How to safely navigate through FEMA regulations and common mistakes to avoid

To facilitate seamless trade-related payments and regulate forex transactions, the government introduced the Foreign Exchange Management Act (FEMA) in 1999, replacing the Foreign Exchange Regulation Act (FERA) of 1973. The older act was not considered to not be in sync with the post-liberalisation market realities of the country.

That was a period when the country was still experimenting with a new economic direction under its focused implementation of long-term goals around liberalisation, privatisation and globalisation — the famous LPG model. The economy was opening up and its merchandise trade was making an impact across global marketplaces. Thus, there was an acute need for an act to regulate foreign trade-related payments. Today, the FEMA Act not only governs foreign exchange transactions and remittances but also provides a robust framework for the functioning of cross-border trade.

As the act also defines the scope, nuances and relevant procedures for all forex transactions in India, every exporter and importer of the country must be well aware of the act and the latest modifications and requirements in its clauses.


Cross-border trade, both in the form of goods as well as in services, is increasingly being facilitated via e-commerce, and that’s also one segment where provisions of FEMA regulation apply. With the rapid growth of the manufacturing/contract manufacturing base as well as the rise of e-commerce in India, the export route has also come under increasing scrutiny by Indian regulators.

Pitfalls in the process
So, what are the common mistakes exporting firms should avoid while dealing with FEMA regulations? Experts say there are some basic dos and don'ts to ensure compliance with the requirements prescribed by the Reserve Bank of India (RBI) for the export of goods and services.

Atul Pandey, Partner of law firm Khaitan & Company, suggests a few best practices. “Exporters must ensure that the amount representing the full export value of the goods exported is received through an AD (authorised dealer) bank within 9 months of the said export. An exporter should also ensure that all exports that involve third-party payments are supported with the necessary documentation (including, if necessary, tripartite agreements between the buyer, seller and third party). It's critical to note whether all filings are duly reported on the Export Data Processing and Monitoring System through the AD bank. Such filings must be consistent with the data provided in the bill of entry,” Pandey says.

Don’t invite RBI wrath
In terms of mistakes to be avoided, the law expert suggests exporters and traders to not ignore compliances at customs ports. Exporters are also advised to not ignore reminders from authorised dealer banks to clear outstanding export payments. A failure to do this could invite action from the RBI.

It is equally important to not accept goods at the port without necessary inspection. Once the goods are accepted, it may be difficult to refuse payment on the grounds of inadequate quality.

One sticky legal area for exporters is around settling outstanding bills within the stipulated time to avoid confrontation with any law enforcement agency. Notably, the RBI Master Directions on exports provide that an exporter entity can be “caution listed” if any shipping bill against it remains open for more than 2 years in the Export Data Processing and Monitoring System, provided no extension is granted by the AD bank or the RBI. Further, the date of shipment will be considered to calculate the realisation period.

The exporter entities can also be caution listed before the expiry of the two years based on the recommendation of the AD bank concerned. The recommendation may be based on cases where the exporter has come to the adverse notice of the Enforcement Directorate, Central Bureau of Investigation, Directorate of Revenue Intelligence, or any such other law enforcement agency, or the exporter is not traceable or not making any serious efforts for realisation of export proceeds.

Keep AD in the loop
What could be the best practical advice for exporters to avoid such an adverse situation? Pushkar Mukewar, Co-Founder and CEO of trade finance platform Drip Capital, says if exporters expect a situation where they may not get the proceeds in due time, they need to immediately contact their AD bank to seek an extension of up to six months. This is needed to realise outstanding export dues. Here, the exporter in question will have to be subject to certain conditions. "For instance, the bank must be satisfied that the exporter couldn’t get the proceeds for reasons beyond his control. Moreover, he may also have to submit a declaration. Even after securing an extension, if the exporter cannot pay off the amount, he can either write off or approach the bank that handled the shipping bill to write it off on his behalf. But all the required paperwork should be submitted as evidence,” Mukewar adds.

In general, exporters need to carefully assess all situations and take necessary steps to settle outstanding bills within the stipulated time to avoid confrontation with any law enforcement agency. For this, knowledge of all documents and a thorough understanding of several situation-specific provisions of the Master Direction under FEMA is required.