Difference Between FERA and FEMA: Meaning and Economic Impact

The Foreign Exchange Regulation Act (FERA) was introduced on 1st January 1974 to regulate foreign exchange payments; it was later repealed during the Atal Bihari Vajpayee government as part of economic reforms in 1998.

The Foreign Exchange Management Act (FEMA) was introduced by the Parliament of India on 29^th December 1999, which came into force on 1^st June 2000.

Key Takeaways

• FERA was introduced in 1973 to strictly control and regulate foreign exchange in India when foreign reserves were limited.
• It was later replaced by FEMA, which came into force on 1^st June 2000, supporting the intention of liberalisation introduced in the New Economic Policy in 1991.
• FERA treated foreign exchange violations as criminal offences, whereas under FEMA, they were treated as civil offences with monetary penalties.
• FEMA promotes the orderly development of the foreign exchange market in India under the supervision of the RBI.

What is FERA and FEMA?

FERA was introduced to regulate foreign exchange transactions, with the objective of conserving foreign exchange resources, ensuring their proper utilisation, and promoting the economic development of the country.

FEMA was introduced with laws regulating foreign exchange transactions and promoting the orderly development and maintenance of the foreign exchange market in India.

Key Differences between FERA and FEMA

Why FERA Was Replaced by FEMA?

The FERA was replaced by FEMA due to drastic changes in the Indian economic environment, and the older law had become too restrictive for a liberalised economy.

1. Change in the Economic Policy 
   The FEMA was enacted with effect from the introduction of the New Economic Policy (NEP) in 1991, when the GOI, as part of its agenda to liberalise the Indian economy, permitted the free movement of foreign exchange in and out of India.
2. Shift from Regulation to Management 

• FERA focused on the strict regulation and control of foreign exchange.
• FEMA focuses on the management and facilitation of foreign exchange transactions.

3. Criminal Provisions Under FERA – 

• Under FERA, violations were treated as criminal offences with possible imprisonment.
• Under FEMA, violations are treated as civil offences with monetary penalties.

4. Facilitate Foreign Trade and Payments
   FEMA was introduced with the objective of facilitating external trade and payments and promoting smooth international financial transactions.
5. Development of Foreign Exchange Markets
   FEMA aims to promote the orderly development and maintenance of the foreign exchange market in India, under the supervision of the Reserve Bank of India (RBI).

Impact of FEMA on Indian Economy

The introduction of FEMA had a significant impact on the Indian Economy by creating a more liberal and transparent framework for regulating foreign exchange transactions.

1. Promotion of Foreign Exchange – FEMA has remarkably simplified the rules and regulations related to foreign exchange investments, allowing easier inflows of Foreign Direct Investment (FDI) and portfolio investment. This resulted in increased capital flows and more foreign investment in India.
2. Growth in International Trade – The introduction of FEMA contributed to the expansion of Indian global trade by facilitating external trade and payments, making it easier for businesses both in India and abroad to engage in exports and imports.
3. Development of the Foreign Exchange Market – FEMA permitted commercial banks to deal in foreign exchange, thereby improving liquidity and efficiency.

FEMA aims at the orderly development of foreign exchange markets under the supervision of the RBI.

4. Simplified regulation and compliance – Compared to FERA, FEMA introduced simpler procedures and fewer restrictions, making compliance easier for businesses and individuals dealing in foreign exchange.

For example, an Indian company wants to import machinery from another country:

• Under FERA, the company had to seek prior permission from the government or authorities before making a foreign payment, which delayed the supply of machinery.
• But under FEMA, the Company can make the payment directly through an authorised bank or dealer, following the simpler rules set by the RBI.

5. Encouragement of Global Integration – FEMA supported India’s integration with the global economy by facilitating cross-border investments, foreign collaborations and international financial transactions.