FEME Act amended for first time to prevent the money laundering activities


The Foreign Exchange Management Act (FEMA) has been amended for the first time since its inception in the year 2000 and that too by the Finance Bill! There are some very important policy amendments which have been brought about by the amendments.


II. Power to regulate Capital Account Transactions


The Financial Sector Legislative Reforms Commission (FSLRC) was set up in the year 2013 under the chairmanship of Justice BN Srikrishna to consider all financial sector laws comprehensively. It had suggested changes regarding policy and regulation for foreign exchange capital flows.


It had suggested that power to make rules for inward capital flows (FDI) should be with the Government. Rules for outward flows (ODI) could be made by RBI.


The finance bill has proposed even more powers for the Central Government thanwhat has been recommended by the FSLRC.


Section 6 of FEMA provides that RBI may prescribe rules for Capital Account transactions. Sub-section (3) lists several capital account transactions inflow of investment, outflow of investment, loans, guarantees, immovable property, etc.


The Finance Bill proposes that RBI will have the powers to prescribe any transactions of capital account transactions involving debt instruments. The Central Government will have the powers to prescribe any transactions of capital account transaction which do not involve debt instruments. The meaning of debt instruments will be determined by the Central Government.


Thus not just for inflow of funds, but even for outflow of funds, RBI will not have any powers. Only the Central Government will have the powers.


The Finance Bill clarifies that the rules issued by RBI will continue till the same are amended.


The Regulatory Powers under FEMA may be broadly considered to be divided as under:


–  Current Account Transactions Section 5 Already with Central Government.


–  Capital Account Transactions Section 6 was with RBI.


Now only debt instruments stay with RBI. All other capital account transactions shall be regulated by Central Government.


Thus RBI will have very little powers as far as FEMA is concerned.


There were differences between RBI and Ministry of Finance regarding foreign inward investment. Some of the differences took several years to get resolved. Even Supreme Court had to comment upon different regulations by Government & by RBI. With powers being centralisedwith the Central Government, these differences should not be there.


Administration of Section 3 (Dealing in Foreign Exchange) and Section 7 (Export of goods & services) continue with RBI.


III. Action against black money held abroad:


Assets held outside India in contravention of FEMA:


A new section 37A is proposed to be inserted. It provides that if any person holds any foreign exchange, foreign security or any immovable property outside India in contravention of section 4 of FEMA, the equivalent value of property in India can be seized. Prescribed procedure has to be followed.

This power of seizure under FEMA is in addition to the penal action under Income-tax Act and penal action under FEMA.


This provision is drastic. It provides that if the Authorised officer has “reason to believesuspected to have been held in contravention of FEMA ¦” the consequences of seizure will follow.


Any penal consequence should follow if the contravention is proved. One cannot seize property if an officer has mere reason to believe and he just suspects a contravention. Penal consequences should follow only after the contravention is established.


There are several instances where FEMA rules are not clear at all. Yet RBI or the Enforcement Directorate believe that there is a violation. A difference of view cannot be a basis for seizure.



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eMinds Legal is a Corporate Law Firm based in Gurgaon, India specializing in Corporate Legal, Corporate Secretarial and Compliance. The Firm comprises of a team of Corporate Lawyers and Company Secretaries with in-depth subject matter knowledge and participative industry experience of over 15 years.

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