an adjudicating authority who is an Assistant Director or Deputy Director of Enforcement lies to the Special Director (Appeals) under section 17, within forty-five days of receipt of the order. A further appeal lies to the Appellate Tribunal under section 19, within forty-five days, and the person appealing against a penalty must deposit the amount, unless the Tribunal finds that this would cause undue hardship and dispenses with it on conditions. Since the Finance Act, 2017, section 18 makes the Appellate Tribunal constituted under section 12 of the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 the Appellate Tribunal for the Act. From the Tribunal an appeal lies to the High Court on a question of law under section 35, within sixty days of communication of the order. The High Court is the one within whose jurisdiction the aggrieved party ordinarily resides or carries on business or personally works for gain.

Investigation by the Directorate of Enforcement

The Directorate of Enforcement and officers not below the rank of Assistant Director take up contraventions for investigation under section 37, and they exercise the powers of income tax authorities, including summons and search. Section 37A, inserted in 2015, allows the seizure of property in India of equivalent value where foreign exchange or property is suspected to be held outside India in breach of the Act.

What the law does not allow

Dealing in foreign exchange outside an authorised person. This is a contravention of section 3 and is outside the Reserve Bank's power to compound.

Using the exchange for another purpose. A payment released on a declared purpose, then used for a different one, is a contravention of section 10(6).