FEMA, or the Foreign Exchange Management Act, is a critical piece of legislation in India that governs foreign exchange transactions, overseas investments, and the management of foreign exchange reserves. It was enacted in 1999, replacing the outdated Foreign Exchange Regulation Act (FERA), and aims to modernize and liberalize India’s foreign exchange regime while ensuring compliance and control over cross-border transactions.

Under FEMA, the Reserve Bank of India (RBI) is the central authority responsible for regulating and overseeing FDI inflows. It prescribes the procedures and limits for FDI, as well as the sectors where foreign investment is permitted or restricted.

Meanwhile, when it comes to FDI or Foreign Direct Investment, it refers to the investment made by foreign entities or individuals in Indian businesses or assets. It is closely linked with FEMA as FEMA regulations govern the entry, operation, and exit of foreign investments in India.