Comparison of the Foreign Exchange Regulation Act (FERA) and the Foreign Exchange Management Act (FEMA) - the reason for the switch to the latter

Key Takeaways 

• In order to address economic issues and protect reserves, India has enacted the Foreign Exchange Regulation Act (FERA) and the Foreign Exchange administration Act (FEMA), which govern cross-border transactions, the administration of reserve currencies, and the movement of foreign currency internationally.
• Strict limitations on currency exchange, foreign capital, real estate acquisitions, and business activities between Indian nationals and foreigners were enforced by the FERA, which went into effect in 1974. These rules hampered economic expansion and discouraged international investment. In order to free up the market and abolish governmental control, FEMA was established in 1991.
• Under the Foreign Exchange Management Act (FEMA), the RBI permits individuals to transact in foreign cash or securities. The Act must be adhered to and prohibited transactions must be avoided by authorised parties. 
• Non-resident payments to banned accounts were excluded from section 9 under FERA’s Section 10, however they must receive authorization from the credit of a restricted account. Without prior notice, the Central Government was able to inspect accounts under Section 20.
• In contrast to FERA, which prioritises rigorous management of foreign exchange reserves, FEMA prioritises attracting foreign investment, modernising procedures, and enabling cross-border trade. India's transition highlights flexibility, consistency, and conformity.

Introduction 

Foreign Exchange Regulation Act (FERA) and Foreign Exchange Management Act (FEMA) are important laws in India that regulate international currency movement, cross-border transactions, and the management of reserve currencies.

 FERA was formed in 1973 in response to economic concerns and to protect reserves. Whereas by regulating foreign exchange trades and conserving reserves, FEMA attempted to forbid unauthorised trades and ensure rupee stabilisation. 

Notable features

FERA (91 sections)

The FERA went into effect on January 1st, 1974.

Severe restrictions on currency exchange transactions, including bans on the possession, disposal, and usage of foreign currency.

Foreign capital and the purchase of real estate require the consent of non-residents.

Control on business dealings between Indian citizens and foreigners. Harsh fines and legal action are used to enforce violations.

The strict and complex restrictions of FERA were well-known for routinely discouraging foreign investment and stifling economic growth. 

FEMA was created as a result of economic reforms India carried out in 1991 in order to open its economy and end rigorous government oversight.

FEMA (48 sections)

The Foreign Exchange Management Act (FEMA), which succeeded the Foreign Exchange Regulation Act (FERA), was approved by the Indian Legislature on December 29, 1999. It became operative and enforceable in June 2000.

Its objectives were to simplify foreign exchange limitations, promote foreign investment, and ease trade and payments between nations. The Act was developed to align India’s the management of foreign currencies with the dynamic character of the global economy.

Adoption of a single, all-encompassing law to regulate foreign investment and international financial operations.

A concentration on building and keeping up foreign exchange reserves.

The main regulatory authority for foreign exchange activities was established as the Reserve Bank of India (RBI).

Removing restrictions on various transactions and expediting the approval process.

Differences and the changes it brought

The Foreign Exchange Management Act (FEMA) changed quite a bit from the Foreign Exchange Regulation Act (FERA), which it succeeded. Under FEMA, the term "Authorised person" includes banks, but FERA's meaning was more limited. The requirement to have been in India for the previous six months replaced citizenship as the criterion for determining resident status. 

Provisions pertaining to information technology (IT) were left out of the FERA but included in the FEMA. FERA considered violations as criminal offences with the penalty of jail, while FEMA treated breaches as civil offences with monetary fines that could lead to detention for non-payment.

In contrast to FERA offences, which were not compoundable and did not grant the right to legal counsel, FEMA offences allowed for the mitigation of charges. While FEMA established an appeals director and court, FERA’s appeals went all the way to the Supreme Court.

 The necessity under FERA for RBI approval of foreign exchange dealings has ultimately been eliminated by FEMA.

Relevant Sections from each

FEMA 

• Section 10

The Reserve Bank of India (RBI) has the authority to allow individuals to transact in foreign cash or securities under the Foreign Exchange Management Act (FEMA). The authorization is granted based on a request and is limited by a few boundaries. 

The RBI may revoke the authorisation if it is in the public interest to do so or if the authorised person fails to abide by the Act's or its terms. Authorised parties are required to abide by the RBI's directives and refrain from engaging in transactions that are not permitted by them. 

If the other party refuses to comply or provides unreliable information, an authorised person must refuse the transaction and contact the RBI.

• Section 20

The Appellate Tribunal is managed by a central government delegate and a nominated Chairperson. It may exercise its authority through its Benches, which convene in New Delhi or other locations after consulting the Chairperson. 

The areas under each Bench's authority are designated by the Central Government. The Chairperson has the authority to move a Member and send cases to a bench having two Members if required.

FERA

Section 10

The Reserve Bank may give an exemption from section 9 if a payment is made to a person who lives outside of India as long as the transfer is made to a blocked account. If payment is made in the recipient’s name, the crediting will be a positive clearance.

 No money can be withdrawn without permission from a prohibited account’s credit. An account opened at a bank that has received Reserve Bank approval as a “blocked account” or that has been ordered shut is referred to as a “blocked account.”

Section 20

The Central Government may allow a gazetted official to look over someone’s records of account if they don’t provide notice within the permitted timeframes or if their books of account aren’t compliant with the law. 

The officer may enter the property at any reasonable hour, both before and after sunset, for the aim of inspecting the records of accounts. Sensitive material linked to the audit will be kept discrete and kept from distribution unless this Act expressly mandates it.

Relevant Criticism of the  FEMA

It can be challenging and time-consuming to comply with FEMA guidelines, especially for small businesses and individuals. They can increase regulatory costs and slow down currency exchange operations. They also limit the flexibility of some transactions, such as capital market transactions, which may be limited. 

Due to ignorance, small businesses may experience non-compliance and penalties. Foreign investment may be discouraged by FEMA restrictions, particularly in sectors with tight standards or difficult approval procedures, which would be bad for the growth and advancement of the economy.

Conclusion 

FEMA and FERA have quite different methodologies and end results. To support economic growth, FEMA works to promote foreign investment, simplify regulations, and facilitate cross-border trade. There is more freedom, more protection from the law, and easier access to foreign exchange transactions.

The FERA, on the other hand, prioritised strict administration and maintenance of foreign exchange reserves, which impeded investment inflow and blocked economic liberalisation.

 The switch from FERA to FEMA demonstrates India’s commitment to an economy that is more transparent and welcoming to investors. Investments must be encouraged while being safeguarded from vulnerabilities and potential hazards. Continuous review and adjustments are needed to create the perfect regulatory environment that promotes economic growth while maintaining stability and compliance.