Difference Between FERA and FEMA

Edited by Diffzy | Updated on: May 31, 2023

       

Difference Between FERA and FEMA

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Introduction

With a growing economy comes greater problems and much greater crises. To solve the economic crisis of the economy, two acts were introduced to regulate and manage the foreign exchange market. But one Act came into existence before the liberalization while the other was post-liberalization. It has impacted the investors and the authorized dealers. While formulating any act, the scenarios of the nation's economy at that time are the topmost priority. The situation at the drafting of the foreign exchange regulation act and foreign exchange management act was quite different. FERA was for the regulation of foreign currencies and to regulate trading activities in foreign markets. FEMA, as the name has "management" in it, specifies that the ACT is for the management of foreign exchange dealings rather than the regulations.

FERA vs. FEMA

The foreign exchange regulation act (FERA) came into existence in the year 1973, whereas Foreign Exchange Management Act was introduced on January 1, 1999. FERA is applied to every Indian citizen or any Indian company working on Indian premises. At the same time, FEMA is applied to every authorized person as per the act and the Indian companies or the subsidiaries of Indian companies incorporated within India or outside the domestic borders. The FERA Act was replaced by the FEMA Act 1999 after the liberalization to manage the forex Market.

Difference between FERA and FEMA ( in tabular form)

Parameters of comparisonFERAFEMA
EstablishmentIt came into existence in the year 1973 on 1 January.It came into existence in the year 1999 but it was officially implemented on 1 June 1999.
Reason for ExistenceThe reason for the FERA was only to safeguard the Indian economy and regulate the payments in the forex market.The act replaces the Foreign Exchange Regulation Act of 1973 after the liberalization. The purpose was to manage the foreign exchange market.
PunishmentThe violation of the FERA Act was considered a criminal offense. The person found guilty was given punishment as per the criminal offense.The violation of the FEMA Act is considered a civil offense. The guilty is imposed with heavy charges in monetary terms when found guilty.
SectionsIt includes 81 sections.It contains 49 sections as compared to FERA Act.
FrameworkIts structure was very rigid and cannot be altered accordingly.The framework of the FEMA Act is quite flexible.
Level of transparencyThere was a severe lack of transparency which gave birth to trust issues.The act is quite favorable and provides transparency.

What is FERA?

The FERA, or the foreign exchange regulation act, was passed by parliament under the Vajpayee government in the year 1973. And it was implemented on 1 January 1973. The primary objective of the act was to regulate the financial payments in the forex market. Not only it regulates the payment, but it also governs the export and import of currencyThe number of transactions executed by the investors was meticulously monitored. The legislation was enacted at a time when the nation's reserves were barely flourishing. Consequently, it aids in the preservation of resources.

Further, we will be discussing some of the characteristics of the Foreign Exchange Regulation Act 1973, which are as follows:

Salient features

  • The FERA Act gave the Reserve Bank of India autonomous ownership to control the flow of markets.
  • The conversion of currencies was only allowed at the rate predetermined by the RBI.
  • People were allowed to participate only after having prior permission from the Reserve Bank of India.
  • There were limitations in dealing with securities, and the number of transactions was also limited.
  • RBI has the right to surprise check whenever necessary.
  • There were heavy restrictions on the settlement of security holders in foreign countries.
  • The foreign exchange regulation act imposed restrictions on the transfer of property or any other immovable assets.

No single act is free from the criticism it receives from those in opposition. Foreign exchange regulation act or FERA was one of them.

Limitations of FERA

  • The act prohibited Indian citizens, dealers in the stock exchange, and Indian companies to hold and deal with foreign currencies without the consent of the Reserve Bank of India.
  • FERA made it a nightmare for the Indian dealers and owners of securities to deal in foreign markets with the motive of expansion and earning profits.
  • The strict rules and regulations proved to be a hindrance to the growth and expansion of the economy.
  • There were endless restrictions on the appointment of some individuals as a dealer or brokers in the stock market to carry out trading operations.
  • There were severe penalties imposed upon the person found guilty under the FERA Act 1973 and that was charged under the criminal offense.
  • Citizenship plays a huge role in determining the status of the dealers participating in the stock market operations.

What is FEMA?

Foreign Exchange Management Act, which came into effect on 1 June 1999, amended the Foreign Exchange Regulation Act of 1973. However, on June 1, 2000, the act went into operation. The act's major mission was to regulate both the economy's rules and regulations as well as the foreign exchange market. As the first legislation was not suitable considering the state of the economy at the time, FEMA was created. Since it is constantly shifting, the economy is never stable. The Indian economy was so affected by this trend. Liberalization policies had a vital impact on the formulation of the FEMA Act 1999. The purpose was to grow the economy and earn attractive profits like the other nations of the world. Act was formulated at that time when the country had overcome the economic crisis. Now the nation was in favor of liberal trading policies. So, the coming of FEMA had a  quite remarkable impact on the Indian economy.  The foreign exchange management act is as per the framework of the World Trade Organisation (WTO). WTO is the governing body that manages and regulates the trading activities of the international financial markets of the institutions.

We can term FEMA as the amendments done in the original ACT of Foreign Exchange Regulation Act 1973

The FEMA Act applies to everyone residing in India or outside India (but compulsory to be within the boundary of India for at least six months ). The act regulates people, dealers, Indian incorporated companies residing in India, and the subsidiaries of the Indian companies settled abroad.  It also applies to the exports and imports within and outside the nation.

To have a clear view of the working and restrictions of the FEMA Act, we will be discussing some of its important features.

Features of the FEMA Act 1999 are as follows

  • The act clearly States that the dealings can be only carried out through the "Authorized person". These authorized personnel are determined by the central government or the Reserve Bank of India.
  • The FEMA Act provides the right to Indian citizens residing in foreign countries to deal in the forex market in currencies, shares, or immovable assets.
  • The Reserve Bank of India (RBI) had laid restrictions on the accounts held by the public.
  • The FEMA Act 1999 is governed by the Directorate of Enforcement along with the ruling party.
  • An individual is needed to have a current account opened for the transaction of securities.
  • RBI is obligated to impose an end number of restrictions on the transactional activities conducted through the capital account. As the Reserve Bank of India has full control over the capital accounts.
  • FEMA wanted to encourage the public to deal in the forex market as the market provides vast no. Of securities to deal in. So it has restrictions up to a certain level as per the public interest in general.

The act has a certain implementation on the "Authorised person". He is the person who has been granted authentication from the Reserve Bank of India.

The following people hold the definition of authenticity:

  1. Personal
  2. Hindu Undivided Family
  3. Any general or the person president of the nation.

The organizational structure of the Foreign Exchange Management Act or FEMA 1999

  • The FEMA Act 1999 comprises 5 zonal offices in different parts of the countries.
  • Delhi, Mumbai, Jalandhar, Kolkata, and Chennai are some of the prominent cities having the zonal offices of the FEMA Act.
  • These zonal offices comprise sub-zonal heads, which govern and help in maintaining the decorum. There are 7 sub-division zonal offices.

Both the Reserve Bank of India and the central government are involved in the FEMA Act. All the decision-making power is in the hands of these two governing bodies. They take all the decisions relating to the framework of the trading policies. RBI is responsible for the enforcement of the act, while the directorate-general is the administrative and management head of the FEMA act.

Penalties regarding the violation of the Act are as follows

If any person found guilty in the act of violation of the foreign exchange management act 1999 he would be penalized under the civil offense as per the act.  The person or any individual or the dealer may be imposed with imprisonment along with severe charges of up to rupee 5 to 2 lakhs as per the contravention. If the person continues to violate the act he may be further imposed with more charges and will be obligated to pay double the amount of monetary interest.

Difference between FERA and FEMA in the form of points

  • The FERA Act came into existence in the year 1973, while the FEMA came into force in the year 1999. But officially it was made into use was from the 1 June 2000.
  • The FERA Act was very rigid and complex, whereas the FEMA Act 1999 was quite flexible.
  • There was a lack of transparency in the FERA Act 1973, while the FEMA Act ensured the procedure was fully transparent.
  • The violation of the FERA Act was considered a criminal offense, whereas the violation of the FEMA Act converted the violation offense from a criminal offense to a civil offense.
  • The FERA Act safeguarded the Indian economy from the outside world, whereas the FEMA act was encouraging to involve and participation in foreign exchange in the financial markets.
  • FERA Act was quite a lengthy act as it has 81 sections, whereas the FEMA has only 49 sections, and it is the extension of the foreign exchange regulation act 1973.

FERA Act has a very rich history as its roots are back then from the time of the Independence of the nation, whereas FEMA is a new concept replacing the original one.

Conclusion

The FEMA and FERA were established for the protection and development of the Indian economy at the forefront after taking into consideration all the evidence presented against them. This was a serious and tricky to manage economic crisis affecting the Indian economy at the time. More losses are too difficult to withstand. Therefore, it was determined that, Ideally, a measure would be taken to regulate payments received through the forex market. It ultimately contributed to the 1973 adoption of the Foreign Exchange Regulation Act. The statute, however, lacked transparency and was exceedingly rigid.

To overcome the limitations Of FERA, the Foreign Exchange Management Act 1999 was formulated to manage the Indian economy in the foreign exchange market. The sections were reduced from 81 to 49. It was a huge decision to replace the act. It was a drastic change in the Indian economy made by the Indian government. The FEMA intended to contribute to the explosive development of the Indian economy, which it appropriately accomplished. Liberalization was the new concept in the Indian economy after independence which was far from reached if the foreign regulation ACT 1973 still prevailed. So, the foreign exchange management act 1999, or FEMA, brings a lot of good changes to the Indian economy. One of the drastic changes that FEMa brought was the conversion of FERA's criminal punishment to civil punishment under the FEMA Act. The penalty was catastrophic under the law on criminal conduct, but under FEMA, it may take into account the form of a fine or possibly a prison sentence.


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"Difference Between FERA and FEMA." Diffzy.com, 2024. Mon. 17 Jun. 2024. <https://www.diffzy.com/article/difference-between-fera-and-fema>.



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