FERA to FEMA

What is FERA?

Foreign Exchange Regulation Act, shortly known as FERA, was

introduced in the year 1973. The act came into force, to regulate foreign
payments, securities, currency import and export and purchase of fixed assets by
foreigners. The act was promulgated in India when the position of
foreign reserves wasn’t satisfactory. It aimed at conserving foreign exchange and
its optimum utilisation in the development of the economy.

The act applies to the whole country. Therefore, all the citizens of the
country, inside or outside India are covered under this act. The act extends to
branches and agencies of the Indian multinationals operating outside the country,
which is owned or controlled by the person who is the resident of India.

What is FEMA?

FEMA expands to Foreign Exchange Management Act, which was

promulgated in the year 1999, to repeal and replace the earlier act. The act applies
to the whole country and to all the branches and agencies of the body corporate
operating outside India, whose owner or controller is an Indian resident and also
any violation committed by the person covered under the Act, outside India.

The main objective of the act is to facilitate foreign trade and to encourage
systematic development and maintenance of forex market in the country. There
are total seven chapters contained in the act which are divided into 49 sections,
out of which 12 sections deal with the operational part while the remaining 37
sections cover penalties, contravention, appeals, adjudication and so on.

Transition of FERA to FEMA

The Foreign Exchange Regulation Act (FERA) was a legislation passed by

the Indian Parliament in 1973 and came into force with effect from January 1,
1974. The laws were enacted for the management and regulation of foreign
exchange and payments in India. It was a temporary arrangement to control the
flow of investment at the time of Independence. It also imposed stringent
regulations on certain kinds of payments, foreign exchange, securities, and
transactions which had an indirect impact on the import and export of currency.

Features and Objectives of FERA

FERA was applicable to all citizens residing in and outside India, branches
and agencies outside India, as well as companies or corporate bodies, registered
or incorporated in India. The principal rule that governed such bodies was that all
branches of foreign companies that operated in India were made to convert
themselves into Indian companies with at least 60 per cent local equity
participation. Moreover, all subsidiaries of foreign companies were ordered to
bring down their foreign equity share to 40% or less.
The preamble to the Act describes it as ‘An Act to consolidate and amend
the law regulating certain payments, dealings in foreign exchange and securities,
transactions indirectly affecting foreign exchange and the import and export of
currency and bullion, for the conservation of foreign exchange resources of the
country and the proper utilisation thereof in the interests of the economic
development of the country”. On the face of it, the objective is the conservation
of foreign exchange and its proper utilisation, and not towards the regulation of
foreign companies.
During the post-Independence period, the objective of the Act was limited
i.e., it was mainly to regulate the inflow of foreign capital and concerns with the
substantial non-resident interest, and the employment of foreigners. Owing to the
preserving and consolidating attitude of the Government, so as to avoid any sort
of foreign domination, the initial approach towards foreign investment was
unenthusiastic. However, due to rapid industrialisation in the country, there was
an essential need to conserve foreign exchange. There was a severe imbalance
between trade and payments.
In this background, the Ministry of Finance pointed out before the Joint
Parliamentary Committee on the Foreign Exchange Regulation Bill that it was
necessary to replace the previous Foreign Exchange Regulation Act of 1947 in
order to deal effectively with the following:
1. regulation of foreign capital in India
2. regulation of employment of foreigners in India
3. making enforcement of provisions regarding foreign exchange leakages more
rigorous.
The Foreign Exchange Regulation Act, 1973 was drafted with the major
changes in the abovementioned areas. It worked towards the effective
implementation of the Government policy and the removal of the previous
inconsistencies.

Challenges that led from Foreign Regulation Act, 1973 (FERA) to Foreign
Exchange Management Act, 1999 (FEMA)
The FERA in its original form became ineffective and increasingly
incompatible with the change in the economic policy and the opening up of the
country to liberalization in the early 1990s. The need for a sustained foreign
exchange husbandry was required along with a less stringent and supportive
enactment. Therefore, the Foreign Exchange Management Act, 1999 (FEMA)
was adopted.
The FERA system provided for the approval of the Reserve Bank whether
it was special or general, in accordance with many of the laws thereunder. General
permits have been granted by the State Bank under these provisions in respect of
various matters by issuing several notices from time to time since the Act came
into effect on 1 January 1974. Special permits were granted to applicants who
applied for the purpose. Therefore, in order to understand part of the operation of
the regulations one must refer to the Exchange Control Manual and the various
notices issued by the RBI and the Central Government.
FEMA has brought about a change in and out of phase 3, which deals with
foreign exchange transactions, etc. There are no other FEMA provisions that
specify obtaining RBI approval. It looks like this is a change from the time of the
permit to the regulation. FEMA's emphasis on the RBI is to lay down regulations
rather than granting warrants. This change also removed the concept of "exchange
control" and ushered in the era of "exchange management". As a result of this
change, the legal title has rightly been changed to FEMA.
The preamble of FEMA stipulates that the Act shall incorporate and amend
the law relating to foreign exchange in order to facilitate foreign exchange and
payment and to promote the systematic development and maintenance of the
foreign exchange market in India. Regarding the facilitating of foreign exchange,
Section 5 of the Act removes restrictions on foreign currency deductions for the
purpose of current account transactions. Since foreign trade i.e., import and
export of goods and services, involves transactions in the current account, there
will be no need to seek RBI permits in respect of remittances involving foreign
trade. The need to remove restrictions on account sales currently became
necessary as the country had submitted to the IMF in August 1994 that it had
secured Article VIII. This notice states that no restrictions will be placed on
remittances due to the current account transaction.

The Need for FEMA

The need for a new law was addressed to two main figures.
FERA was introduced in 1974 when India's financial position was unsatisfactory.
It required strong controls to save foreign currency and to use it for the benefit of
the country. The strongest limits have exceeded their use in the current changed
environment.
Secondly there was a need to scrap FERA provisions and there was a forward-
looking law on foreign exchange issues.

Key Differences between FERA and FEMA

1. FERA is an act which is enacted to regulate payments and foreign
exchange in India, is FERA. FEMA an act initiated to facilitate external
trade and payments and to promote orderly management of the forex
market in the country.
2. FEMA came out as an extension of the earlier foreign exchange act FERA.
3. FERA is lengthier than FEMA, regarding sections.
 4. FERA came into force when the foreign exchange reserve position in the
country wasn’t good while at the time of introduction of FEMA, the forex
reserve position was satisfactory.
5. The approach of FERA, towards forex transaction, is quite conservative
and restrictive, but in the case of FEMA, the approach is flexible.
6. Violation of FERA is a non-compoundable offence in the eyes of law. In
contrast violation of FEMA is a compoundable offence and the charges can
be removed.
7. Citizenship of a person is the basis for determining residential status of a
person in FERA, whereas in FEMA the person’s stay in India should not
be less than six months.
8. Contravening the provision of FERA may result in imprisonment.
Conversely, the punishment for violating the provisions of FEMA is a
monetary penalty, which may turn into imprisonment if the fine is not paid
on time.

Conclusion
It was seen that there were several inconsistencies and gaps between the
declared object and the actual impact of the Act in India. But what made FERA
stand out was that foreign companies were gaining by implementing the various
provisions of the Act. The Indian economy was at an all-time low of foreign
exchange reserves, which continued to drop even with FERA in place. Thus, in
order for the vision of FERA to come into place, it was replaced by FEMA, 1999,
which proved to be more fruitful in the long run.