FEMA 1999 Section 3: Dealing in Foreign Exchange (2026)
What Section 3 of FEMA, 1999 does: it is the core rule that you cannot deal in foreign exchange or make or receive cross-border payments except through an authorised person or with RBI permission. Last verified October 2026.
Explainer · Economic Law · FEMA
Section 3 of FEMA, 1999 is the starting rule of India's foreign exchange law. It says that, unless the Act allows it, no person may deal in or transfer foreign exchange, make a payment to a person outside India, receive a payment on behalf of someone outside India outside proper channels, or fund the acquisition of an asset abroad, except through an authorised person or with permission of the Reserve Bank of India. In short, cross-border money must flow through licensed channels. This page explains what each part of Section 3 covers, the penalty for breaking it, and how it is enforced. Last verified October 2026.
- What it is: Section 3 is FEMA's core rule that cross-border dealing and payments must go through authorised channels.
- What it bars: dealing in foreign exchange with non-authorised persons, paying or receiving on behalf of persons abroad outside channels, and funding assets abroad, without RBI permission.
- Gateway: transactions must go through an authorised person, such as an authorised dealer bank or money changer.
- Penalty: civil penalty under Section 13, up to three times the sum involved, enforced by the Enforcement Directorate.
01The short answer
Section 3 is the core prohibition in FEMA. It says that, save as otherwise provided in the Act, its rules or RBI permission, no person shall, except through an authorised person:
- deal in or transfer any foreign exchange or foreign security to a person who is not an authorised person;
- make any payment to, or for the credit of, a person resident outside India in any manner;
- receive, otherwise than through an authorised person, any payment by order or on behalf of a person resident outside India; or
- enter into any financial transaction in India as consideration for, or in association with, the acquisition or creation of a right to an asset outside India.
The idea is simple: foreign exchange and cross-border payments must go through licensed channels, not around them.
02What Section 3 prohibits
Each limb of Section 3 closes a different door around the regulated system.
| Clause | What it stops |
|---|---|
| Section 3(a) | Dealing in or transferring foreign exchange or foreign security to a non-authorised person |
| Section 3(b) | Making a payment to, or for the credit of, a person resident outside India in any manner |
| Section 3(c) | Receiving a payment, by order or on behalf of a person outside India, outside authorised channels |
| Section 3(d) | Funding, in India, the acquisition of a right to an asset outside India |
Clause 3(d) is the one that catches informal arrangements, such as paying someone in India so that an asset is acquired abroad. The hawala style of settling cross-border dues falls within these prohibitions.
03Who is an authorised person
The whole of Section 3 turns on the phrase authorised person. Under Section 2 and Section 10 of FEMA, an authorised person is someone the Reserve Bank of India has authorised to deal in foreign exchange, such as an authorised dealer bank, a money changer, an offshore banking unit, or another person so authorised.
The gateway, not a shield
Routing a transaction through an authorised person is the lawful gateway. But being an authorised person does not put a firm above the law. An authorised dealer can still be penalised if it breaks the Act's conditions.
04The deemed receipt rule
The Explanation to Section 3 adds an anti-avoidance rule. Where a person receives a payment, including through another person or even an authorised person, and there is no corresponding inward remittance from outside India, that person is deemed to have received the payment otherwise than through an authorised person.
This stops people from dressing up an informal cross-border settlement as a domestic payment. If the money that should have come from abroad did not actually come through proper channels, the receipt is treated as a breach of Section 3.
05Penalty and enforcement
FEMA is a civil law, not a criminal one. It replaced the old FERA, under which foreign exchange offences could lead to arrest. Under FEMA, a contravention of Section 3 is dealt with by a penalty, not a prison term as a first step.
Under Section 13, a contravention can attract a penalty of up to three times the sum involved where that amount is quantifiable, or up to two lakh rupees where it is not, with a further penalty for each day a continuing contravention lasts. The matter is adjudicated by an adjudicating authority under Section 16, with appeals to the Appellate Tribunal. The Enforcement Directorate investigates and enforces FEMA, and a contravention can be settled through compounding. For that route, see compounding under FEMA.
06Key case law
Tribunals and courts have applied Section 3 to a range of unauthorised dealings, including hawala transactions, unaccounted foreign remittances, and the misuse of forex cards. In a recent decision, the Appellate Tribunal under SAFEMA held that even an entity authorised by the RBI to deal in foreign exchange remains liable to penalty under FEMA if it violates the law in dealing under Section 3.
Courts have also read the Explanation on deemed receipt to catch arrangements where no genuine inward remittance backed a domestic payment.
07Where Claw fits
Claw is an all-in-one legaltech platform for Indian advocates, law firms, and corporate legal teams, combining AI-based case search, an AI legal assistant (Legal GPT), case management, and compliance automation across all Indian courts and tribunals.
How Section 3 has been applied to a given kind of dealing, and how adjudicating authorities and tribunals have fixed penalties, turns on the case law. Claw lets you search more than 30 crore judgments on Section 3 of FEMA, by party or advocate, with results in under 5 seconds, and reported authority runs from Supreme Court rulings of 1950 and High Court rulings of 1990 to the latest orders. You can also follow a live matter, with its orders and hearings, across 9,102 courts, benches and forums. Claw does not use the documents you upload to train its AI models.
Create a free Claw account to see how Section 3 of FEMA has been applied and to track a pending matter. To research the wider body of law, see case search across Indian courts.
08Sources and further reading
- India Code (official text of FEMA, 1999): indiacode.nic.in
- Reserve Bank of India (FEMA notifications and master directions): rbi.org.in
- Enforcement Directorate (FEMA enforcement): enforcementdirectorate.gov.in
- Claw: clawlaw.in
This explainer is general information, not legal advice. The law changes through amendments, notifications and judgments, so check the current text and take advice from counsel before you act.
09Frequently asked questions
What does Section 3 of FEMA say?
Section 3 provides that, unless the Act allows it, no person shall, except through an authorised person or with RBI permission, deal in or transfer foreign exchange, make a payment to a person resident outside India, receive a payment on behalf of such a person outside authorised channels, or fund the acquisition of a right to an asset outside India.
Who is an authorised person under FEMA?
An authorised person is someone the Reserve Bank of India has authorised under Section 10 to deal in foreign exchange, such as an authorised dealer bank, a money changer, or an offshore banking unit.
Is a breach of Section 3 a crime?
FEMA is a civil law, so a contravention of Section 3 is dealt with by a penalty under Section 13, not by arrest as a first step, unlike the old FERA. The penalty can go up to three times the amount involved where it is quantifiable.
What is the deemed receipt rule in Section 3?
The Explanation to Section 3 says that if a person receives a payment without a corresponding inward remittance from outside India, that person is deemed to have received it otherwise than through an authorised person, which is a breach. It targets informal cross-border settlements.
Who enforces Section 3 of FEMA?
The Reserve Bank of India regulates foreign exchange, and the Enforcement Directorate investigates and enforces contraventions. A matter is adjudicated under Section 16, with appeals to the Appellate Tribunal, and can often be settled by compounding.
Can I find judgments on Section 3 of FEMA in Claw?
Yes. Claw lets you search more than 30 crore judgments on Section 3 of FEMA, by party or advocate, with results in under 5 seconds, and track orders and hearings across 9,102 courts, benches and forums. It researches and tracks the matter but does not give legal advice.