The Indian stock market operates within a regulatory framework that includes two crucial acts – FERA (Foreign Exchange Regulation Act) and FEMA (Foreign Exchange Management Act). These are two important laws that regulate the foreign exchange market and the transactions involving foreign currency in the country. FERA stands for Foreign Exchange Regulation Act, which was enacted in 1973 and repealed in 1999. FEMA stands for Foreign Exchange Management Act, which replaced FERA and is still in force. However, there is a huge difference between FERA and FEMA in terms of their objectives, scope, provisions, and penalties.
In this blog, we will explain the major differences between FERA and FEMA and share insights into the reasons why FEMA replaced FERA.
What is FERA Act?
The FERA Act stands for the Foreign Exchange Regulation Act, which was enacted in 1973 and repealed in 1999.
The FERA Act introduced stringent rules for specific payments, foreign exchange and securities transactions, and dealings that indirectly influenced foreign exchange, as well as the import and export of currency.
The result?
It was a hindrance to the smooth economic development of the nation.
Some Basics About FERA Act
- Full Name: Foreign Exchange Regulation Act.
- Enacted in 1973, repealed in 1999.
- Strict rules on certain payments, foreign exchange dealings, and transactions indirectly affect foreign exchange, currency import, and export.
- Presumed that all foreign exchange earned by Indian residents belonged to the Government and had to be surrendered to the Reserve Bank of India (RBI).
- Treated all offences related to foreign exchange as criminal, with possible imprisonment and fines.
What is FEMA Act?
The FEMA Act stands for the Foreign Exchange Management Act, which replaced the FERA Act in 1999 and is still in force.
The primary goal of the FEMA Act is to consolidate and modify the laws pertaining to foreign exchange, aiming to ease external trade and payments. Additionally, it seeks to foster the systematic development and upkeep of the foreign exchange market in India.
Some Basics About FEMA Act
- Full Name: Foreign Exchange Management Act.
- Replaced the FERA Act in 1999 and is still active.
- Aims to streamline foreign exchange laws to support external trade payments and maintain the foreign exchange market in India.
- Empowers RBI to create regulations and the Central Government to establish rules aligned with India’s foreign trade policy.
- Considers offences related to foreign exchange as civil, imposing penalties and providing avenues for appeals.
The Foreign Exchange Management Act (FEMA) in India comprises 49 sections. These sections are organised into 7 chapters, with 12 sections focusing on the operational aspects and the remaining covering contravention, penalties, adjudication, appeals, enforcement directorate, and other related matters.
Why was FEMA Introduced?
The need for the Foreign Exchange Management Act (FEMA) arose due to the limitations and challenges posed by the Foreign Exchange Regulation Act (FERA).
When FERA was introduced in 1973, India faced a critical situation with extremely low foreign exchange reserves.
In an effort to boost these reserves, the government adopted a strict approach, asserting that all foreign exchange earned by Indian residents, whether living in India or abroad, belonged to India’s government and had to be surrendered to RBI- Reserve Bank of India.
FERA imposed stringent regulations on all foreign exchange transactions, directly or indirectly impacting India’s forex reserves, including the import and export of currency.
However, the intended effects of FERA did not materialise as expected, and the Indian economy faced ongoing challenges.
As a result, FEMA was introduced to replace FERA, aiming for a more effective and flexible foreign exchange management, promoting external trade and payments, and ensuring the
orderly development of the forex market in India.
FEMA addressed the shortcomings of FERA and adapted to the changing needs of the Indian economy.
FERA vs FERA: Exploring the Key Differences
Both acts have had an impact on how India manages its foreign exchange, but FEMA is the current law, focusing on facilitating trade and maintaining a stable foreign exchange market.
Definition and Origin
- FERA: Enacted in 1973, FERA was designed to regulate foreign payments in India
- FEMA: Introduced in 1999, FEMA focuses on promoting the orderly management of foreign exchange and payments
Regulatory Style
- FERA: Known for its conservative approach with many restrictive regulations
- FEMA: Embraces a more liberal regulatory style, providing transparency and flexibility
Management of Foreign Exchange
- FERA: Focused on regulating payments and foreign exchange and treated foreign exchange as a scarce resource
- FEMA: Geared towards the orderly management of foreign exchange, offering a transparent and efficient system
Evolution Over Time
- FERA: Predominant in the early years but replaced by FEMA to adapt to changing economic dynamics
- FEMA: Active and more relevant in today’s globalised financial landscape
FERA vs FEMA: Key Differences
The following table summarises the key differences between FERA and FEMA:
| Basis | FERA | FEMA |
| Year of Introduction | 1973, repealed in 1999 | 1999 |
| Enactment | Old | New |
| Number of sections | 81 | 49 |
| Approach towards forex transactions | Rigid | Flexible |
| Basis for determining residential status | Citizenship | More than 6 months stay in India |
| Violation | Criminal offence | Civil offence |
Conclusion
The Indian stock market is influenced by the foreign exchange market and the transactions involving foreign currency. Therefore, it is important for investors and traders to be aware of the laws and regulations that govern the foreign exchange market in India. By knowing the differences between FERA and FEMA, one can understand the evolution and development of the foreign exchange market in India and comply with the rules and regulations of foreign exchange management.
FAQs | Difference Between FERA and FEMA
The shift from Fera to FEMA happened because Fera was a strict and inflexible law that didn’t align with the Government of India’s post-liberalization policies. FEMA was introduced to ease controls on foreign exchange, encouraging foreign trade and payments.
Fera stands for Foreign Exchange Regulation Act, enacted in 1973 to regulate payments and foreign exchange in India. It imposed strict restrictions on specific transactions involving foreign currency and securities. Fera was replaced by FEMA in 1998.
FEMA stands for Foreign Exchange Management Act. It’s a set of regulations empowering the Reserve Bank of India and the Central Government to make rules related to foreign exchange in line with India’s foreign trade policy.
Fera was replaced by FEMA in 1999. FEMA was enacted on December 29, 1999, and became effective from June 2000.
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