Know about FERA and FEMA – Banking Awareness

Mentor for Bank Exams
Know about FERA and FEMA – Banking Awareness
Here is the most important terms used in both Banking and Economics, FERA and FEMA. Most of you might be well aware of these terms and their functioning.
Foreign Exchange Management Act, 1999 (FEMA) emerged as a replacement or say an improvement over the old Foreign Exchange Regulation Act, 1973 (FERA). Foreign investors, frequently hear the terms FERA and FEMA, when they deal with India. As their name specifies, FERA lays emphasis on the regulation of currencies, whereas the FEMA manages foreign exchange, i.e. forex. Government hopes that the FEMA will make favourable development in the foreign money market.

Foreign Exchange Regulation Act (FERA), 1973
Government of India (PM was Smt. Indira Gandhi) enacted Foreign Exchange Regulation Act (FERA) in 1973 , which came into force w.e.f. January 1, 1974, to regulate all Indian exchanges or dealings with foreign countries.
At the time of legislation of the lawIndia had acute shortage of foreign exchange (forex). The government then tried to restrict (very strictly) the exchanges, or dealings of India with foreign countries. But the rules and regulations were so stringent that it had a great impact on the import and export of currency.
There were several issues with this act, like -
  • Law violators were treated as criminal offenders (instead of civil offenders)
  • Wide power on the hand of Enforcement Directorate (E.D) to arrestany person, seize any document (Corporate world found themselves at the mercy of E.D.!)
  • Control everything that was specified, relating to foreign exchange,aimed at minimizing dealings in forex and foreign securities, etc.

Foreign Exchange Management Act (FEMA), 1999
FERA was too strict on regulating the foreign exchanges, that acted like an obstacle in foreign trade, and had become incompatible with the pro-liberalization policies of government.
Hence government of India, under PM Shri. Atal Bihari Vajpayee repealed the FERA Act, and introduced FEMA in 1999. This time, instead of "regulating" the foreign exchange, government tried to "manage" it (with simpler norms).
FEMA has brought a new management regime of foreign exchange with the new framework of the World Trade Organization (WTO). Also, it brought with it the Prevention of Money Laundering Act, 2002, w.e.f. July 1, 2005.

Key Differences Between FERA and FEMA:
The primary differences between FERA and FEMA are explained in the following points:
  • FERA is an act which is enacted to regulate payments and foreign exchange in India, is FERA. FEMA an act initiated to facilitate external trade and payments and to promote orderly management of the forex market in the country.
  • FEMA came out as an extension of the earlier foreign exchange act FERA.
  • FERA is lengthier than FEMA, regarding sections.
  • FERA came into force when the foreign exchange reserve position in the country wasn’t good while at the time of introduction of FEMA, the forex reserve position was satisfactory.
  • The approach of FERA, towards forex transaction, is quite conservative and restrictive, but in the case of FEMA, the approach is flexible.
  • Violation of FERA is a non-compoundable offence in the eyes of law. In contrast violation of FEMA is a compoundable offence and the charges can be removed.
  • Citizenship of a person is the basis for determining residential status of a person in FERA, whereas in FEMA the person’s stay in India should not be less than six months.
  • Contravening the provision of FERA may result in imprisonment. Conversely, the punishment for violating the provisions of FEMA is a monetary penalty, which may turn into imprisonment if the fine is not paid on time.