Foreign Exchange Management Act (FEMA) vs Foreign Exchange Regulation Act (FERA)

The Foreign Exchange Management Act (FEMA) is a legislation that was made by the Indian Government in order to manage foreign exchange transactions, whereas the Foreign Exchange Regulation Act (FERA) contains more stringent rules and regulations.

This article will explore the key differences between FEMA and FERA, as well as explore how they impact Indian foreign exchange.

Introduction

The Foreign Exchange Management Act (FEMA) and the Foreign Exchange Regulation Act (FERA) are two different pieces of legislation that regulate foreign exchange in India. FEMA was introduced in 1999 and FERA was introduced in 1974.

The Foreign Exchange Management Act (FEMA) is a law in India that regulates the foreign exchange market. The purpose of FEMA is to promote stability and flexibility in the Indian currency and to protect the interests of Indian citizens who invest in foreign assets.

The Foreign Exchange Regulation Act was passed in the year 1973 and was implemented in the year 1974. In FERA, organizations are required to maintain a daily exchange rate at its premises. The organization should keep sight on the prospect of any change or movement in exchange rate. However, it was very strict and rigid.

Important Differences between FEMA and FERA

The main objective for Foreign Exchange Management Act (FEMA) was to replace Foreign Exchange Regulation Act (FERA) which was more strict and quite opposite the liberal policies of India.

1. The Foreign Exchange Regulatory Act, or FERA, was enacted by the Indian government to regulate payments and foreign exchange in the country. Whereas, Foreign Exchange Management Act was enacted to improve the management of the Forex market and facilitate external trade and payments.
2. FERA is an old act, which was introduced in the year 1973 and was implemented in the year 1974. Whereas, FEMA was passed in the year 1998 and was implemented in whole India by 1999.
3. FERA was strict and rigid as it introduction with around 81 sections which was supposed to be followed which showed the approach of FERA was conservative. Whereas, FEMA as around 49 sections to provide flexibility in the foreign exchange.
4. Also, in FERA it was required to take permission from RBI for most transactions. However, in the case of FEMA there was no need of permission from RBI untill the transactions are related to foreign exchange.
5. In FERA any violation of the law was considered a criminal offense. Therefore, even for a mynute mistake the person was sentenced for the imprisonment. However, in the case of FEMA as the act is flexible and not strict as FERA, the violation of FEMA was considered as civil offense, in which the person can bail out by paying fine or are imprisoned in case the fine is not paid.
6. In FERA, a person’s citizenship determines their residential status, whereas in FEMA, their stay in India cannot be less than six months.
7. When the FERA was introduced, the country had a poor foreign exchange reserve position, but when FEMA was introduced, it had a satisfactory foreign exchange reserve position.

Main Features of Foreign Exchange Management Act, 1999

Following are the main features of FEMA:

1. According to FEMA, the transaction is classified as a current transaction or a capital transaction.
2. According to FEMA, the Central Government can restrict and supervise three things: payments made to or receipts from persons outside India, forex and foreign security transactions.
3. Residents of India who live outside the country are not covered by the FEMA.
4. Reserve Bank of India (RBI) or government permission was required for specific areas where forex could be held.
5. Under FEMA act, a person must have spent more than 182 days (6 months) in India in the preceding financial year.

Conclusion

In this article, we compare and contrast the Foreign Exchange Management Act (FEMA) and the Foreign Exchange Regulation Act (FERA), two pieces of legislation governing foreign exchange in India.

FEMA was enacted in 1999, while FERA came into force in 1974. Hope you guys understood the key differences between FEMA and FEMA and the implications for the entities covered by both.