F.E.R.A . AND F.E.M.A.

(FOREIGN EXCHANGE REGULATION ACT

AND FOREIGN EXCHANGE MANAGEMENT
ACT)
 Historical Background : 
•Historical Background The Foreign Exchange
Regulation Act of 1973 (FERA) Enacted in 1973
•In the backdrop of acute shortage of Foreign
Exchange in the country.
• 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 (E.D.).
 
 Foreign Exchange Regulation Act
•The Foreign Exchange Regulation Act (FERA) was legislation passed by
the Indian Parliament in 1973 by the government of Indira Gandhi
•It came into force with effect from January 1, 1974.
•FERA imposed stringent regulations on certain kinds of payments.
• It deals in foreign exchange and securities and the transactions which had
an indirect impact on the foreign exchange and the import and export of
currency.
•The purpose of the act, inter alia, was to "regulate certain payments,
dealings in foreign exchange and securities, transactions indirectly
affecting foreign exchange and the import and export of currency, for the
conservation of foreign exchange resources of the country". 
•FERA was repealed in 1999 by the government of Atal Bihari Vajpayee.
•It replaced by the Foreign Exchange Management Act,which
liberalised foreign exchange controls and restrictions on foreign
investment.
 Foreign Exchange Management Act
• The Foreign Exchange Management Act(FEMA) was an act
passed in the winter session of Parliament in 1999 which
replaced Foreign Exchange Regulation Act.
• This act seeks to make offenses related to foreign exchange civil
offenses.
• It extends to the whole of India.
• FEMA, which replaced Foreign Exchange Regulation Act(FERA).
• It had become the need of the hour since FERA had become
incompatible with the pro-liberalisation policies of
the Government of India.
• FEMA has brought a new management regime of Foreign
Exchange consistent with the emerging framework of the World
Trade Organization(WTO).
 Objective Of F.E.R.A &F.E.M.A
• 1) To help RBI in maintaining exchange rate stability.
• 2) To conserve precious foreign exchange.
• 3) To prevent/regulate Foreign business in India.
• 4) To consolidate and amend the law relating to
foreign exchange with the object to facilitating
external trade and payments and for promoting the
foreign exchange market in India.
• 5) So the new law is for the management of foreign
exchange instead of regulation of foreign exchange.
• 7) The size of the bare act got reduced to 49 sections
in place of 81 sections in FERA
 Objectives
 8) To facilitate external trade and payments
 9) To promote the orderly development and
maintenance of foreign exchange market
 DIFFERENCE BETWEEN FERA AND FEMA : 

1)-The objective of FERA was to conserve forex

and to prevent its misuse.
• The objective of FEMA is to facilitate external
trade and payments and maintenance of forex
market in india.
2-Violation of FERA was a criminal offence
• whereas violation of FEMA is a civil offence.

3- Offences under FERA were not compoundable

• Offences under FEMA are compoundable.

4- Citizenship was a criteria to determine the residential

status of a person underFERA.
• while stay of more than 182 days in India is the criteria
to decide residential status under FEMA. 

5- Almost all current account transactions are free, except

a few.
 FERA & FEMA
• To
Object
facilitate
to conserve
external
andtrade
prevent
and payments
misuse

• Violation was
is Criminal
a civil Offence
offenceandand
was isnon
compoundable

• It is
wasa civil
a draconian
law police law

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 Current Account and Capital Account
transactions

Under the FEMA regime, the thrust was on regulation and control
of the scarce foreign exchange, whereas under the FEMA, the
emphasis is on the management of foreign exchange resources.

Under FERA it was safe to presume that any transaction in foreign

exchange or with a non-resident was prohibited unless it was
generally or specially permitted.
FEMA has formally recognised the distinction between current
account and capital account transactions.
• Two golden rules or principles in FEMA are mentioned
as follows:

 all current account transactions are permitted unless

otherwise prohibited.

 all capital account transactions are prohibited unless

otherwise permitted.
 Current Account Transactions
• Any person may sell or draw foreign exchange to or from
an authorized person if such sale or drawal is a current
account transaction.

• The Central Government may, in public interest and in

consultation with the Reserve Bank, impose such
reasonable restrictions for current account transactions as
may be required from time to time.

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 Current Account Transactions Contd.
The definition is inclusive and any expenditure which is not a capital
account transaction will be current account transaction. It includes:

• payments due in connection with foreign trade, other current business,

services, and short-term banking and credit facilities in the ordinary
course of business

• payments due as interest on loans and as net income from investments

• remittances for living expenses of parents, spouse and children

residing abroad, and

• expenses in connection with foreign travel, education and medical

care of parents, spouse and children

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 Current Account Transactions
Few Examples
• Payment for imports of goods
• Remittance of interest on investment made and funds
borrowed from abroad after tax deductions
• Remittance of Dividend if the investment was
allowed without any condition
• Booking with Airlines/Shipping
• Salary/remuneration to Foreign Directors subject to
restrictions in any other law

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 Capital Account Transactions
• capital account transaction" means a transaction which alters
the assets or liabilities, including contingent liabilities, outside
India of persons resident in India or assets or liabilities in India
of persons resident outside India, and includes transactions like:

– Changes in Assets/ Liabilities

– Transfer/ issue of security
– Borrowing/ Lending
– Export, import or holding of currency or currency notes
– Giving guarantee

• Capital Account Transaction are deemed to be prohibited unless

permitted and Current Account Transactions are deemed to be
permitted unless prohibited

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 Penalties for Contravention under FEMA
• The Penalty could be up to thrice the sum involved
where amount is quantifiable

• If the Amount is not quantifiable , penalty upto Rs 2

lacs can be imposed

• If contravention is of continuing nature, further

penalty up to Rs 5000 per day during which the
contravention continues can be imposed

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 Administration Of The Act
- The rules regulations and norms pertaining to many sections are
laid down by RBI in consultation with central Government.

- The Act requires central Government to appoint,

• Adjudicating Authorities for holding enquires related to the
contravention of the Act
• one or more Special Directors (appeals) to hear appeals against
the order of the Adjudicating authorities

- Central Government shall have to establish

1. An Appellate Tribunal for foreign Exchange to hear appeals
against the order of the Adjudicating Authorities and the Special
Directors
2. A Director of Enforcement with a Director and such officers or
class of officers as it thinks fit for taking up for investigation the
contravention under this Act
THANK YOU