Put simply, foreign exchange regulations in India govern the inflow and outflow of funds to and from the country. However, the regulations have undergone drastic reforms since the time the government enacted the stringent Foreign Exchange Regulation Act (FERA) in 1973. In line with the government’s liberalized economic policy, FERA was replaced by the Foreign Exchange Management Act (FEMA) in 1999. It is important to understand FEMA vs. FERA differences to keep tabs on these regulations that have a bearing on Indians who are working abroad or want to invest abroad and on economic activity in general.
The change in policy brought in simplification, providing people and corporations with increased latitude in foreign exchange transactions while adhering to established laws. An important step in the direction of a more open and internationalized economic framework was taken with the switch from FERA to FEMA. Gaining an understanding of FEMA vs. FERA is essential to understanding India’s changing foreign exchange rules.
What is FERA?
The Foreign Exchange Regulation Act (FERA), which came into force in 1974, has to be analyzed from the perspective of the pre-liberalized Indian economy. It was an era of strict government control and FERA was enacted on the premise that foreign exchange is a scare resource which needs to be conserved. This law monitored activities affecting foreign exchange and the import and export of money, restricted some types of payments, and controlled some deals in foreign exchange. Violations of FERA provisions were considered a criminal offence.
Objectives of FERA
One of the key goals of the FERA was to guarantee the preservation and effective use of India’s foreign currency reserves. The government controlled and restricted the flow of foreign currency to stop excessive withdrawals and maintain the stability of the country’s external financial status. FERA was created with the intention of preventing illegal foreign exchange transactions. Acquisitions of foreign assets and investments in foreign securities were all subject to the framework for managing foreign investments laid forth by the Act.
To avoid excessive swings and preserve monetary stability, FERA gave government the power to monitor and regulate exchange rates. FERA sought to promote lawful international trade by regulating foreign exchange transactions. FERA created a network of approved dealers, usually banks, to serve as middlemen in foreign currency dealings. This made it possible to better monitor transactions using foreign currencies and promoted legal compliance. Legal help was not available for individuals charged with FERA violation and the Act provided for direct punishment. The purpose of this was to dissuade people and organizations from carrying out illicit foreign currency transactions or other associated crimes.
Primary features of FERA
The FERA Act’s Section 29 made explicit references to multinationals operating in India. As per the Section, foreign branches and subsidiaries that are non-banking and with foreign stock over 40% were required to get approval before initiating new ventures, buying shares in already-existing enterprises, or acquiring any other company, either fully or partially. Some of the other provisions were:
- Limits on the import and export of particular currencies.
- Illegal payment limitations while exchanging foreign money.
- Payments for products exported should be in compliance with RBI regulations.
- Limitations on the issuance of bearer securities.
- Limitations on settling in other countries.
- It is forbidden to own real estate outside of India.
- Limitations on the designation of specific people and businesses as FOREX agents.
- There are several limitations to starting a business in India.
- Foreign nationals needed approval from the Reserve Bank of India to engage in their professions in India.
- Indian laws govern the purchase, holding, and other aspects of immovable property.
What is FEMA?
The government of India enacted the Foreign Exchange Management Act to promote international payments and cross-border commerce in India. In 1999, the Foreign Exchange Regulation Act (FERA) was replaced by the Foreign Exchange Management Act (FEMA). To be sure, FEMA addressed many of the shortcomings and loopholes of the Foreign Exchange Regulation Act (FERA). FEMA was essentially implemented to liberalize and de-regularize foreign exchange transactions.
Objectives of FEMA
To enable seamless foreign exchange and payment processes, FEMA seeks to expedite and simplify foreign currency operations. It offers a framework of laws that permits people and companies to conduct cross-border import, export, and remittance activities. By offering a legal framework that permits non-citizens to invest in several industries, FEMA promotes foreign funding in India. The rules govern the influx and outflow of forex to keep the Indian currency stable. It seeks to control excessive trade price swings, which may have a detrimental effect on the steadiness of the economic system.
Preventing money laundering and criminal acts associated with foreign currency transactions is one of FEMA’s main goals. By guaranteeing a well-regulated foreign currency market, FEMA adds to the nation’s overall financial stability. It helps avoid unwarranted disruptions and preserves trust in the financial system. FEMA supports economic growth and development by fostering trade and investment internationally. A legal foundation for a range of cross-border activities, such as borrowing from foreign sources, purchasing foreign assets, and remittances, is provided by the Act.
Salient features of the FEMA
To understand FEMA vs FERA, it is important to analyze the provisions of each. FEMA was enacted in line with the post-liberalization reforms implemented in India and the standards of the World Trade Organisation. Its purpose is to ease foreign commerce and payments and encourage the growth of the foreign exchange market in the country.
The FEMA grants the central government authority over foreign exchange.
- Financial transactions involving stocks or foreign exchange must be completed by “Authorized Persons” with FEMA permission. Authorized dealers, money changers, and offshore financial entities are deemed authorized individuals.
- Transactions involving foreign exchange are divided into capital account and current account categories.
- Transactions involving assets, products, and services between citizens of other nations are documented in the FEMA balance of payments.
- The Reserve Bank of India, in cooperation with the Indian government, is empowered by the FEMA Act to determine the types of capital account transactions and the exchange limits that apply to them.
- It contains clauses about the progressive opening up of capital account operations.
- The law permits a person who now resides in India but was formerly resident overseas to own, possess, and transfer real estate or foreign securities obtained during that time.
Difference between FERA and FEMA
FERA was passed by the Indian government in 1973 to control and preserve foreign currency reserves. But the draconian provisions of FERA actually led to the creation of a foreign exchange black market. On the other hand, FEMA eased foreign exchange rules when it replaced FERA in 1999. Additionally, it encouraged India’s foreign exchange market to expand in an orderly manner. Knowing the FERA and FEMA difference is crucial to understand how India’s foreign exchange regulations are changing.
Number of Sections
81 sections made up the Foreign Exchange Regulation Act. There are 49 provisions in the Foreign Exchange Management Act.
Year of Implementation
This FERA was enacted by the Indian Parliament in the year 1973. The Act came into force on the first of January in 1974. In 1999, the Parliament enacted FEMA Act to repeal the FERA. FEMA became operational from June 2000.
Goals
While studying the FERA and FEMA difference, understanding their respective goals should be prominent. Control, management, and preservation of foreign exchange were the main goals of FERA. In addition to encouraging the orderly administration of India’s foreign currency market, FEMA was created to ease payments and commerce with other countries.
Approach
A proactive strategy was used by FERA. A lot of foreign exchange-related operations were forbidden. Conversely, FEMA adopts a liberal stance with the stated aim to improve the foreign exchange flow in the country.
Definition of an Authorized Person
An Authorized Person was defined narrowly under FERA, reducing the pool of individuals capable of managing foreign exchange operations. The system had a bottleneck as a result. Banks were included in the definition by FEMA. This makes it possible for a foreign exchange system to operate more quickly and easily.
Foreign Exchange Management
Foreign currency was regarded as a precious resource and payments were the primary emphasis of FERA. FEMA was designed to provide a clear and effective mechanism for the orderly management of foreign exchange.
Regulatory Framework
The Reserve Bank of India (RBI) was given broad authority under FERA to oversee and manage foreign currency operations. Both the procedure and enforcement were bureaucratic.
A more decentralized regulatory framework is offered by FEMA. The statute gives approved dealers—such as banks—the authority to handle foreign exchange transactions, but the RBI still has a major role to play. This decentralized strategy encourages ease of doing business by reducing bureaucratic obstacles.
Violation
Legally, FERA violations were considered crimes. A term in prison was the direct consequence of breaking the terms of FERA. In FEMA it is a civil offence to violate the provisions. There are be financial penalties for breaking any of the FEMA regulations. Prison time might be the outcome, though, if the fine is not paid within 90 days.
Status of Residence
A person’s residence status under the FERA was established by the length of time they spent in India—six months. According to FEMA, a visitor must stay in India for 182 days to be classified as a resident.
Facilitation of Trade and Investment
Strict limitations on international commerce and investment were enforced by FERA. When it came to accepting foreign investment and involvement in the Indian economy, it was more stringent.
The purpose of FEMA is to encourage and assist international investment and commerce. It encourages the integration of the Indian economy with the international market and creates a climate that is more favourable for foreign investment.
Summing Up FEMA vs. FERA
The transition from FERA to FEMA was a pathbreaking innovation in India’s foreign exchange policy. Economic growth was frequently impeded by FERA’s strict rules, which were designed to preserve foreign exchange. On the other hand, FEMA, which was implemented in 1999, enabled a flexible and growth-oriented strategy that was in line with international trade standards.By putting more of an emphasis on administration than control, FEMA facilitated international commerce and investment, which aided in the growth of the economy. The shift from FERA to FEMA has been essential for India’s economic integration, boosting investor confidence and creating an atmosphere that supports economic growth. Thus, FEMA vs. FERA demonstrates how India’s economic policies are changing in favor of globalization and liberalization.
