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Distinguishing Between FERA and FEMA: An Overview

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Following India’s struggle for independence and the subsequent formation of the Indian Parliament, numerous regulatory acts were implemented to harmonise various sectors. One crucial area demanding significant government focus was the Foreign Exchange System. In response, the Foreign Exchange Regulation Act of 1973 was introduced to standardise this system. However, in 1999, due to specific reasons, the Foreign Exchange Regulation Act was replaced by the Foreign Exchange Management Act. In this blog, we will delve into the FERA vs. FEMA debate, exploring their distinctions and their respective contributions to the Indian ecosystem. FERA and FEMA are two significant pieces of legislation in India that deal with foreign exchange and its management. Let’s delve into the differences between these two acts.

Understanding FERA

FERA stands for the Foreign Exchange Regulation Act, was introduced with the primary aim of facilitating and simplifying the foreign exchange system in India. This regulatory act had several key objectives, including:Regulating foreign exchange and securities transactions.Controlling the import and export of currencies.Managing transactions that indirectly affected foreign exchange.However, as India’s economic growth was hindered by the rigid regulations of FERA, this act was eventually abolished and replaced by FEMA.

Key Highlights of FEMA

  • Enactment: The Foreign Exchange Regulation Act was passed by the Indian Parliament in 1973.
  • Objective: FERA aimed to regulate foreign payments, currency import/export, securities, and the purchase of fixed assets by foreigners.
  • Context: It was introduced when India’s foreign exchange reserves were low.
  • Focus: Conservation of foreign exchange was the primary goal.

Understanding FEMA

FEMA, or the Foreign Exchange Management Act, took the reins in 1999, succeeding FERA, with the aim of bolstering India’s foreign exchange framework and administration.

Comprising 49 sections, FEMA embarked on a journey that involved:

1. Establishing an organised framework for managing foreign exchange in India.

2. Instituting transparent guidelines and regulations to govern the foreign exchange market.

3. Streamlining external trade and payments with a clear and systematic approach.

4. Introducing a precise legal structure to oversee legal proceedings.

Key Highlights of FERA 

  • Enactment: The Foreign Exchange Management Act replaced FERA in 1999.
  • Objective: FEMA facilitates external trade, payments, and orderly management of the forex market in India.
  • Context: Introduced when India’s foreign exchange position was satisfactory.
  • Focus: Promoting foreign payments, trade, and increasing forex reserves.

Key Differences Between FERA and FEMA

AspectFERAFEMA
Enactment19731999
Effective DateJanuary 1, 1974June 2000
RepealedYes (by Vajpayee Government in 1998)No
Sections8149
Notion about ForexScarce resourceAsset
Authorised PersonNarrow definitionWidened definition (includes banks)
Residential StatusCitizenship + stay >6 months in IndiaNo specific duration; broader definition
ViolationCriminal offenceCivil offence
Legal Help for AccusedNot providedProvided
Tribunal/Appellate BodyAppeals sent to High CourtsSpecial Director (Appeals) and Tribunal

Conclusion

In summary, while FERA focused on conserving foreign exchange as a scarce resource, FEMA aims to manage it as an asset. The transition from FERA to FEMA marked a shift towards a more flexible approach, encouraging foreign trade and promoting economic growth.

FERA and FEMA shared the common goal of improving foreign exchange management, but FERA was notably stricter, prompting its replacement for the greater good of the economy.

Following the transition to FEMA, India adopted a more liberal foreign exchange framework, with the act providing clear objectives and contributing to the desired economic growth.

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