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What is the Difference Between FERA and FEMA

27 Oct 2023

In the ever-expanding world of international trade and economic globalisation, foreign exchange management is vital in safeguarding a nation's financial stability and facilitating cross-border transactions. India's foreign exchange regulations have evolved significantly over the years, with the Foreign Exchange Regulation Act (FERA) and its successor, the Foreign Exchange Management Act (FEMA), representing two prominent milestones.

FERA: India's Strict Foreign Exchange Regime

The Foreign Exchange Regulation Act (FERA) was an Indian law enacted in 1973 to regulate foreign exchange transactions and conserve the country's foreign exchange resources. FERA was introduced at a time when India's foreign exchange reserves were low, and its primary objective was to prevent the misuse and illegal activities involving foreign exchange.

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FERA imposed strict controls on a wide range of forex-related transactions, including:

  • Currency conversions
  • Remittances
  • Acquisitions of foreign assets
  • Transactions involving non-residents

The act also empowered the Reserve Bank of India (RBI) to monitor and regulate these activities and to impose heavy penalties, imprisonment, and even confiscation of assets in cases of non-compliance.

FERA was known for its strict enforcement measures, and it played a significant role in shaping India's foreign exchange landscape for several decades. However, the act was criticised for its complex procedures, stringent penalties, and perceived hindrance to economic liberalization.

FEMA: India's Liberalized Foreign Exchange Regime

In 2000, India introduced the Foreign Exchange Management Act (FEMA) to replace the Foreign Exchange Regulation Act (FERA). FEMA was implemented to modernise and make India's foreign exchange system more open and flexible, in tune with the evolving global economic landscape and the nation's ambitions for economic progress and integration.

FEMA governs a wide range of foreign exchange transactions, including:

  • Currency conversions
  • Remittances
  • Acquisitions and disposals of foreign assets
  • Transactions involving non-residents
  • External commercial borrowings
  • Overseas investments

FEMA is overseen jointly by the Reserve Bank of India (RBI) and the central government. A primary goal of FEMA is to streamline international trade and transactions, encourage the organised growth and upkeep of foreign exchange markets, and create an environment conducive to drawing foreign investments. FEMA establishes a framework for governing, overseeing, and managing foreign exchange transactions, offering increased flexibility and a more business-friendly approach compared to its predecessor, FERA.

FEMA introduced several significant changes, such as:

  • Simplified procedures for foreign exchange transactions
  • Liberalization of current account transactions
  • Establishment of the Foreign Exchange Management (FEM) framework to regulate foreign investments in India
  • Introduction of a more flexible and market-oriented approach to foreign exchange management.

Here are the differences between FERA and FEMA:

Particulars FERA FEMA
Goal FERA was brought with an intent to regulate and conserve forex transactions and foreign payments  FEMA’s focus is on enhancing India's forex reserves and emphasise on the promotion of foreign payments and trade.
Regulations Style FERa was conservative and had many restrictive regulations. FEMA’s regulation style is more liberal.
Residential Status In this act, the residential status of an individual was determined by their stay in India for a span of 6 months. In this act, the span of stay in India to identify the residential status is 182 days.
Violation Violations of FERA were regarded as criminal offences. A violation of FERA’s provisions resulted in imprisonment. Violations of FEMA are regarded as civil offences. A violation of FEMA’s provisions could result in a monetary penalty. However, if the penalty is not paid within a span of 90 days, it may result in imprisonment.

The significance of FERA and FEMA

FERA and FEMA, each with its distinct approach, have played significant roles in shaping the difference between FERA and FEMA in the evolution of India's foreign exchange management system. FERA helped to conserve foreign exchange resources during a time of scarcity, while FEMA has facilitated economic growth and liberalisation by promoting external trade and payments.

These two acts are pivotal for economic development, maintaining financial stability, and preventing money laundering. The Reserve Bank of India (RBI) takes a central role in overseeing the administration and enforcement of FEMA, ensuring that businesses and individuals understand and comply with the differences between FERA and FEMA.

Overall, FERA and FEMA are two critical pieces of legislation that have helped to shape India's foreign exchange landscape. The transition from FERA to FEMA marked a significant shift towards a more liberal and market-oriented approach, contributing to India's economic growth and development.

 

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