Difference between FERA and FEMA

FERA and FEMA are two sets of rules for managing money coming in and going out of a country. FERA started in 1973, was all about strict control over foreign money to protect India’s savings. Then, in 1999, FEMA came along, making things simpler and more open. Understanding the differences between FERA and FEMA is like peeking into how India’s economy changed over time to connect more with the rest of the world.

What is FERA?

FERA stands for the Foreign Exchange Regulation Act. It was an Indian law that regulated foreign exchange and payments in the country. FERA was enacted in 1973 to control certain aspects of foreign trade and payments and to conserve the foreign exchange reserves of India. FERA was primarily aimed at regulating foreign exchange transactions. It controlled the flow of foreign currency in and out of India, as well as the holding of foreign currency by residents.

Key Characteristics of FERA:

• Stringent Controls: FERA imposed stringent controls and regulations on various aspects of foreign exchange dealings, including transactions, investments, and remittances.
• Enforcement Mechanisms: FERA empowered authorities to enforce its regulations through measures such as inspections, investigations, and penalties for non-compliance. Violators could face severe penalties, including fines and imprisonment.
• Conservation of Foreign Exchange Reserves: One of the main objectives of FERA was to conserve India’s foreign exchange reserves and prevent their depletion. It aimed to achieve this by regulating foreign exchange transactions and preventing activities that could lead to excessive outflows of foreign currency.

What is FEMA?

FEMA stands for the Foreign Exchange Management Act. It is an Indian law enacted in 1999 to regulate foreign exchange and payments in the country. FEMA replaced the Foreign Exchange Regulation Act (FERA), which was seen as outdated and overly restrictive in the context of India’s liberalizing economy. FEMA aimed to liberalize and simplify foreign exchange regulations to promote foreign investment, facilitate trade, and encourage economic growth.

Key Characteristics of FEMA:

• Current Account Transactions: FEMA categorized foreign exchange transactions into current account transactions and capital account transactions. Current account transactions, such as trade-related payments, were made more accessible and subject to fewer restrictions.
• Capital Account Transactions: Capital account transactions, including investments and loans, were also liberalized under FEMA. It allowed for greater flexibility in foreign investment, both inbound and outbound.
• Authorized Dealers: FEMA established a system of authorized dealers, such as banks and financial institutions, to facilitate foreign exchange transactions and ensure compliance with regulations.

Difference between FERA and FEMA

Basis	FERA	FEMA
Objective	Focused on strict regulation and control of foreign exchange transactions, aimed at conserving foreign exchange reserves and preventing their depletion.	Aimed at liberalizing and simplifying foreign exchange regulations to promote foreign investment, facilitate trade, and encourage economic growth.
Date of Enactment	Enacted in 1973.	Enacted in 1999, repealing FERA.
Approach	Adopted a restrictive and controlling approach to foreign exchange management, requiring government approval for many transactions.	Adopted a liberal and market-oriented approach, emphasizing simplification of regulations and promoting ease of doing business.
Categories of Transactions	Did not distinguish between current account transactions and capital account transactions.	Categorized foreign exchange transactions into current account transactions (trade-related payments) and capital account transactions (investments and loans), subjecting them to different regulatory frameworks.
Authorized Dealers	Did not have a formal system of authorized dealers for foreign exchange transactions.	Established a system of authorized dealers, such as banks and financial institutions, to facilitate foreign exchange transactions and ensure compliance with regulations.
Penalties	Imposed stringent penalties, including fines and imprisonment, for violations of its provisions.	Imposes penalties for non-compliance but generally has less severe penalties compared to FERA.
Flexibility	Offered limited flexibility in foreign exchange transactions, with many transactions requiring prior approval from government authorities.	Introduced greater flexibility in foreign exchange transactions, allowing for more streamlined procedures and fewer restrictions, especially in current account transactions.

Conclusion

The shift from FERA to FEMA signifies a transformation in India’s foreign exchange regime, from a restrictive to a more liberal and market-friendly framework. While FERA served its purpose in a different economic context, FEMA’s emphasis on simplification and liberalization has been instrumental in promoting foreign investment and facilitating trade, contributing to India’s economic development and global integration.

FERA and FEMA – FAQs

Why was there a shift from FERA to FEMA?

In order to modernize and liberalize India’s foreign exchange management regulations, bringing them into line with international standards and facilitating ease of doing business, the country switched from FERA to FEMA.

What distinguishes the FCRA from the FEMA?

Foreign exchange transactions and restrictions are covered under the Foreign Exchange Management Act, or FEMA. The Foreign Contribution Regulation Act, or FCRA, governs how Indian non-governmental organizations may receive and use funds from outside.

What effects on India’s economy did FERA and FEMA have?

FERA was created in 1973 to safeguard and control the usage of foreign exchange in India. But because of its strictness, the black market was born. FEMA took the position of FERA in 1999. This statute makes currency restrictions simple and helps the foreign exchange market in India.

How many sections are there in FEMA?

FEMA is organized into seven chapters and forty-nine parts. Twelve of the sections deal with the operating portion of the agency; the remaining sections address violations, fines, hearings, appeals, the enforcement directorate, etc.

Which Act, FERA or FEMA, is superior for handling foreign exchange?

When it comes to handling foreign exchange, FEMA is seen as superior to FERA. It encourages the orderly administration of the foreign currency market and is less restrictive and more transparent. Additionally, FEMA promotes India’s economic connectivity with the world economy, which is advantageous for commerce and economic growth.