FERA and FEMA

FERA or the Foreign Exchange Regulation Act was introduced in the year 1973 at a time when the foreign reserves of the country were quite low. Its main purpose was to regulate the foreign exchanges so as to maintain a satisfactory account of the foreign reserves in the country.

FEMA or the Foreign Exchange Management Act was introduced in 1999 and replaced FEMA. It was introduced at a time when the foreign reserves of the country were satisfactory. Its main aim was to manage the foreign exchange to promote and facilitate growth.

FERA was related to restricting and regulating foreign exchange while FEMA was enacted to manage the foreign exchanges.

Foreign Exchange

Foreign Exchange refers to the trading of one currency over another.  For example, USD can be swapped for, say, INR or Euro. The market that facilitates the foreign exchange is called the Foreign Exchange Market or Forex for short. 

The Forex market is one of the most profitable and liquidated markets in the world with trillions of dollars flowing into it. The Forex market is a system of banks, brokers, institutions and individual traders worldwide.

The rate of Foreign Exchange is determined by the market, a value which is known as the exchange rate. The currencies are listed in pairs while trading in Foreign Exchange with a price associated with them. Once, Foreign Exchange was touted as the affairs of the government and large firms. Today’s world has become more accessible and anyone can trade in the Foreign Exchange easily. Numerous investment companies offer opportunities to individuals to open accounts for the purpose of trade. 

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Foreign Exchange Regulation Act (FERA)

The Foreign Exchange Regulation Act was formulated with the aim of controlling foreign exchange to preserve the foreign reserves, which were seen as a scarce resource back then. The aim was to regulate foreign payments, regulate the dealings in foreign exchanges and security and conservation the foreign exchange for the nation. There are a total of 81 sections under this act. 

Some important features of the FERA are as follows:

• The RBI shall authorise a company/individual for dealings in foreign exchange
• RBI has the power to authorise the dealers for transactions in foreign currencies and even revoke the authorisation in cases of non-compliance
• Money changers, the individuals who are entrusted with the responsibility of converting currency, shall be authorised by the RBI to do so at the specified rates (by RBI)
• No individual apart from the authorised dealers shall attempt to deal in cases of foreign exchange
• The foreign currency shall only be used for the purposes it was acquired for
• In case that is not possible, the currency shall be sold to another dealer within 30 days
• No person, without permission from RBI, is liable to make any transactions with a partner, not a resident of India
• No negotiations shall be made regarding any bills of exchange in which the right to receive payment is outside India
• No person is permissible to make any credits into the account of any person outside India
• No individual, other than the ones authorised by the RBI is liable to send foreign currency outside the territory of India
• The person, liable to make foreign exchanges, shall not delay the receipt of the foreign exchange

The FERA faced severe criticism and received backlash from the economic experts because it hindered growth and also produced several impediments in the path of modernisation of Indian industries.

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Foreign Exchange Management Act (FEMA)

The Foreign Exchange Management Act was enacted in 1999 and replaced the previous Foreign Exchange Regulation Act.  It was introduced in the background of various liberalisation reforms concerning the Indian economy. The main idea behind the act was to facilitate external growth and encourage foreign exchanges. It has a total of 49 sections.

Some of the key features under FEMA are as follows:

• The Act enabled the authorised individuals to facilitate forex trading
• It also empowered RBI to place restrictions and they were expected to provide regular input regarding the trading to RBI
• The Act allowed Indian nationals to trade in forex and own immovable property outside Indian territory
• This was however only applicable if the property was acquired on trips to the said country or if the person in question has inherited the property
• The FEMA Act also took into consideration foreign exchange transactions and remittances which included foreign transactions by Indian residents or for the exchange of foreign currency in India for travelling
• The Act also included several regulations and restrictions, pertaining to issues such as authentication of the required documents, current account transactions
• According to FEMA, a few limits were also put in place such as:

1. In instances, where the person breaches the limit set in place, the penalty fee stands at thrice the value of the transaction amount. In cases, where the amount of transaction is unquantifiable, the penalty remains on INR 2 lakh and for daily occurrences of the breach, the penalty amount stands at INR 5000 every day.
2. If any kind of property is involved in such cases, the property is confiscated and is considered as a part of the penalty fee.

Differences and Comparison

Aims

1. FERA- To regulate the foreign exchange in order to conserve foreign reserves.
2. FEMA- To facilitate and manage external trade and payments and encourage dealings in foreign exchange to liberalise the economy and create opportunities for growth and development.

Number of Sections

1. FERA- 81 sections
2. FEMA- 49 sections

Enactment Background

1. FERA – It was formulated at a time when the foreign reserves of the country were considered a scant resource
2. FEMA- It was enacted at a time when the foreign reserves of the country were quite satisfactory

Category of Violation

1. FERA- Criminal offence
2. FEMA- Civil offence

Punishment

1. FERA- Direct imprisonment
2. FEMA- Fine and imprisonment in cases where the penalty fee is not paid on time

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Conclusion

The FERA was drafted to regulate and place restrictions on forex trading to prevent the misuse and preserve foreign reserves. FEMA was enacted to manage forex trading and implement measures to liberalise the economy. The move to enact FEMA marked a major shift in the Indian government’s policy from the rigidity of FERA to the flexibility of FEMA.