What is FEMA?
FEMA, or Foreign Exchange Management Act, was passed in 1999 to replace the conservative FERA policy. The main objective of the Act was to improve and strengthen India’s foreign exchange framework and management. To fulfil this chief objective, FEMA did the following:
- Established an organised management framework for managing foreign exchange in India
- Laid down transparent guidelines, rules, and relations to help govern the foreign exchange market
- Simplified external trade and payments with a systematic and clear approach
- Built a clear and precise legal structure to review legal proceedings
FEMA focuses on promoting external trade and foreign payments in India and increasing forex reserves in the country. Its liberal approach was considered more conducive to the liberalising Indian economy, allowing for the structured growth of the foreign exchange market in the country rather than simply restricting it.
Difference Between Fema and Fera
Here’s a comprehensive table that sums up the differences between FEMA and FERA:
Parameters
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FERA
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FEMA
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Enactment year
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Passed by Parliament in 1973 and enforced from 1st January 1974.
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Passed in 1999 and came into effect on 1st January 2000.
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Objective
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Aimed to control and regulate foreign exchange transactions.
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Aims to facilitate external trade and payments, promoting proper forex market management.
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Notion behind concept
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Based on the idea that foreign exchange is a scarce resource.
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Based on the idea that foreign exchange is an asset.
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Approach
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Restrictive approach limiting forex-related activities.
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Liberal approach to manage and encourage foreign exchange flows.
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Treatment of violations
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Violations were considered criminal offences.
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Violations are considered civil offences.
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Penalties
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Resulted in imprisonment.
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Usually leads to monetary penalties; imprisonment if unpaid within 90 days.
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Status of residence
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Required a 6-month stay in India.
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Requires a stay of 182 days in India.
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Sections
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Consisted of 81 sections.
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Consists of 49 sections.
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What is the importance of FERA and FEMA?
The two most important laws that govern foreign exchange transactions in India are the Foreign Exchange Regulation Act (FERA) and the Foreign Exchange Management Act (FEMA). Here is their importance in the financial world:
1. Foreign Exchange Regulation Act (FERA)
The Foreign Exchange Regulation Act (FERA) was passed in 1973 and introduced to regulate and control foreign exchange reserves. The act's main purpose was to impose strict regulations on currency exchange, foreign investments, and international trade to prevent the outflow of foreign exchange from India. Under FERA, all transactions involving foreign exchange were highly controlled. Violations of the act were considered criminal offences, with severe penalties, including imprisonment.
FERA was crucial for India at a time when it was dealing with severe foreign exchange shortages and needed regulations to ensure that foreign reserves were not depleted to become non-existent. However, its restrictive nature and extensive regulations became a hassle for foreign investment and economic liberalisation, and experts called for its replacement with a better and less extensive regulation act.
2. Foreign Exchange Management Act (FEMA)
There were extensive talks about improving FERA as it extensively restricted foreign exchange transactions. The result was the introduction of the Foreign Exchange Management Act (FEMA). The Indian government replaced FERA with FEMA by introducing the Act in 1999 as a part of its flagship economic liberalisation scheme. The Act focuses on facilitating external trade and foreign payments and promotes the seamless development and maintenance of the foreign exchange market in India. Unlike FERA, FEMA does not contain extensive restrictions and is more liberal in promoting foreign trade and payments. Its main purpose is foreign exchange management rather than regulation and control, with violations treated as civil offences, not criminal ones.
FEMA is vital for ensuring the alignment of India’s foreign exchange laws with global foreign exchange practices. It encourages foreign investment, facilitates trade, and contributes to economic growth. It also simplifies compliance for businesses, helping India contribute more to the global economy by increasing its GDP.
Conclusion
India's foreign exchange regulations have undergone a significant transformation. Earlier, the focus was on tightly controlling and conserving foreign currency. Today, the emphasis has shifted towards liberalising and simplifying foreign exchange dealings. This transition, marked by the move from FERA to FEMA, has enhanced India’s global trade and economic integration.
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