Foreign Exchange Management Act, 1999

Section 3 FEMA 1999: Dealing in Foreign Exchange

Section 3 of the Foreign Exchange Management Act, 1999 regulates dealings in foreign exchange and foreign securities, payments to persons resident outside India, certain receipts on their behalf, and specified financial transactions connected with assets outside India.

Core rule: Unless FEMA, the rules or regulations made under it, or a general or special permission of the Reserve Bank of India provides otherwise, the transactions listed in Section 3 cannot be carried out in the prohibited manner.

Text of Section 3 of FEMA

3. Dealing in foreign exchange, etc. - Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall -

(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorised person;

(b) make any payment to or for the credit of any person resident outside India in any manner;

(c) receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner;

Explanation to clause (c). For the purpose of this clause, where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person (including an authorised person) without a corresponding inward remittance from any place outside India, then, such person shall be deemed to have received such payment otherwise than through an authorised person;

(d) enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.

Explanation to clause (d). For the purpose of this clause, "financial transaction" means making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt.

For authoritative wording and amendments, refer to the official India Code text linked below.

What Section 3 means

Clause (a): foreign exchange and foreign securities. A person must not deal in or transfer foreign exchange or a foreign security to a person who is not an authorised person, unless the transaction is otherwise permitted under FEMA or by RBI permission.
Clause (b): payments to non-residents. The clause restricts making payments to, or for the credit of, a person resident outside India except as permitted by the FEMA framework.
Clause (c): receipts on behalf of non-residents. A payment ordered by or received on behalf of a person resident outside India must be received through the permitted authorised channel. The statutory explanation also addresses cases where there is no corresponding inward remittance from outside India.
Clause (d): transactions linked with overseas assets. The provision restricts a financial transaction in India that serves as consideration for, or is associated with, acquiring, creating or transferring a right to acquire an asset outside India, unless otherwise permitted.

Important definitions under FEMA

Section 3 should be read with the definitions in Section 2 of FEMA. The following expressions are especially relevant when applying the provision:

Authorised person

Section 2(c) covers an authorised dealer, money changer, off-shore banking unit or another person authorised under Section 10(1) to deal in foreign exchange or foreign securities.

Foreign exchange

Section 2(n) broadly covers foreign currency and specified deposits, credits, balances, drafts, travellers cheques, letters of credit and bills of exchange expressed or payable in foreign currency.

Foreign security

Section 2(o) covers shares, stocks, bonds, debentures or other instruments denominated or expressed in foreign currency, and includes securities expressed in foreign currency where redemption or any form of return such as interest or dividends is payable in Indian currency.

Person resident in India

Section 2(v) contains FEMA's residence test and specific inclusions and exclusions. FEMA residence is a statutory concept and should not be assumed to be identical to residence under tax law.

How Section 3 fits within FEMA

Section 3 appears in Chapter II, "Regulation and Management of Foreign Exchange." It lays down baseline restrictions. Other provisions then deal with related subjects, including holding foreign exchange or overseas property under Section 4, current account transactions under Section 5, capital account transactions under Section 6, and authorised persons under Section 10.

A transaction should therefore not be tested against Section 3 in isolation. The applicable FEMA rules, regulations, directions, permissions and the status of the authorised person may determine whether a particular transaction is permitted and on what conditions.

Contravention and penalty

A contravention of FEMA, or of a rule, regulation, notification, direction or order issued in exercise of powers under FEMA, may attract the consequences provided by Section 13. Certain contraventions may also be considered for compounding under Section 15, subject to the applicable legal framework.

Official legal resources

For the current statutory text, amendments and subordinate legislation, use the India Code. For RBI directions, regulations, notifications and foreign exchange guidance, use the Reserve Bank of India. These official sources should be checked for transaction-specific requirements before acting.

Practical caution: FEMA permissions and conditions can depend on the nature of the transaction, residence status, amount, instrument, purpose and the applicable RBI framework. This article is a general explanation of Section 3 and is not a substitute for transaction-specific professional advice.