FERA and FEMA, Objectives, Difference, Salient Features

FERA and FEMA are two acts regarding foreign exchange which were promulgated by Government of India in 1973 & 1999 respectively. Check Difference between FERA and FEMA in detail here for UPSC exam.

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FERA and FEMA

In the ever-expanding realm of international trade and global economic integration, the management of foreign exchange plays a crucial role in maintaining a nation’s financial stability and facilitating cross-border transactions. In the Indian context, the evolution of foreign exchange regulations has been marked by significant milestones, prominently represented by the Foreign Exchange Regulation Act (FERA) and its successor, the Foreign Exchange Management Act (FEMA).

These acts have shaped India’s approach to foreign exchange management, offering a framework for the regulation, control, and effective utilization of foreign currency reserves.

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What is Foreign Exchange Regulation Act (FERA)?

FERA stands for the Foreign Exchange Regulation Act. It was an Indian law that came into effect in 1973 with the primary objective of regulating foreign exchange transactions and conserving the country’s foreign exchange resources. FERA was enacted to address concerns related to the misuse and illegal activities involving foreign exchange, such as unauthorized foreign currency transactions, smuggling, and illegal transfers of money outside India.

Under FERA, stringent controls and restrictions were imposed on various aspects of foreign exchange, including currency conversions, remittances, acquisitions of foreign assets, and transactions involving non-residents. The act empowered the Reserve Bank of India (RBI) to monitor and regulate these activities, to preserve the stability of India’s external trade and balance of payments.

FERA was known for its strict enforcement measures, including provisions for heavy penalties, imprisonment, and even confiscation of assets in cases of non-compliance with the regulations. The act played a significant role in shaping India’s foreign exchange landscape for several decades.

However, FERA faced criticism for its complex procedures, stringent penalties, and perceived hindrance to economic liberalization. In response to changing economic and regulatory needs, FERA was eventually replaced by the Foreign Exchange Management Act (FEMA) in 2000.

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What is Foreign Exchange Management Act (FEMA)?

FEMA stands for the Foreign Exchange Management Act. It is an Indian law that replaced the Foreign Exchange Regulation Act (FERA) in 2000. FEMA was enacted to modernize and liberalize India’s foreign exchange regime, aligning it with the changing global economic landscape and the country’s aspirations for economic growth and integration.

FEMA governs various aspects of foreign exchange transactions, dealings in foreign currency, external commercial borrowings, overseas investments, and the management of foreign exchange reserves in India. The act is administered by the Reserve Bank of India (RBI) in coordination with the central government.

One of the key objectives of FEMA is to facilitate external trade and payments, promote orderly development and maintenance of foreign exchange markets, and foster an environment conducive to attracting foreign investment. It provides a framework for the regulation, control, and management of foreign exchange transactions, allowing greater flexibility and ease of doing business compared to its predecessor, FERA.

FEMA introduced several significant changes, such as simplified procedures for foreign exchange transactions, liberalization of current account transactions, and the establishment of the Foreign Exchange Management (FEM) framework to regulate foreign investments in India. The act also enables the RBI to frame regulations and guidelines to ensure compliance with its provisions.

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Difference Between FERA and FEMA

Here is a comprehensive table that gives the Difference Between FERA and FEMA.

FERA (Foreign Exchange Regulation Act)	FEMA (Foreign Exchange Management Act)
Passed in 1973	Enacted on 29 December 1999
Came into force on January 1, 1974	Came into force in June 2000
Repealed in 1998	Succeeded FERA
81 sections	49 sections
Foreign Exchange is considered a scarce resource	Foreign Exchange is considered an asset
Focused on the conservation of Foreign Exchange	Focused on management of Foreign Exchange
A narrow definition of “Authorized Person”	Widened definition of “Authorized Person”
Banking units not considered Authorized Persons	Banking units considered Authorized Persons
Violation is considered a criminal offence	Violation is considered a civil offence
The accused was not provided legal help	The accused provided legal help
Appeals sent to High Courts	Provision for Special Director (Appeals) and Special Tribunal
Direct punishment for FERA violation	Fines imposed for FEMA violation; imprisonment if penalty not paid within 90 days
Prior approval from RBI is required for fund transfers	No prior approval is needed for external trade and remittances
No provision for IT	Provision for IT (Information Technology)

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FERA and FEMA UPSC

Understanding the Foreign Exchange Regulation Act (FERA) and the Foreign Exchange Management Act (FEMA) is important for aspirants preparing for the UPSC examination. These topics are relevant to the UPSC Syllabus, particularly in the areas of the Indian economy, international trade, and economic legislation. Familiarity with FERA and FEMA demonstrates a comprehensive understanding of the regulatory framework governing foreign exchange management in India. It allows candidates to address questions related to economic reforms, legal provisions, and the transition from FERA to FEMA. Aspirants can make use of UPSC Online Coaching and practice UPSC Mock Test to enhance their grasp of these topics.

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FERA and FEMA FAQs