Foreign exchange has always been one of the most closely regulated aspects of the Indian economy and financial infrastructure. The most notorious foreign exchange act India had has ever 'suffered' through was the Foreign Exchange Regulation Act which was imposed in 1973. The Act provided for criminal proceedings against people who were found to be handling foreign exchange in contravention to the provision of the said Act.

With the opening up of India economy and the elimination of licensing scheme, this law became a big roadblock in the process of economic development of the country. In the year 2000, the Government of India repealed the Foreign Exchange Regulation Act and enacted a new statute in place of it. This new Act, known as the Foreign Exchange Management Act was already passed by the Parliament in Winter Session of the Parliament of India 1999.

The new statute brought foreign exchange regulation procedures in India in accordance with the framework as prescribed by the World Trade Organization. The main change that was brought by this new Act was that instead of the previous Act, which considered all the contraband activities as a criminal offense, this new act considers the contraband activity as a civil wrong.

Similarly the new Act is in more compliance with the principles of natural justice. According to FERA (older Act) the accused was considered guilty and he had the burden to prove his innocence. Similarly under this law, any activity was considered to be prohibited, unless it was specifically allowed by its provisions.

The FEMA (new Act) removes both these restrictions and makes it much simpler and easy to handle the foreign exchange especially that earned from a foreign country.

The Foreign Exchange Management Act gives sweeping power to the Reserve Bank of India to manage the way foreign currency is handled in India. It can issue directives and give out permissions to individuals and institutions to handle foreign exchange. While the Bank can issue permissions on its own accord, it can issue new directives in consultation with the Central Government of India.

The Reserve Bank of India grants a general or special permission to an individual after which he can indulge in transfer of any foreign security or foreign exchange. This transfer can be made to any person outside India who is not considered an "authorized person" according to the relevant sections of this Act. Similarly, the Act also allows RBI to authorize an individual for making payments towards the credit of any person who resides outside the Indian borders.

Apart from this, the new foreign exchange Act of India also discusses the limitations that the Reserve Bank of India and the Government of India can impose. The Act regulates the complete flow of foreign exchange in India.