FERA and FEMA

FERA
FERA is the Foreign Exchange Regulation Act (1973).
It was implemented to streamline and simplify the foreign exchange system in India.
The primary objectives of this regulatory act were to oversee foreign exchange
transactions, manage imports and exports of currencies, and regulate transactions
indirectly impacting foreign exchange.
With 81 sections, FERA aimed to control foreign exchange dealings and conserve
foreign exchange reserves in the country. However, due to its rigid regulations
obstructing India's economic progress, FERA was eventually replaced by FEMA
Key Provisions in FERA
•The Reserve Bank of India (RBI) authorises companies or individuals to make foreign
exchange transactions.
•The RBI can authorise dealers for foreign currency transactions and revoke this authorisation
for non-compliance.
•Money changers who convert currency must be authorised by the RBI and adhere to specified
exchange rates.
•Only authorised dealers are permitted to engage in foreign exchange transactions.
•Foreign currency must be used only for its intended purpose or sold to another dealer within
30 days if not feasible.
•Transactions with non-resident partners require permission from the RBI.
•Negotiations involving bills of exchange with payments outside India are prohibited.
• Credits into accounts outside India require RBI approval.
•Sending foreign currency out of India is only permissible for authorised individuals.
• Timely Receipt of foreign exchange is mandatory for individuals handling foreign
exchange transactions.
•FERA received criticism from economic experts for hindering growth and creating
obstacles to modernising Indian industries
Advantages of FERA
1.Increased government control over the economy: FERA granted the government broad powers to regulate the
economy, including setting prices and controlling the distribution of goods and services. This allowed the
government to better manage the economy during the Great Depression.
2.Relief for the unemployed: FERA provided funding for public works projects and other programs that created
jobs for the unemployed. This helped to alleviate the suffering of those affected by the economic downturn.
3.Improved living standards for the poor: FERA provided funding for programs that helped to improve the living
conditions of the poor, including public housing, education, and health care.
4.Encouraged economic recovery: By providing funding for public works projects and other programs, FERA
helped to stimulate economic activity and promote recovery from the Great Depression.
5.Promoted social welfare: FERA provided funding for programs that helped to improve the welfare of the general
population, including education, health care, and housing.
6.Encouraged private-public partnerships: FERA provided funding for private companies to participate in public
works projects and other programs, which helped to promote cooperation between the private and public sectors.
Disadvantages of FERA
1.Reduced personal freedom: The government's broad powers under FERA limited the freedom of
individuals and businesses to make economic decisions.
2.Inefficiency and bureaucracy: The implementation of FERA programs was often slow and bureaucratic,
which reduced their effectiveness.
3.Dependence on government: FERA programs created a dependency on government assistance for many
individuals and businesses, which could be difficult to break in the future.
4.Limited economic growth: FERA's focus on government control and regulation of the economy may
have hindered economic growth in the long term.
5.Lack of flexibility: The government's rigid control over the economy under FERA limited the ability of
the private sector to adapt to changing conditions.
6.Inequalities: FERA programs were not always distributed equitably, with some individuals and businesses
receiving more benefits than others.
FEMA
FEMA is the Foreign Exchange Management Act.
It succeeded FERA in 1999 to enhance India's foreign exchange framework and administration.
Comprising 49 sections, FEMA:
•Established a structured management system for foreign exchange in India.
• Implemented transparent guidelines and regulations governing the foreign exchange market.
•Streamlined external trade and payments with a defined approach. Introduced a precise legal
framework to oversee legal proceedings.
Key Features of FEMA
1.It gives powers to the Central Government to regulate the flow of payments to and from a person
situated outside the country.
2.All financial transactions concerning foreign securities or exchange cannot be carried out without the
approval of FEMA. All transactions must be carried out through “Authorised Persons.”
3.In the general interest of the public, the Government of India can restrict an authorized individual from
carrying out foreign exchange deals within the current account.
4.Empowers RBI to place restrictions on transactions from capital Account even if it is carried out via an
authorized individual.
5.As per this act, Indians residing in India, have the permission to conduct a foreign exchange, foreign
security transactions or the right to hold or own immovable property in a foreign country in case
security, property, or currency was acquired, or owned when the individual was based outside of the
country, or when they inherit the property from individual staying outside the country.
 Advantages of FEMA
1.Improved Foreign Exchange Management: FEMA provides a comprehensive framework for managing foreign
exchange transactions in India, thereby reducing the risk of illegal or unauthorized transactions. It also streamlines
the process of obtaining necessary approvals and permissions for conducting foreign exchange transactions.
2.Encourages Foreign Investment: FEMA allows for greater ease of doing business in India, particularly for
foreign investors. It removes restrictions on foreign investment in various sectors, thereby attracting more foreign
investment and boosting economic growth.
3.Facilitates International Trade: FEMA simplifies the process of obtaining foreign exchange for import and
export transactions, thereby facilitating international trade and promoting economic integration.
4.Enhances Transparency: FEMA requires all foreign exchange transactions to be reported to the Reserve Bank
of India, thereby increasing transparency in the foreign exchange market and reducing the risk of money
laundering and other illegal activities.
5.Promotes Stability: FEMA helps to maintain stability in the foreign exchange market by preventing speculative
and unauthorized transactions. This helps to minimize the impact of external shocks on the Indian economy.
 Disadvantages of FEMA
1.Complex Regulations: The regulations under FEMA can be complex and time-consuming to navigate,
particularly for small businesses and individuals. This can lead to delays in foreign exchange transactions and
added costs for compliance.
2.Limited Flexibility: FEMA imposes strict restrictions on certain types of foreign exchange transactions, such as
those related to capital account transactions. This can limit the flexibility of businesses and individuals to
conduct transactions as per their needs.
3.Lack of Awareness: Many businesses and individuals may not be aware of the regulations under FEMA,
leading to non-compliance and penalties. This can be a major disadvantage for small businesses that may not
have the resources to navigate the regulations.
4.Limited Impact on Illegal Transactions: Despite the regulations under FEMA, illegal foreign exchange
transactions may still occur due to a lack of enforcement or the use of illegal channels.
5.Discourages Foreign Investment: The restrictions and regulations imposed by FEMA may discourage foreign
investors from investing in India, particularly in sectors where regulations are strict or approvals are difficult to
obtain. This can negatively impact economic growth and development.
 FERA
FERA stands for Foreign Exchange Regulation
Act.
FERA was enacted in 1973 by the
Government of India to regulate foreign
exchange transactions.
FERA had strict rules and regulations for
Difference foreign exchange transactions, and non-
compliance could result in severe penalties
between FERA and imprisonment.
and FEMA FERA applied to all residents of India and
required them to seek permission for certain
foreign exchange transactions.
FERA restricted the amount of foreign
exchange that could be held and used by
individuals and businesses.
FERA was criticized for being too restrictive
and hindering economic growth.
FEMA
FEMA stands for Foreign Exchange
Management Act.
FEMA was enacted in 1999 by the
Government of India to replace FERA and
provide a more liberalized regime for foreign
exchange transactions.
FEMA has a more relaxed and liberal
approach to foreign exchange transactions,
and non-compliance results in monetary
penalties.
FEMA applies only to entities regulated by
the Reserve Bank of India (RBI) and does not
require permission for most foreign exchange
transactions.
FEMA allows for greater flexibility in holding
and using foreign exchange by individuals
and businesses.
FEMA is seen as a more growth-friendly and
investor-friendly law.