Differences Between FERA and FEMA

India’s economic policies have evolved significantly over the years, particularly in foreign exchange regulation. The difference between FERA and FEMA lies in their approach to managing foreign exchange transactions. While FERA (Foreign Exchange Regulation Act) was a stringent law aimed at conserving foreign exchange, FEMA (Foreign Exchange Management Act) represents a more liberalised framework aligned with India's economic reforms. Understanding what FERA and FEMA are is crucial to comprehending India's transition from a controlled to a market-driven economy.

This article delves into the objectives of FERA and FEMA, their key differences, and the impact of this transition on India's financial landscape.

What is FERA?

FERA stands for the Foreign Exchange Regulation Act. Enacted in 1973, its main goal was to regulate foreign exchange transactions to conserve India's foreign exchange reserves, which were quite limited at the time. Think of FERA as a strict gatekeeper, ensuring that every foreign exchange transaction is closely monitored and controlled to prevent misuse and depletion of the country's scarce resources.

Under FERA:

• Strict Regulations: The act imposed stringent controls on all foreign exchange dealings, including payments, securities transactions, and the import and export of currency.

• Authorisations Required: Individuals and businesses needed explicit permission from the Reserve Bank of India (RBI) for various foreign exchange activities.

• Severe Penalties: Violations were treated as criminal offences, leading to hefty fines and even imprisonment.

While FERA aimed to protect India's economy, its rigid framework was often seen as a hindrance to economic growth and modernisation.

What is FEMA?

Fast forward to 1999, and we have FEMA - the Foreign Exchange Management Act. This act replaced FERA and marked a significant shift in India's foreign exchange policy. With the economy opening up and foreign reserves in a healthier state, FEMA adopted a more liberal and flexible approach.

Key features of FEMA include:

• Simplified Framework: With only 49 sections compared to FERA's 81, FEMA made foreign exchange dealings more straightforward and user-friendly.

• Liberal Approach: The act focuses on facilitating external trade and payments, promoting orderly development and maintenance of the foreign exchange market in India.

• Civil Penalties: Unlike FERA, violations under FEMA are treated as civil offenses, leading to monetary penalties rather than criminal charges.

In essence, FEMA views foreign exchange as an asset to be managed rather than a scarce resource to be conserved.

Objectives of FERA and FEMA

Understanding the objectives behind these acts helps highlight their core philosophies.

Objectives of FERA:

• Conserve Foreign Exchange: Given the limited reserves, FERA aimed to prevent the misuse of foreign exchange.

• Regulate Transactions: It sought to control payments, securities dealings, and currency imports and exports.

• Prevent Misuse: By imposing strict regulations, FERA aimed to prevent activities that could negatively impact India's foreign exchange reserves.

Objectives of FEMA:

• Facilitate Trade: FEMA aims to promote external trade and payments, making it easier for businesses and individuals to engage in international transactions.

• Develop the Forex Market: The act seeks to foster an organised and efficient foreign exchange market in India.

• Manage Foreign Exchange: Rather than strict control, FEMA focuses on the management and prudent utilisation of foreign exchange resources.

FERA vs FEMA: Key Differences

Let's break down the key differences between FERA and FEMA:

In summary, while FERA was all about control and conservation, FEMA focuses on facilitation and management, reflecting India's evolving economic landscape.

Impact of Transition from FERA to FEMA

The shift from FERA to FEMA had profound implications for India's economy:

• Boosted Foreign Investment: The liberalised approach under FEMA made India a more attractive destination for foreign investors.

• Simplified Compliance: Businesses found it easier to comply with foreign exchange regulations, encouraging more international trade.

• Economic Growth: By facilitating external trade and payments, FEMA contributed to India's integration into the global economy, fostering growth and development.

Conclusion

This transition marked India's move towards a more open and globally integrated economic framework. In essence, FEMA has played a pivotal role in integrating India's economy with the global market, fostering growth and development.