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Difference between FERA and FEMA| UPSC Notes PDF Download

Last Updated on Aug 02, 2024
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The Difference between FERA and FEMA lies primarily in their objectives, regulatory frameworks, and the nature of their enforcement mechanisms. The Foreign Exchange Regulation Act (FERA), enacted in 1973, was designed to regulate foreign exchange and control the flow of foreign currency in and out of India. FERA operated under a stringent framework with a focus on conserving foreign exchange and preventing misuse. It was characterized by its harsh penalties and rigid enforcement, with violations considered criminal offenses. In contrast, the Foreign Exchange Management Act (FEMA), which replaced FERA in 1999, embodies a more liberal approach towards foreign exchange management. FEMA aims to facilitate external trade and payments and promote orderly development and maintenance of the foreign exchange market in India. 

This topic on the Difference between FERA and FEMA will be very helpful for the UPSC aspirants in their upcoming Prelims and the Mains examination.

In this article on the Difference between FERA and FEMA, we shall discuss the basic difference between FERA and FEMA which laid regulations and restrictions on foreign exchange transactions. 

GS Paper

General Studies Paper III

Topics for UPSC Prelims

Foreign Exchange Regulations in India, Directorate of Enforcement, Reserve Bank of India, Liberalized Exchange Rate Management System (LERMS)

Topics for UPSC Mains

Analysis of FERA (1973) and FEMA (1999), Economic Liberalization and its Impact on Foreign Exchange Management, Role of FEMA in Facilitating Trade and Investment, Globalization and Its Influence on Indian Foreign Exchange Policies,Benefits of FEMA in Comparison to FERA for India’s Economic Growth,Policy Interventions and their Effect on the Foreign Exchange Market

Difference between FERA and FEMA

Let us look into the differences between FERA and FEMA in the following table,

Difference between FERA and FEMA

FERA

FEMA

FERA is an acronym for Foreign Exchange Regulation Act.

FEMA is an acronym for Foreign Exchange Management Act.

It was passed by the Parliament of India in 1973. The act came into force on 1st January 1974.

The FEMA Act was passed by the Parliament of India in 1999 to replace the FERA. It came into force on 1st June 2000.

The FERA Act was repealed by the Vajpayee government in 1998.

FEMA is currently active in the country.

It was enacted to regulate foreign exchange and payments in India. Its main objective was to conserve forex transactions.

It was enacted to remove the stringent regulations on foreign exchange and promote orderly management of foreign exchange and payments. Its main objective was to manage the forex transactions.

The rules and regulations of FERA on foreign exchange were conservative and restrictive.

The approach of the FEMA Act toward foreign exchange is flexible.

This act came into force when the forex position in the country was not good.

This act was introduced when the strict provisions of FERA were hampering the growth of the Indian economy.

Comparatively, FERA Act is lengthier as it has 81 sections.

FEMA has 49 sections and is shorter than the FERA.

Under this act, the definition of the term ‘Authorized person’ was narrow.

Under this act, the definition of the term ‘Authorized person’ is broad and it has included the banks under it.

Under this act, the citizenship of an individual was the basis for determining his/her residential status.

Under this act, the basis for determining the residential status was that an individual should be residing in India for the past 6 months.

Under FERA, no provisions were made for IT.

Provisions on IT were introduced under the FEMA Act.

Violation of the provisions of FERA has been considered a criminal offence and the punishment for contravention was imprisonment.

Violation of the provisions of FEMA has been considered a civil offence and the punishment for contravention was a monetary penalty. If an individual fails to pay the penalty on time, he/she may be imprisoned.

Violation of FERA was a non-compoundable offence i.e. the offence cannot be compromised. Moreover, the accused was not allowed any assistance from the lawyer.

Violation of FEMA is a compoundable offence and the charges can be compromised or removed. FEMA provides the accused the right to obtain legal assistance from a lawyer.

The appeals were sent to the Supreme Court.

A special director and a special court were introduced under FEMA to address the appeals.

According to FERA, an individual should obtain permission from the RBI to carry out forex transactions.

Under FEMA, no such pre-approval or permission of RBI is required to carry out forex transactions.

Also, study the Directorate General of Foreign Trade (DGFTR) here.

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What is FERA?

The Foreign Exchange Regulation Act (FERA) of 1973 deals with the laws formulated to manage foreign exchange and investment in India. Post-independence, there was tremendous industrialization growth in India, which led to an increase in foreign investments. To manage this, the FERA was passed by the Indian Parliament.

Objectives of FERA

Some of the major objectives of FERA are as follows:

  • To regulate dealings in foreign exchange and securities
  • To regulate the import and export of currencies and bullions
  • To regulate the employment of foreign nationals.
  • To regulate the acquisition and holding of immovable properties in India by the nonresidents of the country.
  • To regulate the transactions that affect the foreign exchanges indirectly.

Check out Foreign Contribution Regulation Act (FCRA) here.

What is FEMA?

The proposal to replace FERA Act with Foreign Exchange Management Act (FEMA) was presented by the Vajpayee government in the budget of 1997-98, and it came into force on 1st June 2001. The rules and regulations related to forex transactions in India were simplified and liberalised under the FEMA to ensure better foreign cash flow.

Objectives of FEMA

The Foreign Exchange Management Act (1999) was created primarily to unify and update foreign exchange laws to facilitate international trade and payments and to support the orderly growth and upkeep of the Indian foreign exchange market. India as a whole is covered by FEMA. The statute also covers all branches, offices, and agencies owned or controlled by an Indian resident outside India.

Also, study the Foreign Policy of India here.

Conclusion

The laws created to control foreign exchange and investment in India are covered by the Foreign Exchange Regulation Act (FERA) of 1973. The Vajpayee government proposed replacing the Foreign Exchange Regulation Act (FERA) with the Foreign Exchange Management Act (FEMA), which went into effect on June 1st, 2001. After the implementation of FEMA, the Indian government's policy significantly changed from the rigidity of FERA to the flexibility of FEMA. The Tarapore Committee made proposals to change the country's current foreign currency regulations in 1997. FEMA then took over from FERA in the nation.

Key Takeaways for UPSC Aspirants

  • Objective and Approach: FERA aimed at stringent control over foreign exchange, being regulatory and prohibitive; FEMA focuses on facilitating external trade and payments, promoting orderly development of the forex market.
  • Nature of Regulation: FERA was a criminal law with non-compliance treated as criminal offenses; FEMA is a civil law with violations treated as civil offenses.
  • Penalties and Enforcement: FERA imposed severe penalties, including imprisonment; FEMA imposes financial penalties and provides more lenient enforcement mechanisms.
  • Scope and Coverage: FERA had a broader scope with extensive controls on all foreign exchange transactions; FEMA has a narrower scope, liberalizing many aspects and easing restrictions.
  • Authority and Administration: Under FERA, the Reserve Bank of India and Enforcement Directorate had sweeping powers; under FEMA, the role of enforcement is more balanced with emphasis on compliance rather than punishment.
  • Citizen Engagement: FERA mandated strict permission and approvals for forex transactions; FEMA simplifies procedures, enabling smoother and more transparent engagement for citizens and companies.
  • Economic Impact: FERA was seen as restrictive, potentially hampering economic growth and foreign investments; FEMA is designed to boost economic growth by fostering a more favorable environment for investment and trade.
  • Legal and Procedural Differences: FERA involved cumbersome legal procedures and bureaucratic red tape; FEMA introduces streamlined processes and is more aligned with global practices and World Trade Organization guidelines.

We hope this article on the difference between FERA and FEMA UPSC will be useful for the aspirants of various competitive exams. For more such notes and NCERT summaries, check the Testbook App. You can also access mock tests, quizzes, live coaching sessions, and more by downloading the Testbook App now.

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Difference Between FERA and FEMA UPSC FAQs

FERA (Foreign Exchange Regulation Act) was an older legislation that regulated foreign exchange transactions. FEMA (Foreign Exchange Management Act) replaced FERA and provides a more liberalized framework for managing foreign exchange.

The shift from FERA to FEMA was made to modernize and liberalize India's foreign exchange management policies, aligning them with global practices and promoting ease of doing business.

The full form of FERA is Foreign Exchange Regulation Act, and the full form of FEMA is Foreign Exchange Management Act.

FEMA (Foreign Exchange Management Act) deals with foreign exchange transactions and regulations. FCRA (Foreign Contribution Regulation Act) regulates the acceptance and utilization of foreign contributions by NGOs in India.

FEMA features a more liberalized approach, simplified procedures, emphasis on compliance, and a focus on promoting foreign investment. FERA had stricter regulations, controlled foreign exchange transactions, and emphasized enforcement and penalties for violations.
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