Foreign Exchange Management Act (FEMA) was formulated by the Central Government of India to outward payments and border trades. FEMA was introduced in the year 1999 replacing the previous Foreign Exchange Regulation Act (FERA). FEMA filled those loopholes and drawbacks that FERA failed to develop. Apart from these developments, different economic reforms were introduced under this Act. The purpose of FEMA was deregulation and a wide-ranging economy in India.
Foreign exchange transactions are classified further into two categories: -
Current Account Transactions – These transactions include the inflow and outflow of money to and from the different countries, during a year. The reason for the happening of these transactions is trading or rendering services, income and commodities between the countries. Current Account can be a parameter to view a nation’s economic status. Definition of the current accounts transactions is given under Section 2 (gg) of the FEMA Act which defines current account transactions as transactions that are other than capital account transactions and includes:
- payments relating to foreign trade, other current business, services and short-term banking and credit facilities in the ordinary course of business,
- payments for interest on loans,
- expenses relating to education, foreign travel and medical care of spouse, parents and children, and remittances for living expenses of parents, spouse and children residing abroad.
Further categorization of these current account transactions is into:
- The transactions that require Central Government’s permission
- Prohibited transactions by FEMA
- The transactions that require approval from RBI
Capital Account Transactions – As mentioned above, the reason for the incorporation of the current account and the capital account is the payment balance. Therefore, the balance of payment reminder is the Capital Account. They contain all the movement of capital within the economy because of capital expenditure and receipts. These capital accounts acknowledge foreign assets within domestic investments and vice-versa. According to FEMA, Capital Account Transactions are transactions that alters the liabilities or assets outside India of the persons residing in India or liabilities in India of the persons residing outside of India.