Difference Between FERA and FEMA - Complete Guide

Indian foreign exchange law has undergone rapid development over the years in accordance with the changing requirements of its economic development and the growing volume of international transactions. Two major pieces of legislation which govern the Indian foreign exchange arena are FERA and FEMA. For both the investors, businesses and individuals involved in foreign exchange dealings, the difference between FERA and FEMA is critical. This blog focuses on the major aspects, purposes, and differences between FERA and FEMA.

Overview of foreign exchange laws in India

Foreign exchange law is that body of law which governs the movement of foreign exchange into and out of the country. These regulations play a vital role in managing India's foreign exchange reserves in a stable manner, enabling cross-border trade, and adhering to various financial controls. 

The Government regulated foreign exchange transactions through the Foreign Exchange Regulation Act (FERA), a law that placed tough controls over the conduct of foreign exchange transactions. With the liberalization of the Indian economy and greater integration into the global economy, the government introduced the Foreign Exchange Management Act (FEMA) in the year 1999. It has replaced the FERA as discussed before. 

While analyzing the difference between FERA and FEMA, it is essential to note that FERA regulations were about controlling and regulating, while FEMA provisions are about managing and facilitating foreign exchange transactions.

What is FERA?

The Foreign Exchange Regulation Act (FERA) was introduced in the year 1973 to regulate foreign exchange dealings and preserve India's foreign exchange reserves. There was a scarcity of foreign exchange in India at the time, and regulations were necessary in order to control these payments.

FERA had laid down strict controls on foreign exchange dealings, investments abroad, working of foreign companies, and foreign dealings. The act had given enormous powers to its enforcing agencies, and any breach of these acts was treated as criminal in nature.

It is an important factor to consider the difference between FERA and FEMA because during the regime of FERA, the economy had been strictly controlled and foreign exchange was considered to be a scarce commodity.

What is FEMA?

FEMA was enacted in 1999, and the act came into force in 2000. FEMA replaced FERA and was enacted to promote the economic liberalisation policy of India and manage foreign exchange.

Unlike FERA, FEMA takes a flexible and management-based approach towards foreign exchange transactions. This act gives importance to maintaining an orderly development and management of foreign exchange. 

FEMA was established with the objective of establishing a more flexible system for foreign exchange operations and foreign investments. Therefore, it has a significant role in the regulation of Foreign Portfolio Investment (FPI)  and foreign investments in India.

The difference between FERA and FEMA is clearly evident from the objective of both acts. Where FERA focused on conserving foreign exchange, FEMA was enacted for managing foreign exchange and conducting business activities through foreign exchanges. 

Difference Between FERA and FEMA 

The following table highlights the key differences between FERA and FEMA. 

What is the Importance of FERA and FEMA? 

FERA and FEMA are important legislation with respect to foreign exchange in India. Both acts were enacted to control, manage, and regulate foreign exchange transactions, but the approach is different. Let's understand the importance of FERA and FEMA. 

Importance of FERA 

• FERA was enacted in 1973 with the aim of regulating and controlling the foreign exchange reserves of India during a time of foreign exchange shortage. 
• Imposed strict regulations on currency exchange, foreign investments, and international trade in order to avoid excessive outflow of foreign exchange. 
• Ensured that all foreign exchange-related transactions were highly regulated in order to protect limited reserves. 
• Treated violations as criminal offences and thus imposed stiff penalties, including imprisonment, to ensure compliance. 
• Played an important role when India needed supervision of foreign exchange due to the economic pressures at that time. 

Importance of FEMA

•  FEMA was introduced in 1999 to replace the restrictive FERA structure and support India's economic liberalisation objectives. 
• The act facilitates external trade, foreign payments, and the efficient conduct of the foreign exchange market. 
• Adopted a liberal and management-focused approach, shifting from a strict regulatory and control-oriented framework. 
• Treated violations as civil offences, making compliance easy and the enforcement measures more structured and manageable. 
• Encourages foreign investment and simplifies cross-border transactions, thereby contributing to economic growth. 
• It helps in running business operations smoothly in the international markets and ensures easy participation of India in the global economy, improving the contribution of GDP. 

Key Features of FERA

Major Features of FERA are:

• Passed in 1973.
• Focussed on rigid control over foreign exchange.
• Foreign exchange was treated as a scarce national resource.
• Breaches constituted criminal offenses.
• Burdens of proof lay on the accused individual.
• Very rigid controls on the operations of foreign firms in India.
• Large discretionary power vested in enforcement agencies.

These characteristics make it clear that FERA is a restrictive statute and constitute an integral part of the difference between FERA and FEMA.

Key Features of FEMA

Main features of FEMA:

• Passed in 1999 and enforced from 2000 onwards.
• It emphasizes management and not regulation.
• Helps in facilitating international business transactions.
• Violations under it are civil offenses.
• The burden of proof lies with the enforcing authorities.
• It helps in promoting foreign investments.
• Provides for a clear structure to do business.

These features make FEMA more compatible with the policies of liberalized economy of India. FEMA promotes foreign investment and offers regulations in regard to investments such as  Foreign Direct Investment (FDI)

FERA vs FEMA -Which is Better?

In contrast to the comparison of the differences between FERA and FEMA, FEMA seems to be relatively superior to FERA due to changing economic conditions. The Indian economy has advanced quite significantly since the times of 1970s; thus, a need has arisen for regulations that would promote trade, investments, and financial activities across borders.

FERA performed efficiently during the time when there were insufficient foreign exchange reserves, and it became necessary to impose certain restrictions on businesses.

However, the restrictive nature of FERA did not correspond to liberal economic policies. In comparison to the previous law, FEMA demonstrates a number of benefits:

• More flexibility in regard to foreign exchange operations
• Increased convenience for businesses
• Promotion of foreign investment
• Fewer regulatory requirements
• Primarily civil, rather than criminal, penalties for violations

That is why FEMA is deemed more appropriate to the current economic needs of India

Conclusion 

Understanding the difference between FERA and FEMA can help in understanding how India moved from strict foreign exchange control to a more flexible one that facilitated trade and international business. Today, FEMA facilitates cross-border payments and investment facilities smoothly, which helps individuals and companies carry out their financial transactions with ease. As more people venture into global markets, digital channels like a share market app can help access information about the market, track prices, and manage investments.