Difference Between FERA and FEMA

FERA focused on controlling and conserving India’s foreign exchange. FEMA replaced this strict system with a more flexible framework for managing foreign exchange and supporting international trade and payments.

• FERA was enacted in 1973 and came into effect on 1 January 1974.
• FEMA was enacted on 29 December 1999 and came into effect on 1 June 2000.
• FERA had 81 sections, while FEMA has 49 sections.
• Violations under FERA were mainly treated as criminal offences.
• Violations under FEMA are generally treated as civil contraventions.
• FERA mainly aimed to conserve foreign exchange.
• FEMA mainly aims to manage foreign exchange and support the orderly development of the foreign exchange market.
   

The main differences between FEMA and FERA are explained below:

FEMA’s stated objective is to facilitate external trade and payments and promote the orderly development and maintenance of India’s foreign exchange market.

FERA stands for the Foreign Exchange Regulation Act. Parliament enacted it in 1973 to regulate foreign exchange dealings, securities and transactions that could affect India’s foreign exchange reserves.

At the time, India had limited foreign currency reserves. FERA therefore followed a strict control-based approach to conserve these reserves and use them for economic development.

Its main objectives were to:

• Regulate foreign exchange payments and securities dealings
• Control the import and export of currency
• Manage transactions that directly or indirectly affected foreign exchange
• Conserve India’s foreign exchange resources

For example, a person wishing to transfer money abroad or buy property outside India could face strict approval requirements under FERA.

The Reserve Bank of India had wide powers to monitor and regulate foreign exchange activities. Non-compliance could lead to penalties, confiscation of assets and, in certain cases, imprisonment.

FERA was later replaced because its strict controls were not suited to India’s increasingly liberalised economy. The official long title of FERA confirms that its central purpose was conserving foreign exchange and using it for economic development.

FEMA stands for the Foreign Exchange Management Act. Parliament enacted it in 1999, and it came into force on 1 June 2000.

FEMA replaced FERA with a more flexible framework for managing foreign exchange. Its main objective is to facilitate external trade and payments and support the orderly development of India’s foreign exchange market.

FEMA:

• Creates a structured system for managing foreign exchange
• Sets rules for foreign exchange transactions
• Facilitates external trade and payments
• Provides a legal process for handling contraventions and appeals

For example, a person can generally obtain foreign exchange for a permitted current account transaction through an authorised dealer, such as an authorised bank. However, restrictions or approval requirements may still apply to specific transactions.

Unlike FERA, FEMA generally treats non-compliance as a civil contravention rather than a criminal offence. It mainly uses monetary penalties and also allows eligible contraventions to be compounded under the prescribed process.

FERA and FEMA reflect two different stages of India’s foreign exchange policy. FERA was important when India needed strict controls to conserve limited foreign currency, while FEMA supports the management of foreign exchange in a more open economy.

1. Importance of the Foreign Exchange Regulation Act (FERA)

FERA was enacted in 1973 when India faced a shortage of foreign exchange reserves. Its purpose was to prevent unnecessary foreign currency outflows and ensure that available reserves were used carefully.

It strictly regulated:

• Currency exchange
• International payments
• Foreign investments
• Overseas property transactions
• Dealings with non-residents

• Import and export of currency

  
  

For example, an overseas payment that may now be permitted under FEMA rules could have required specific approval under FERA.

FERA played an important role when conserving foreign exchange was a national priority. However, its strict rules made foreign transactions more difficult and were considered unsuitable for India’s economic liberalisation.

2. Importance of the Foreign Exchange Management Act (FEMA)

FEMA replaced FERA to create a management-based foreign exchange system. It focuses on facilitating external trade and payments while maintaining an orderly foreign exchange market.

FEMA is important because it:

• Provides rules for foreign exchange transactions
• Makes permitted international payments easier
• Supports international trade and investment
• Provides a civil process for handling most contraventions

• Allows the RBI to regulate authorised persons and foreign exchange activities

  
  

For example, a business making a permitted payment for imported goods can normally process it through an authorised dealer. It must still follow FEMA rules, RBI directions and any reporting or documentation requirements.

FEMA helps align India’s foreign exchange framework with a more open and internationally connected economy. However, it does not remove all restrictions. Certain transactions remain prohibited, restricted or subject to RBI or government approval.

India’s foreign exchange laws have moved from strict control to structured management. FERA aimed to conserve scarce foreign exchange through extensive restrictions, while FEMA focuses on managing foreign exchange and facilitating permitted international trade and payments.
This change created a more flexible legal framework for foreign exchange transactions. At the same time, individuals and businesses must continue to follow FEMA, applicable government rules and RBI directions.