Difference between FERA and FEMA: Comparative Analysis
In 1973, the Indian government enacted FERA for the purpose of conserving and regulating foreign exchange reserves. However, the stringent guidelines of FERA led to the foreign currency black market. In 1999, FEMA replaced FERA, easing foreign exchange controls. It also promoted the orderly development of India’s foreign exchange market.
In this article on the difference between FERA and FEMA, we will be taking at a look at these two regulations. We will also understand their roles in the Indian market and the reason why the other act was introduced
Table of Contents
Difference between FERA and FEMA
Before we understand these terms individually, let us first understand the difference between FERA and FEMA:
| Parameters | FERA (Foreign Exchange Regulation Act) | FEMA (Foreign Exchange Management Act) |
| Year of Enactment | FERA was introduced in the year 1973. | FEMA came into force in the year 1999, replacing FERA. |
| Objective | The primary objective of FERA was to regulate, control, and conserve foreign exchange. | FEMA was designed to facilitate external trade and payments, and promote orderly management of the foreign exchange market in India. |
| Approach | FERA had a preventive approach. It restricted many activities related to foreign exchange. | FEMA, on the other hand, has a liberal approach. It was introduced to enhance the flow of foreign exchange in the country. |
| Violations | Violations of FERA were considered criminal offenses. | Violations of FEMA are considered to be civil offences. |
| Residential Status | Under FERA, the residential status of a person was determined by his/her stay in India for a period of six months. | Under FEMA, the period of stay in India to determine the residential status is 182 days. |
| Treatment of Violation | FERA had a provision for imprisonment for violation of its provisions. | FEMA does not have a provision for imprisonment for any violation of its provisions, unless it is a deliberate attempt to evade the law. |
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What is Foreign Exchange Regulation Act (FERA)?
Foreign Exchange Regulation Act came into force in India in the year 1973 to impose strict regulations on certain payments that dealt in foreign exchange and securities, and those transactions that had an indirect impact on forex and the import and export of currency.
Why was FERA introduced?
The primary objective of FERA was to regulate, control, and conserve India’s foreign exchange. It aimed to prevent the outflow of Indian currency, which was critical in the context of the foreign exchange scarcity that India faced during those times. FERA was introduced at a time when the country’s foreign exchange reserves were low, and it was crucial to utilize the available resources optimally. It played a significant role to manage and regulate foreign exchange in India until it was replaced by FEMA in 1999.
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Features of FERA
The following features highlight the features of FERA:
- FERA applied to all citizens of India, all business entities operating in India, and Indian citizens residing abroad.
- It imposed strict regulations on the types of transactions that could be made in foreign exchange.
- FERA required all foreign exchange transactions to be conducted through authorized individuals or institutions, such as banks.
- It gave the Reserve Bank of India (RBI) the power to control and regulate the acquisition, holding, and sale of foreign exchange.
- FERA allowed the RBI to specify the percentage of foreign exchange earnings that had to be surrendered by Indian companies to the RBI.
- It provided for the confiscation of the value of foreign exchange held in violation of the Act.
- FERA also included provisions for the inspection of documents and business premises by the RBI or other authorized individuals.
- It categorized crimes under FERA as criminal offenses that were punishable with imprisonment or fines.
What is Foreign Exchange Management Act (FEMA)?
The Foreign Exchange Management Act (FEMA) replaced FERA in India in 1999. FEMA’s role is to simplify and liberalization of foreign exchange transactions. It promotes orderly management of foreign exchange, facilitate external trade and regulate foreign payments. Unlike FERA, violations under FEMA are not considered criminal offenses. It encourages free flow of trade to boost the foreign exchange market in India.
Why was FEMA introduced?
The Vajpayee government played a crucial role in the transition from FERA to FEMA. It replaced the restrictive FERA with FEMA in 1999 to introduce a more flexible system to for the growing economy. This move was aimed at easing foreign exchange controls and promoting foreign investment in India.
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Features of FEMA
The following points are the features of FEMA:
- FEMA promotes orderly management and development of the foreign exchange market in India.
- It facilitates external trade and payments to promote orderly development and maintenance of Indian foreign exchange market.
- FEMA is more transparent, providing clear guidelines on issues related to foreign exchange.
- It applies to all parts of India and also applies to every branch, office, and agency outside India that is owned or controlled by an Indian resident.
- FEMA introduced a system where all offenses are civil offenses, unlike under FERA where offenses were criminal.
- It provides the Reserve Bank of India with the power to regulate, prohibit, or restrict the acquisition or disposal of foreign exchange.
- FEMA has provisions for the Central Government on imposing restrictions on activities such as making payments to a person situated outside of the country or receiving money through them.
- It has a well-defined legal structure that provides the right to appeal and a legal hearing.
- Under FEMA, if the contravention is unintentional, the guilt can pay the prescribed sum. After the payment, proceedings may be dropped against the accused person.
Similarities Between FERA and FEMA
While FERA has been replaced by FEMA, both share the following similarities:
- FERA and FEMA were enacted to manage and regulate the foreign exchange market in India.
- Both acts are implemented by The Reserve Bank of India.
- Provisions to penalize individuals or entities for contravention of the rules exist in FERA and FEMA.
- FERA and FEMA aim to conserve foreign exchange and ensure its proper utilization.
- The Central Government can impose restrictions on certain types of foreign exchange activities under these acts.
Conclusion
Both FERA and FEMA played crucial roles in managing the foreign exchange market in India. While FERA followed stringent guidelines to safeguard the forex, FEMA has a more liberal approach, focusing on managing and boosting foreign exchange.
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FAQs
What impact did FERA and FEMA have on India's economy?
FERA was established in 1973 to protect India's foreign exchange and regulate its use. However, its strictness led to the creation of black market. In 1999, FEMA replaced FERA. This act has easy currency controls and facilitates India's foreign exchange market.
Is FEMA still valid in India?
Yes, the Foreign Exchange Management Act (FEMA) is still valid and operational in India.
Which act is better in terms of managing foreign exchange, FERA or FEMA?
FEMA is considered better for managing foreign exchange compared to FERA. It is more transparent, less stringent, and promotes orderly management of the foreign exchange market. FEMA also encourages the integration of the Indian economy with the global economy, which is beneficial for trade and economic growth.
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