Difference between FERA and FEMA

Understanding the difference between FERA and FEMA is essential. It is vital for anyone interested in international business, finance, or law in India. The acronyms FERA and FEMA are the Foreign Exchange Regulation Act (FERA)  and Foreign Exchange Management Act (FEMA). Both laws are crucial for regulating foreign exchange. They have significant impacts on investment and business in India. However, they operate on different principles and frameworks. These reflect the economic philosophies and needs of their times.

Historical Background

The shift from FERA to FEMA marks a significant change in India's economic history. It mirrors the nation's shift from a closed to a liberal economy.  FERA was enacted in 1973. It was made for a post-independence India grappling with economic problems. India aimed to conserve its precious foreign exchange reserves. Its strict regulations reflected a protectionist period. The Indian government wanted to control foreign exchanges tightly to protect the national economy. This backdrop set the stage for the shift to FEMA in 1999. It happened as India embraced globalisation and economic reforms in the early 1990s. This transition highlights a fundamental policy shift from conservation and control to facilitating and liberalising foreign exchange.

What is FERA?

It was a law made by the Indian government to regulate the flow of foreign exchange. Its main goals were to save foreign currency and stop its misuse. Under FERA, strict rules were imposed on some types of payments. It covered trading in foreign exchange and securities. It also covered transactions that indirectly affected foreign exchange. 

The Act mandated detailed documentation and prior approval for most foreign exchange transactions. It exerted much control over all dealings with foreign currency. FERA requires strict compliance from people, businesses, and companies. It was a crucial part of India's strategy to manage its foreign exchange during economic limits and protectionism.

What is FEMA? 

FEMA showed a new way to handle foreign exchange in India. FEMA is different from its predecessor. It aims to manage, not control, foreign exchange flows. This legislation eased restrictions on foreign transactions a lot. It made procedures simpler and reduced government oversight. It introduced a clear distinction between transactions for the capital and current accounts. It laid down the legal groundwork for the liberalised capital movement. It focused on facilitating trade and ensuring orderly forex markets. FEMA marked a shift to a more open and investor-friendly economic policy.

Difference between FERA and FEMA

The core distinction between FERA and FEMA lies in their underlying approach and operational mechanisms towards foreign exchange management. With its stringent regulatory framework, FERA aimed to conserve foreign exchange through tight control over forex transactions, imposing heavy compliance on individuals and corporations.

 In contrast, FEMA adopts a more liberal, facilitative stance, focusing on managing rather than controlling foreign exchange flows. This act significantly relaxes restrictions, streamlines procedures, and minimises government oversight, promoting ease of transactions in the foreign exchange domain. 

Thus, while FERA was characterised by restrictive measures to safeguard economic interests, FEMA facilitates an open, conducive environment for foreign trade and investment, aligning with India's liberalised economic outlook.

Following is a tabular comparison of FERA Vs FEMA 

Deeper Dive into the Differences between FERA and FEMA

The table we gave showcases a clear shift in India's approach to foreign exchange management. Let's delve deeper into the specific changes and their implications:

1. Objective:

FERA: Focused on conserving foreign exchange, treating it as a scarce resource. This meant strict regulations to limit outflows and maintain control.

FEMA: Focused on managing foreign exchange. It saw it as an asset that can be used strategically for growth. This opened doors for increased foreign trade and investment.

2. Number of Sections:

FERA: It had 81 sections, which indicates a complex and potentially cumbersome regulatory framework. Businesses and individuals might need help navigating these regulations.

FEMA: Reduced the number of sections to 49, suggesting a more streamlined and user-friendly approach. This could have simplified compliance and encouraged participation in foreign exchange activities.

3. Authorised Person Definition:

FERA: Had a narrow definition of Authorised Person. This likely limited the number of people who could handle forex transactions. This created a bottleneck in the system.

FEMA: Widened the definition to include banks. This allows for a quicker and more accessible system for foreign exchange.

4. Offence Nature:

FERA: Treated violations as criminal offences. This could have led to harsh penalties, including jail. They might have discouraged legal economic activity due to fear of mistakes.

FEMA: Shifted to treating violations as civil offences. It is a less punitive approach. It encourages fixing problems instead of punishing them.

5. Legal Help: 

FERA: Did not offer legal aid to accused individuals. This could have put them at a disadvantage during the process.

FEMA: Introduced the availability of legal help for those facing accusations. This ensures a fairer system by allowing individuals to defend themselves effectively.

6. Appeals

FERA: Made directed appeals to High Courts. This could have increased wait times and costs for resolving disputes.

FEMA: Set up a dedicated system. It has a Special Director (Appeals) and a Special Tribunal. This system can handle foreign exchange-related appeals faster and more specialised.

The Impact on Foreign Investments and Business Operations

The shift from FERA to FEMA greatly boosted India's appeal to foreign investors. It also improved the situation for global businesses. FEMA has introduced a more liberal and investor-friendly framework. It has been vital in boosting a surge in foreign direct investments (FDI). These investments are essential for the country's economic expansion and technological advancement. 

This change boosted Indian businesses globally. It made it easier to reach foreign markets and get foreign capital. It also encouraged residents to explore investments abroad and buy properties outside India. This change under FEMA has fostered a more dynamic, global business environment. It marks a positive stride towards India's international economic ambitions.

Conclusion

The transition from FERA to FEMA symbolises a fundamental shift in India's economic policy from protectionism to liberalisation. This change mirrors India's journey to a more open economy. It also shows a move to align with global trade norms and attract foreign investment. India has shifted to a system that values management over strict foreign exchange control. This has created a good business environment. It is ripe for growth, trade, and development. The journey from the limits of FERA to the freedoms under FEMA shows India's ambition. India wants to be a big player on the global stage. It shows India is ready to embrace globalisation for its prosperity.