Difference Between FERA and FEMA, Significance, Key Points

Foreign exchange regulations are responsible for managing a country’s foreign transactions and maintaining economic stability. India, recognizing the need to regulate the inflow and outflow of foreign currency, implemented two major laws which includes FERA (Foreign Exchange Regulation Act) and FEMA (Foreign Exchange Management Act). Both laws serve a varied purpose of regulating foreign exchange but they differ in objectives, provisions, and approach.

What is FERA?

The Foreign Exchange Regulation Act (FERA) was introduced in 1973 when foreign exchange reserves of India were critically low. FERA was designed to regulate and conserve foreign exchange resources. It granted the Reserve Bank of India and the central government powers to control and restrict foreign exchange transactions, capital flows, and dealings involving foreign companies in India.

Under FERA, all foreign exchange transactions required prior approval from the Reserve Bank of India. The law expects every foreign exchange violation as a criminal offense, which often leads to prosecution and imprisonment.

Key Features of FERA

• FERA was enacted in 1973, and came into force in 1974.
• Violation of FERA presumed guilt until proven innocent.
• Criminal liability for violations.
• Strict control over foreign companies.
• Required RBI approval for almost every foreign transaction.

What is FEMA?

The Foreign Exchange Management Act (FEMA) replaced FERA in the year 2000. It marked a significant shift in India’s approach towards foreign exchange regulation. FEMA was enacted in response to the liberalization policies of the 1990s and aimed to facilitate external trade and payments rather than control them. Unlike FERA, FEMA focuses on management rather than regulation. It deals with foreign exchange transactions in a more market-friendly and simplified manner. The act encourages transparency, ease of doing business, and flexibility in foreign investments.

Key Features of FEMA

• FEMA was enacted in 1999, implemented from June 1, 2000.
• Under FEMA (Foreign Exchange Management Act), any violation of its provisions is considered a civil offence, not a criminal one.
• Encourages foreign investment and trade.
• Focuses on current account convertibility.
• The Reserve Bank of India regulates foreign exchange under FEMA with delegated authority.

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Difference Between FERA and FEMA

Below we have shared a table outlining the main Difference Between FERA and FEMA:

FEMA Significance

FEMA plays an important role in India’s economic growth. It enables Indian businesses to participate in the global economy, facilitates remittances, and eases cross-border investment flows. FEMA is also crucial in ensuring that foreign exchange transactions with the legal framework while promoting transparency.