Acknowledgment

I, Amartya Mishra, student of B.A. LL.B (V year) would like to show

gratitude and reverence towards our Assistant Professor Dr Anurag
Agarwal who gave the opportunity to work on this particular topic titled
“​FERA v/s FEMA: A historical perspective​” and evaluate its facets
with respect to our own views.
Content:
1. Introduction to FERA
2. Features
3. Introduction to FEMA
4. Features
5. The transition phase
6. Difference in Approach
7. Conclusion
8. Bibliography
Introduction of FERA

The Foreign Exchange Regulation Act, 1973 was an Act to consolidate and amend
the law regulating certain payments, dealing in foreign exchange and securities,
transactions indirectly affecting foreign exchange and the import and export of
currency, for the conservation of the foreign exchange resources of the country and
the proper utilisation thereof in the interest of the economic development of the
country.
Foreign Exchange Regulation Act (FERA) was introduced at a time when foreign
exchange (Forex) reserves of the country were low. FERA proceeded on
presumption that all foreign exchange earned by Indian residents rightfully
belonged to the Government of India and had to be collected and surrendered to the
Reserve Bank of India (RBI). FERA primarily prohibited all transactions that are
not permitted by RBI.
The intent of the Act was to ameliorate the condition of pre-1973 foreign exchange
and fly high on money that was being earned by foreign companies and
particularly indianise it.

This legislation was passed by the Indian Parliament by the government of Indira
Gandhi but it came into force with effect from January 1, 1974. FERA had a
controversial 27 year stint during which many bosses of the Indian Corporate
world found themselves at the mercy of the Enforcement Directorate.

FERA imposed stringent regulations on certain kinds of payments. It dealt in

foreign exchange and securities and the transactions which had an indirect impact
on the foreign exchange and the import and export of currency. It was repealed in
1999 by the government of Atal Bihari Vajpayee and replaced by the Foreign
Exchange Management Act, which liberalised foreign exchange controls and
restrictions on foreign investment.

FEMA had become the need of the hour since FERA had become incompatible
with the pro-liberalisation policies of the Government of India. It brought a new
management regime of Foreign Exchange consistent with the emerging framework
of the World Trade Organisation (WTO). It is another matter that the enactment of
FEMA also brought with it the Prevention of Money Laundering Act 2002, which
came into effect from 1 July 2005.

Features:
As per FERA, the RBI followed certain rules and regulations with respect to
foreign exchange and foreign reserves such as:
1. Restrictions on export and import of certain currencies
2. Restrictions on illegal payments
3. Restrictions in foreign exchange dealings
4. Rules for the payment of exported goods
5. Restrictions on the issue of bearer securities
6. Restriction on settlement in another country
7. Restriction on the holding of immovable property outside India
8. Restrictions on the appointment of certain persons and companies as agents
for dealing in foreign exchange

FERA - that four-letter acronym for the Foreign Exchange Regulation Act - has for
close to a decade signified the Government's determination to bring foreign
companies to heel. For that reason, it has invariably signalled dread in the hearts of
these companies, among them some of the country's best known firms in fields as
diverse as drugs and tea, soap and electronics.

Various instances have been found from excerpts of newspaper and writings of
journalist as to cause a dent of the revenue of foreign firms which in consequence
lacerated the economy of companies.
1. IBM left the country because of FERA; so did Coca-Cola and 12 lesser
known entities who chose not to give in to official demands asking them to
Indianise and reduce foreign shareholdings. These departures caused major
 controversies in the world of international business and affected the
perceptions of prospective foreign investors, most of whom chose to stay
away.

2. The vast majority of companies have chosen to stay. Of the close to 900
foreign equity companies in the country who applied for permission to
continue operations after FERA was passed by Parliament, over 400 were
unaffected by the new law.

3. By any account, it has been a mammoth exercise, seen by not a few as an

effort directed towards gaining greater economic independence. Willy-nilly,
an foreign company had to Indianise unless it was already in, or willing to
go into, specified core sector industries, high-technology areas or exports. In
the process ITC, the tobacco giant, had to reduce its foreign shareholding to
40 per cent, as did Peico Electronics and Electricals, Colgate-Palmolive, and
numerous others.

4. But many others managed to retain foreign majority shareholding: Siemens,

Dunlop, Hindustan Lever itself, Hoechst Pharmaceuticals and dozens of
others, including most of the foreign tea companies.

5. Inevitably, opinions varied: some saw it as a worthwhile effort, others

thought the whole process had been counter-productive, and a third section
felt FERA had achieved but little.1

Explained a spokesman of the Reserve Bank of India (RBI) who handled the
implementation of FERA: "The most important aim of FERA was that we should
allow major foreign participation only when it is accompanied by high technology,
exports, import substitution or research. Before FERA, there was no regulation of
any kind on foreign company investments, and many were in areas of business

1
https://www.indiatoday.in/magazine/economy/story/19820815-what-has-foreign-exchange-regulation-act-
achieved-772094-2013-10-05
which Indian companies could handle just as well. So the foreign exchange outgo
on their operations was not very necessary."
Losses:​ But the failures have been no less noteworthy: despite the reduction in
foreign shareholding in scores of companies, the foreign exchange outgo on
account of many of these foreign companies has gone up, instead of coming down.
L.K. Jha, adviser-at-large to the prime minister, did his own personal study of three
such companies recently and found that in all three cases, including ITC, the
foreign exchange outgo had increased sharply after dilution of foreign equity
holding.

Jha argued that the basic assumptions behind FERA were wrong on a number of
counts: remittances by companies which diluted had gone up in many cases
because they had achieved dilution not by selling off shares in foreign hands but by
raising fresh capital from Indian investors.

Thus, foreign ownership of shares declined not in absolute terms but only in
percentage terms. Further, with the capital raised in the country, they expanded
their operations, so that profits - and hence remittances - went up.

Management Control:​ Jha also argued that reducing foreign equity did not in
most cases lead to a loss of foreign control of the company, since 40 per cent was
sufficient in these cases to ensure management control.

S.K. Goyal of the Indian Institute of Public Administration buttresses this

argument by pointing out that companies like Lipton, Chesebrough Ponds, Warren
Tea and May & Baker had gone to the extent of amending their articles of
association to specify that management control would continue to vest in foreign
hands even if majority ownership was Indian.

A third negative result achieved by FERA has been the sharp slowing down of
fresh foreign investment into India, since the perception in international business
circles was that India was now hostile to foreign investment. Between 1965-66 and
1972-73, foreign investment in India went up from Rs 680 crore to Rs 1,800 crore.

There are still other negative results: under FERA any foreign company that brings
its foreign shareholding down to 40 per cent will then be treated on an equal
footing with Indian companies, and is therefore free from the usual FERA
supervision. Many such companies have as a result achieved the paradoxical result
of growing faster after equity dilution.
The RBI, however, defends FERA by arguing that before FERA was enacted,
companies could grow without any restrictions whatsoever. Says an RBI
spokesman: "Now we have forced them to have 60 per cent Indian shareholding.
That is a step forward."

Warner-Hindustan, another drug company which has already diluted to 40 per cent,
has been readying for rapid growth by acquiring one new licence after another.
May & Baker similarly sees the advantages in reducing foreign holdings and is
preparing to dilute.

It has, therefore, turned out to be a strange denouement: the companies which were
to be tamed by FERA now see it as a blessing, while the Government, which
thought it was being both socialist and nationalist, now wonders whether the game
has been worth the candle.
Introduction to FEMA
In the budget of 1997-98, the government had proposed to replace FERA-1973, by
FEMA (Foreign Exchange management act). FEMA was proposed by the both
house of the parliament in Dec. 1999. After the approval of president, FEMA 1999
has come into force w.e.f. June, 2000. Under the FEMA, provisions related to
foreign exchange have been modified and liberalized so as to simplify foreign
trade. The government hopes that the FEMA will make favourable development in
the foreign money market.

FEMA had become the need of the hour since FERA had become incompatible
with the pro-liberalisation policies of the Government of India. It brought a new
management regime of Foreign Exchange consistent with the emerging framework
of the World Trade Organisation (WTO). It is another matter that the enactment of
FEMA also brought with it the Prevention of Money Laundering Act 2002, which
came into effect from 1 July 2005.

The Foreign Exchange Management Bill (FEMA) was introduced by the

Government of India in Parliament on August 4, 1998. The Bill aims "to
consolidate and amend the law relating to foreign exchange with the objective of
facilitating external trade and payments and for promoting the orderly development
and maintenance of foreign exchange market in India.

Among the various objectives of the Foreign Exchange Management Act (FEMA),
an important one is to revise and unite all the laws that relate to foreign exchange.
Further FEMA targets to promote foreign payments and trade in the country.
Another important motive of the Foreign Exchange Management Act (FEMA) is to
encourage the maintenance and improvement of the foreign exchange market in
India.
Features of the FEMA:

1. FEMA contains 7 Chapters divided into 49 sections of which 12 sections

cover operational part and the rest contravention, penalties, adjudication,
appeals, enforcement directorate, etc.
2. As far as transactions on account of trade in goods and services are
concerned, FEMA has, by and large, removed the restrictions except for the
enabling provision for the Central Government to impose reasonable
restrictions in public interest. The capital account transactions will be
regulated by RBI /Central Government for which necessary circulars
/notifications will have to be issued under FEMA

3. Machinery responsible for various aspects of FEMA is:

Enforcement Directorate​ – To investigate provisions of the Act, the

Central Government have established the Directorate of Enforcement with
the Director and other officers as officers of the Enforcement.
It is mainly concerned with the enforcement of the provisions of the Foreign
Exchange Management Act to prevent leakage of foreign exchange which
occurs through malpractices.
The directorate has to detect cases of violation and also perform substantial
adjudicatory functions to curb malpractices2

4. Foreign Exchange refers to money denominated in the currency of another

nation or group of nations like Euro. Foreign exchange can be cash, funds available
on credit cards and debit cards, travellers’ checks, bank deposits, or other
short-term claims.

2
​Directorate Of Enforcement​, available at http://www.ceib.nic.in/ed.htm,last seen 
6/10/2014.
Section 2(n) of FEMA3 states that “foreign exchange” means foreign currency and
includes,-
(i) deposits, credits and balances payable in any foreign currency,
(ii) drafts, travellers' cheques, letters of credit or bills of exchange, expressed or
drawn in Indian currency but payable in any foreign currency,
(iii) drafts, travellers' cheques, letters of credit or bills of exchange drawn by banks,
institutions or persons outside India, but payable in Indian currency;

FEMA prohibits:
● Dealing in or transfer of Foreign Exchange or Foreign Security to any
person other than Authorised Person
● Make any payment otherwise through an authorized person to or for the
credit of any person resident outside India in any manner
● receive otherwise through an authorized person, any payment by order or on
behalf of any person resident outside India in any manner.
● enter into any financial transaction in India as consideration for or in
association with acquisition or creation or transfer of a right to acquire, any
asset outside India by any person

Comparison between FERA and FEMA:

1. The current account was not defined under FERA however it was introduced
in FEMA.
2. FEMA has more widened definition of “​Authorized Perso​n” and have also
included banks in it.
3. Compatibility with IT was not at all dealt with under FERA however FEMA
has provision for IT.
4. Under FERA, its violation was a criminal offence which was changed to
civil offence in FEMA.

3
​https://indiankanoon.org/doc/127497341/
 5. Under FERA, the appeal used to be sent to High Court however FEMA had
the provision of Special Director (Appeals) and Special Tribunal.
6. Under FERA, no help was extended to the accused however as per section
32 of FEMA, the accused have the right to get the help of a legal
practitioner.
7. FERA was set up with the main objective of conservation of foreign
exchange however FEMA was set up with the main objective of
management of foreign exchange.
8. Under FERA only authorized dealers and money changers were defined as
Authorized Persons however under FEMA even offshore banking units were
included in this definition.

These certain changes were required and it being of innocuous nature has only
helped the FEMA to fall into the place. The FERA was a requisite act and it was
meant to be evolved and amended. The draconian law as in FERA was to be set
aside by the policies of Liberalisation and its effect on it by the implementation of
FEMA alongside other things.
Conclusion
The transition from FERA to FEMA was a requisite implementation of policies
with respect to foreign exchange and inflow of money in the country.
The so called draconian law which punished the offenders with criminal lens was
toned down via civil punishment. The twenty seven years of FERA were essential
as to have a guideline for curtailing the nature of big companies in controlling the
indian market.

The FEMA is because of the lacunas in FERA which were avoided by the
lawmakers and then converted into provisions which are of innocuous nature so as
to punish an offender only through civil action. The role of Officers was mellowed
down as in FERA which was going through BabuRaj and now there is a set of
procedure which needs to be followed and such Raj could be avoided as these
impediments could create an issue in settling of companies. The ease of business is
to an extent and in a way has been related by these several provisions which fillip
in making a positive conducive environment for the companies to settle down in
the country.
Bibliography
1. https://www.gktoday.in/gk/foreign-exchange-regulation-act-1973-f
era​/
2. https://www.taxmann.com/blogpost/2000001675/difference-betwe
en-fera-and-fema.aspx
3. https://www.jagranjosh.com/general-knowledge/fera-fema-in-india
-1448706242-1
4. https://keydifferences.com/difference-between-fera-and-fema.html
5. https://byjus.com/free-ias-prep/foreign-exchange-management-act-
fema/