Understanding the Features of FEMA and FERA in India
India has undergone significant regulatory changes in managing foreign exchange and cross-border transactions. The Foreign Exchange Regulation Act (FERA) of 1973 and the Foreign Exchange Management Act (FEMA) of 1999 are pivotal laws shaping the country’s economic landscape. Here, we delve into the features of FERA and FEMA, highlighting the evolution of foreign exchange regulations in India.
FERA (Foreign Exchange Regulation Act) 1973
FERA was introduced in 1973 in the backdrop of acute foreign exchange scarcity. The act aimed to regulate and control the movement of foreign exchange to conserve India’s foreign exchange reserves. It was highly regulatory and gave enormous powers to the Enforcement Directorate to investigate and penalize any foreign exchange malpractices. Key features included:
Strict Regulation: FERA imposed stringent controls on certain kinds of payments, dealings in foreign exchange and securities, and transactions that indirectly affected foreign trade and the import and export of currency.
High Penalties: Violations of FERA were criminal offences, often leading to imprisonment. The act imposed severe restrictions that led to a complex regulatory framework businesses usually found challenging to navigate.
Limited Scope for Foreign Participation: FERA restricted foreign companies and individuals from participating freely in the Indian market. Foreign investment was tightly controlled, requiring extensive approvals and leading to a protectionist business environment.
FEMA (Foreign Exchange Management Act) 1999
As the Indian economy liberalized in the 1990s, the need for a less restrictive foreign exchange regulatory framework became evident. FEMA came into force in 1999, replacing FERA, and marked a significant shift in the approach from regulation to management and facilitation of foreign exchange. The key features of FEMA include:
Management of Foreign Exchange: Unlike the stringent controls under FERA, FEMA is designed to facilitate external trade and payments and promote the orderly development and maintenance of the foreign exchange market in India.
Civil Offenses: FEMA moved the offences from criminal to civil offences. Penalties are levied for violations, but imprisonment is generally reserved for severe offences and repeated violations after due process.
Simplified Foreign Investments: FEMA has simplified rules and regulations regarding foreign investments. This allows for a much more accessible flow of foreign capital into India, with fewer restrictions and more straightforward procedures, contributing significantly to increased foreign investment.
Clear Definitions: FEMA provides clear definitions of concepts like currency, foreign securities, current account transactions, and more, making it easier for businesses and individuals to comply with the provisions.
Liberalized Remittance Scheme (LRS): FEMA introduced the LRS, allowing individuals in India to remit a certain amount of money during a financial year to another country for investment and expenditure, subject to guidelines.
Role of the Reserve Bank of India (RBI): Under FEMA, the RBI has a significant role in framing the operational guidelines for foreign exchange transactions. This regulatory role ensures that all foreign exchange-related activities are conducted transparently and efficiently under the RBI’s supervision.
What Are The Main Features of FEMA?
Main Features of Foreign Exchange Management Act, 1999
It powers the Central Government to regulate the flow of payments to and from a person outside the country. All financial transactions concerning foreign securities or exchanges cannot be carried out without the approval of FEMA.
FERA vs FEMA
|
Basis of Difference |
FERA |
FEMA |
|
was Established when |
Forex reserves were low |
Forex’s position was satisfactory, but FERA needed some amendments. |
|
Forex transactions |
Rigid |
Flexible |
|
Number of sections |
81 |
49 |
|
Year of enactment |
1957 |
2000 |
The evolution from FERA to FEMA represents a paradigm shift in how India manages foreign exchange. While FERA was about control and stringent regulation, FEMA focused on working, developing, and facilitating foreign exchange in the country. This shift has simplified the legal framework, made India more attractive to foreign investors, and integrated the Indian economy with the global market. Understanding these features helps businesses and individuals navigate the complexities of foreign exchange transactions in India more effectively.