Difference Between FERA and FEMA

What is FERA?

Foreign Exchange Regulation Act (FERA) was passed by the Indian government in 1973 and regulated foreign exchange and capital transactions in India. In 1998, the Act was abolished, and the Foreign Exchange Management Act (FEMA) took its stead. The FERA was one of India's strictest laws governing capital and foreign currency operations. The Act was passed in response to the increasing external payments and capital flows and to give the government more control over the country's foreign exchange and capital transactions.

About this Act

The Act provided for the control of all foreign exchange transactions in India. It made it mandatory for all foreign exchange transactions to be conducted through authorized dealers, either state-owned or private banks. The government also restricted certain types of foreign exchange transactions, such as those involving foreign exchange for speculation or to earn an excessive rate of return. The government also imposed certain restrictions on the purchase of foreign exchange for capital transactions, such as the purchase of foreign equity shares and the purchase of foreign debt instruments. The Act also restricted the movement of capital across India's borders. The Reserve Bank of India (RBI) must approve all capital transactions. This was done to ensure that the capital flows were in line with the government's policies and to control the inflow and outflow of foreign capital. The Act also prohibited using foreign exchange for certain activities, such as purchasing luxury items. It also prohibited the transfer of funds to countries that had not established diplomatic ties with India. FERA also established the Foreign Exchange Regulation Act Advisory Committee (FERAAC), responsible for formulating the rules and regulations related to foreign exchange and capital transactions.

The Act was repealed in 1998 and replaced by the Foreign Exchange Management Act (FEMA). The Act allowed for more foreign exchange and capital transactions liberalization and provided more freedom to move funds across India's borders. The Act also provided more flexibility in the purchase of foreign exchange for capital transactions and allowed for the purchase of foreign equity shares and foreign debt instruments. The repeal of FERA was seen as a significant step towards the liberalization of the Indian economy. It was followed by reforms such as the New Industrial Policy and the Goods and Services Tax introduction.

We can say that the Indian government enacted the foreign currency Regulation Act (FERA) in 1973, which regulated India's capital and foreign currency operations. In 1998, the Act was abolished, and the Foreign Exchange Management Act took its stead. The Act stipulated that all foreign currency operations in India would be governed and that certain transactions would be prohibited. It also created the foreign currency Regulation Act Advisory Committee (FERAAC), whose job is to make the standards and guidelines for capital and foreign currency operations. FERA's removal was regarded as a crucial move in the liberalization of the Indian economy. Changes like the Goods and Services Tax rollout and the New Industrial Policy followed.

Importance of FERA in the Indian Stock Market?

The main objective of FERA was to conserve India's foreign exchange reserves and to ensure that foreign exchange earned was not diverted for illegal activities. FERA applied to all deals involving foreign exchange and foreign security transactions. It is used for all transactions between residents and non-residents involving a foreign exchange or foreign securities.

FERA Applied to Certain Activities, Such As

Foreign Exchange Transactions: FERA regulated all transactions involving foreign exchange. It prohibited any person from entering into any transaction involving a foreign exchange or foreign security without prior approval of the Reserve Bank of India.
Foreign Investment: FERA regulated foreign investment in India. It prohibited any person from investing in India in foreign exchange or foreign securities without prior approval of the Reserve Bank of India.
Foreign Exchange Management: FERA regulates the management of foreign exchange. It provided for the establishment of a Foreign Exchange Management Board to oversee the operations of foreign exchange. The Board was empowered to issue directions for regulating foreign exchange transactions.
Foreign Exchange Control: FERA provided for the establishment of a Foreign Exchange Control Board to monitor and control the flow of foreign exchange into and out of India. The Board was empowered to issue directions for regulating foreign exchange transactions.
Foreign Exchange Repatriation: FERA imposed restrictions on the repatriation of foreign exchange from India. It prohibited any person from repatriating foreign exchange from India without prior approval of the Reserve Bank of India.
Foreign Exchange Earnings: FERA imposed restrictions on the use of foreign exchange earned by Indian citizens. It prohibited any person from using any foreign exchange they made in India for any purpose other than that specified in the Act.
Incentives: FERA incentivized foreign investors and companies to invest in India. It provided for the grant of tax incentives to foreign investors and foreign companies investing in India.
Prohibition on Foreign Exchange Transactions: FERA prohibited certain transactions involving foreign exchange and foreign securities. With the Reserve Bank of India's previous approval, anyone could engage in transactions involving foreign currency or foreign assets.
Penalties: FERA imposed penalties on any person who contravened any of the provisions of the Act. Any person found guilty of violating any of the provisions of the Act was liable to be punished with imprisonment up to seven years, a fine, or both.

The Imposition of FERA in the Indian Stock

The imposition of FERA in the Indian stock market had several implications. Firstly, it led to an increase in the cost of transactions as the requirement of prior approval of the Reserve Bank of India for all foreign exchange transactions added a layer of bureaucracy and complexity to the process. Moreover, the restrictions imposed on the repatriation of foreign exchange from India made it difficult for foreign investors to invest in India. This, in turn, led to a decrease in foreign investment in India.
Secondly, the imposition of FERA led to the emergence of speculative and black market activities in the foreign exchange market. This was because the restrictions imposed by FERA on the repatriation of foreign exchange from India created a demand for foreign exchange that still needed to be fulfilled by official sources. This led to speculative and illegal activities in the foreign exchange market.
Thirdly, the imposition of FERA increased the cost of doing business in India as the restrictions imposed by FERA increased the cost of foreign exchange transactions and foreign investment. This, in turn, increased the cost of doing business in India and made it difficult for Indian companies to compete with their foreign counterparts.
Overall, the imposition of FERA had several implications for the Indian stock market. It led to an increase in the cost of transactions and foreign investment, the emergence of speculative and black market activities in the foreign exchange market, and the cost of doing business in India. For these reasons, the more lenient Foreign Exchange Management Act was ultimately passed in 1998 to supplant FERA.

What is FEMA?

The Indian Parliament's Foreign Currency Management Act (FEMA) governs foreign currency operations in India. This Act's primary goals are to support orderly growth and upkeep of India's foreign currency market and ease external trade and payments. The Reserve Bank of India (RBI) oversees the implementation of FEMA's rules. It was approved in 1999, and on June 1st, 2000, it became effective. The Foreign Exchange Regulation Act (FERA), which was in force starting in 1973, has been superseded by the Act. FEMA applies to all out-of-India branches, offices, companies, and other businesses held or managed by Indian citizens. It also pertains to all locations, divisions, and other companies in India that are owned or operated by people who live outside of India.

The Main Provisions of FEMA are as Follows

It provides for the regulation of transactions related to foreign exchange, current account transactions, and capital account transactions.
It provides for the regulation of payments, foreign exchange reserves, and the transfer of foreign exchange between a person resident in India and a resident outside India.
It provides for regulating foreign exchange transactions and establishing a foreign exchange fund.
It regulates the use of foreign exchange, foreign exchange assets, and foreign exchange liabilities.
It regulates foreign exchange assets and liabilities by persons resident in India.
It provides for the regulation of foreign direct investments.
It provides for the regulation of the payment of foreign exchange for current account transactions and capital account transactions.
It provides for regulating foreign exchange transactions by authorized dealers, money changers, and other persons.
It regulates foreign exchange transfers between a resident in India and outside India.
It provides for the regulation of the acquisition and transfer of immovable property outside India.
It regulates the maintenance of accounts and books of history concerning foreign exchange transactions in India.
It provides for the regulation of the transfer of foreign exchange to and from India.
It provides for the regulation of the payment of foreign exchange for current account transactions and capital account transactions.
It provides for the regulation of the establishment of foreign exchange funds.
It provides for the regulation of the utilization of foreign exchange resources.
It provides for the regulation of the use of foreign exchange for investment in India.
It provides for the regulation of the transfer of funds from India to foreign countries.
It provides for the regulation of the transfer of funds from foreign countries to India.
It regulates funds transfer from India to a person's residence outside India.
It regulates funds transfer from a person's residence outside India to India.
It provides for the regulation of the transfer of securities from India to foreign countries.
It provides for the regulation of the transfer of securities from foreign countries to India.
It regulates the transfer of securities between a person resident in India and a person resident outside India.
It regulates foreign exchange transfers between a resident in India and outside India.
It regulates the acquisition, holding, transfer, and disposal of foreign exchange assets.
It regulates the acquisition, holding, transfer, and disposal of foreign exchange liabilities.
It provides for regulating the establishment, operation, and regulation of foreign exchange dealers.
It provides for the regulation of the operation of foreign exchange accounts.
It regulates the maintenance of accounts and books of history in foreign exchange.
It regulates the maintenance of accounts and books of history in foreign exchange concerning foreign exchange transactions.
It provides for regulating foreign exchange transfers to make investments in India.
It provides for the regulation of the acquisition, holding, and disposal of foreign securities.
It regulates the acquisition, holding, and disposal of foreign currency deposits.
It provides for the regulation of the acquisition, holding, and disposal of foreign exchange assets and foreign exchange liabilities.
It provides for regulating foreign exchange transfers to make payments outside India.
It regulates foreign exchange transfers to make payments for current and capital account transactions.
It provides for regulating the issue, sale, and redemption of foreign securities.
It provides for regulating the issue, sale, and redemption of foreign currency deposits.
It regulates the issue, sale, and redemption of foreign exchange assets and liabilities.
It provides for regulating the establishment, operation, and regulation of foreign exchange banks.
It provides for regulating the establishment, operation, and regulation of foreign exchange companies.
It provides for regulating the establishment, operation, and regulation of foreign exchange brokerages.
It regulates the establishment, operation, and regulation of foreign exchange funds.
It regulates the establishment, operation, and regulation of foreign exchange markets.
It regulates the establishment, operation, and regulation of foreign exchange services.
It regulates establishing, operating, and controlling foreign exchange trading systems.
It regulates establishing, operating, and controlling foreign exchange trading operations.
It regulates establishing, operating, and controlling foreign exchange dealing operations.
It regulates establishing, operating, and controlling foreign exchange risk management services.
It regulates establishing, operating, and controlling foreign exchange reporting services.
It provides for regulating the establishment, operation, and regulation of foreign exchange clearing systems.
It provides for regulating the establishment, operation, and regulation of foreign exchange settlement systems.
It regulates establishing, operating, and controlling foreign exchange margin trading services.
It regulates establishing, operating, and controlling foreign exchange hedging services.
It regulates establishing, operating, and controlling foreign exchange arbitrage trading services.
It requires reporting foreign exchange transactions to the central bank.
It requires the maintenance of reliable records and documentation of foreign exchange transactions.
It provides for the regulation of foreign exchange derivatives and other related financial instruments.
It regulates foreign exchange derivatives and other related financial instruments used for hedging purposes.
It provides for the regulation of foreign exchange derivatives and other related financial instruments used for speculative purposes.

Role of FEMA in the Indian Stock Market

When it comes to the Indian equity market, FEMA is crucial. FEMA aims to create an equal playing field for all players in the Indian equity market. FEMA ensures that all participants comply with the regulations and guidelines set by the Indian government and the Securities and Exchange Board of India (SEBI). FEMA also provides a platform for foreign investors to invest in Indian companies.
FEMA also works to protect the interests of investors by providing a system for resolving disputes between investors and the companies they have invested in. FEMA also works to protect the interests of companies by providing a strategy for resolving disputes between companies and their shareholders.
FEMA also ensures that the Indian stock market is transparent and efficient. FEMA provides all information on the companies listed on the Indian stock exchanges available to all investors. Additionally, FEMA keeps an eye on how the Indian stock markets are operating and prosecutes offenders.
FEMA also plays an essential role in protecting the interests of the Indian economy. FEMA works to ensure that the Indian economy remains stable and that economic growth is not affected by any sudden changes in the stock markets. FEMA also ensures that the Indian economy remains resilient despite any financial shocks.
FEMA is a crucial part of the Indian stock market and is vital in ensuring the Indian economy remains stable and resilient. FEMA's role in the Indian stock market is critical to the success of the Indian economy and its investors.

Difference Between FERA and FEMA

Two Indian statutory laws that regulate foreign currency operations are the Foreign Currency Regulation Act (FERA) and the Foreign Exchange Management Act (FEMA). Despite the tight relationship between the two Acts, FERA and FEMA have some distinct distinctions.

FERA	FEMA
1. FERA was enacted in 1973. The primary goal of FERA was to control foreign exchange operations in India and to guarantee that money outflows only occurred with official approval.	1. On the other hand, FEMA was enacted in 1999. FEMA was introduced to promote the inflow and outflow of foreign exchange and simplify the regulations governing foreign exchange transactions.
2. The primary difference between FERA and FEMA is the nature of the approach. FERA was a restrictive legislation and had stringent measures.	2. FEMA is liberal legislation and provides more freedom to foreign investors.
3. Under FERA, all foreign exchange transactions were subject to the Reserve Bank of India (RBI) approval.	3. On the other hand, under FEMA, most foreign exchange transactions do not require approval from the RBI. However, if the foreign exchange transaction involves more than a certain amount, RBI requires permission.
4. Another significant difference between FERA and FEMA is the penalty imposed for violation of the law. Under FERA, violation of any provision of the Act was treated as a criminal offense, and the offender could be punished with imprisonment, exemplary, or both.	4. On the other hand, it is considered a civil offense, and the offender is liable to pay the penalty.
5. One of the significant differences between FERA and FEMA is the treatment of Foreign Institutional Investors (FIIs). Under FERA, FIIs could not invest in the Indian stock market.	5. But under FEMA, FIIs can invest in the Indian stock market, subject to certain conditions.
6. In addition, FERA imposed strict restrictions on the foreign exchange transactions of Indian citizens. For example, Indians were prohibited from keeping or maintaining foreign currency bank accounts.	6. However, under FEMA, Indians can open and maintain foreign currency bank accounts, subject to certain conditions.
7. The most crucial difference between FERA and FEMA is the purpose of the Acts. FERA was mainly aimed at controlling foreign exchange transactions.	7. FEMA was created to loosen and streamline the rules governing foreign currency operations.
8. FERA (Foreign Exchange Regulation Act) was an Act of the Parliament of India that regulated foreign exchange, foreign trade, and certain payments. It was in effect from 1973 to 1998.	8. To supersede the FERA Act, the Parliament enacted the FEMA (Foreign Exchange Management Act) in 1999. It was established to ease international commerce and payments and create and preserve India's foreign exchange markets.
9. The purpose behind their passage is the main distinction between FERA and FEMA. To protect the country's economy, FERA was passed to regulate and manage international commerce and exchange.	9. On the other hand, FEMA was enacted to facilitate external trade and payments and to develop and maintain foreign exchange markets in India.
10. Under FERA, anyone wishing to conduct foreign currency business or send money to a non-resident must obtain advance approval from the Reserve Bank of India (RBI). Additionally, there were limitations on how much international currency one could possess.	10. On the other hand, FEMA offers a more lenient framework for foreign currency trades. It is founded on the idea that certain restrictions can be placed on current and savings account activities. It does not limit the quantity of foreign currency a person can keep and does not call for prior approval from the RBI to conduct foreign exchange transactions.
11. Under FERA, offenses related to foreign exchange were considered criminal offenses, and the penalties could include imprisonment and fines.	11. FEMA also does not consider offenses related to foreign trade as criminal offenses, and the penalties include only monetary fines.
12. Another significant difference between FERA and FEMA is the treatment of foreign investments. FERA prohibited foreign investments in India and provided for the repatriation of profits earned by foreign entities.	12. FEMA, however, allows foreign investments in India and provides for the repatriation of profits made by foreign entities.

Conclusion

It can be said that FERA and FEMA are two Indian statute laws that control foreign money transactions in India. Despite having a tight relationship, FERA and FEMA differ in key areas. FERA is a provincial legislation, whereas FEMA is an open law. While FERA imposed strict regulations, FEMA allowed international businesses more flexibility. FERA was created mainly to control foreign exchange transactions, whereas FEMA was created to streamline and liberalize the rules regulating such transactions.

Next TopicDifference between

← prev next →