The Foreign Exchange Regulation Act (FERA), 1973, and the Foreign Exchange Management Act (FEMA), 1999, are two important legislations that govern foreign exchange transactions in India. FERA was enacted to regulate and control foreign exchange, treating it as a scarce resource that needed strict supervision. However, as India’s economy expanded, FERA’s restrictive nature became an obstacle to global trade and investment.
To address this, the government replaced FERA with FEMA in 1999, introducing a liberalized approach to foreign exchange management. FEMA was designed to facilitate and regulate foreign exchange transactions rather than restricting them. This shift aligned India’s financial policies with its post-liberalization economic structure, making it easier for businesses and individuals to engage in foreign trade and investment.
This article provides a detailed comparison between FERA and FEMA by analyzing their objectives, legal provisions, penalties, compliance requirements, and impact on India’s economy.
Overview of FERA and FEMA
Foreign Exchange Regulation Act (FERA), 1973
FERA was enacted in 1973 to prevent the misuse of foreign exchange and control external financial transactions at a time when India had limited foreign reserves. The government aimed to conserve foreign exchange, restrict capital outflow, and prevent money laundering.
Key Features of FERA
- Strict regulations on foreign exchange transactions to prevent misuse.
- Restricted foreign investments to control external influence on the economy.
- Mandatory approval from the Reserve Bank of India (RBI) for all foreign transactions.
- Treated foreign exchange violations as criminal offenses, punishable with imprisonment and fines.
- Focused on controlling foreign reserves rather than promoting trade and investment.
Due to its rigid controls and criminal penalties, FERA was often seen as an obstacle to economic growth and foreign investment.
Foreign Exchange Management Act (FEMA), 1999
FEMA replaced FERA in 1999 to support India’s liberalized economy, making foreign exchange transactions simpler and more flexible. The objective of FEMA was to facilitate external trade, foreign investments, and international financial dealings without unnecessary restrictions.
Key Features of FEMA
- Encourages foreign investment by easing regulations.
- Simplifies foreign exchange transactions, requiring minimal government approvals.
- Decriminalizes violations, replacing criminal penalties with monetary fines.
- Focuses on managing foreign exchange flows rather than restricting them.
- Aligns India’s forex regulations with global trade practices.
FEMA transformed India’s foreign exchange system from a restrictive framework to a globally integrated financial system, allowing smoother international business operations.
Key Differences Between FERA and FEMA
1. Objective and Approach
- FERA was designed to regulate and restrict foreign exchange transactions to prevent foreign reserves from depleting.
- FEMA aims to facilitate and manage foreign exchange transactions to promote international trade and investment.
2. Nature of the Law
- FERA was a regulatory and restrictive law, treating forex dealings as a legal offense unless permitted.
- FEMA is a management-based law, making foreign exchange transactions easier and more transparent.
3. Applicability
- FERA applied to all Indian citizens, even if they were living abroad.
- FEMA applies only to foreign exchange transactions that affect India’s economy.
4. Control and Regulations
- FERA imposed strict controls, requiring RBI approval for foreign dealings.
- FEMA allows automatic approvals for most forex transactions, reducing bureaucratic delays.
5. Penalties for Violations
- FERA imposed criminal penalties, including imprisonment.
- FEMA imposes only monetary fines, with imprisonment applicable only in extreme cases.
6. Governing Authority
- FERA was strictly enforced by the RBI and regulatory agencies.
- FEMA is governed by the RBI but allows more flexibility for businesses and individuals.
7. Burden of Proof
- Under FERA, an accused person was presumed guilty unless proven innocent.
- Under FEMA, authorities must prove guilt to impose penalties.
Legal Provisions Under FERA and FEMA
Key Provisions of FERA
- Restricted foreign transactions without RBI approval.
- Limited foreign investment in Indian businesses to prevent external control.
- Treated violations as criminal offenses, resulting in imprisonment and heavy fines.
Key Provisions of FEMA
- Allows automatic foreign investments without the need for government intervention.
- Liberalized remittance and capital transfer policies.
- Replaces criminal prosecution with financial penalties, encouraging compliance.
FEMA’s legal provisions eliminated unnecessary restrictions and made it easier for individuals and businesses to participate in the global financial system.
Impact of FERA and FEMA on the Indian Economy
Impact of FERA
- Created bureaucratic hurdles that discouraged foreign investment.
- Led to increased illegal forex transactions due to excessive restrictions.
- Prevented businesses from expanding internationally, affecting India’s economic growth.
Impact of FEMA
- Encouraged foreign direct investment (FDI) by making forex transactions easier.
- Boosted India’s global trade relations by simplifying regulations.
- Strengthened India’s position in the international financial system.
FEMA played a crucial role in transforming India into an investment-friendly nation, making it easier for companies to conduct cross-border trade and financial transactions.
Judicial Interpretation and Landmark Cases
Supreme Court on FERA’s Rigid Approach
In Director of Enforcement v. MCTM Corporation Pvt. Ltd. (1996), the Supreme Court ruled that FERA’s strict penalties were justified at the time, but the law had become outdated for a growing economy.
High Court on Decriminalization Under FEMA
In Jeevan Kumar v. Enforcement Directorate (2004), the Delhi High Court ruled that FEMA’s shift to civil penalties aligned with global trade practices, removing unnecessary criminal liabilities.
RBI’s Role in FEMA Implementation
In Rameshwar Tanti v. Union of India (2015), the court clarified that the RBI has full discretion to regulate forex transactions under FEMA while balancing economic growth.
Comparison Table: FERA vs. FEMA
| Aspect | FERA (1973) | FEMA (1999) |
|---|---|---|
| Objective | Restrict and regulate foreign exchange | Facilitate and manage foreign exchange |
| Nature | Regulatory and restrictive | Management-oriented and liberalized |
| Control | Stringent government control | Flexible RBI regulations |
| Penalties | Criminal liability with imprisonment | Monetary penalties with rare imprisonment |
| Burden of Proof | Accused presumed guilty | Authorities must prove guilt |
Conclusion
The transition from FERA to FEMA represents India’s shift from a restrictive economy to a global financial hub. While FERA imposed strict forex regulations, FEMA modernized India’s foreign exchange policies, making them business-friendly and investment-oriented.
By simplifying foreign exchange laws, FEMA has strengthened India’s international trade position, boosted foreign investment, and supported the growth of a liberalized financial system.