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.

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.
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.

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

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.
Comparison Chart

BASIS FOR
FERA FEMA
COMPARISON

Meaning An act promulgated, to FEMA an act initiated to

regulate payments and facilitate external trade and
foreign exchange in payments and to promote
India, is FERA. orderly management of the
forex market in the country.

Enactment Old New

Number of sections 81 49

Introduced when Foreign exchange Foreign exchange position was

reserves were low. satisfactory.

Approach towards Rigid Flexible

forex transactions

Basis for Citizenship More than 6 months stay in

determining India
residential status

Violation Criminal offence Civil offence

Punishment for Imprisonment Fine or imprisonment (if fine
contravention not paid in the stipulated time)

About 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.

About 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.
Key Differences Between FERA and FEMA

The primary differences between FERA and FEMA are explained in the following
points:

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

The economic policy of liberalisation was first time introduced in India in the
year 1991 that opened gates for foreign investment in many sectors. In the
year 1997, the Tarapore Committee recommended changes in the present
legislation that regulate foreign exchange in the country. After which FERA
was replaced by FEMA in the country.
Features of FERA
The following features highlight the features of FERA:

● FERA applied to all citizens of India, all business entities operating in India, and
Indian citizens residing abroad.
● It imposed strict regulations on the types of transactions that could be made in
foreign exchange.
● FERA required all foreign exchange transactions to be conducted through
authorized individuals or institutions, such as banks.
● It gave the Reserve Bank of India (RBI) the power to control and regulate the
acquisition, holding, and sale of foreign exchange.
● FERA allowed the RBI to specify the percentage of foreign exchange earnings that
had to be surrendered by Indian companies to the RBI.
● It provided for the confiscation of the value of foreign exchange held in violation of
the Act.
● FERA also included provisions for the inspection of documents and business
premises by the RBI or other authorized individuals.
● It categorized crimes under FERA as criminal offenses that were punishable with
imprisonment or fines.
Features of FEMA
The following points are the features of FEMA:

● FEMA promotes orderly management and development of the foreign exchange

market in India.
● It facilitates external trade and payments to promote orderly development and
maintenance of Indian foreign exchange market.
● FEMA is more transparent, providing clear guidelines on issues related to foreign
exchange.
● It applies to all parts of India and also applies to every branch, office, and agency
outside India that is owned or controlled by an Indian resident.
● FEMA introduced a system where all offenses are civil offenses, unlike under
FERA where offenses were criminal.
● It provides the Reserve Bank of India with the power to regulate, prohibit, or
restrict the acquisition or disposal of foreign exchange.
● FEMA has provisions for the Central Government on imposing restrictions on
activities such as making payments to a person situated outside of the country or
receiving money through them.
● It has a well-defined legal structure that provides the right to appeal and a legal
hearing.
● Under FEMA, if the contravention is unintentional, the guilt can pay the prescribed
sum. After the payment, proceedings may be dropped against the accused
person.