Difference Between FERA and FEMA

What Is FEMA?

The 1999-initiated Foreign Exchange Management Act (FEMA) marks a transition from strict regulation to a management-oriented approach in India. Aligned with '90s liberalization efforts, FEMA encourages external trade, payments, and forex market growth. The RBI, empowered by FEMA, collaborates with the central government to formulate flexible policies, facilitating ease in foreign transactions and investments.

What Is FERA?

In 1973, the stringent Defense of India Rules that regulated post-independence foreign exchange transactions gave way to FERA. FERA full form is the Foreign Exchange Regulation Act. FERA's primary focus - control and regulation of Indian foreign exchange, was a measure taken to conserve reserves, stabilize national currency, and promote sound functioning in the external sector.

The stringent regulatory regime of FERA endowed authorities with wide-ranging powers. They controlled and scrutinized foreign exchange transactions. Various activities - holding foreign currency, acquiring foreign assets, and conducting international transactions without prior approval from the authorities, faced restrictions. Reflecting the prevalent protectionist economic policies of that era, FERA emerged as a product tailored to its time.

Differences between FERA and FEMA

Let's look at the differences between FERA and FEMA -

1. Philosophy and Approach
Philosophy differs when it comes to FEMA FERA. Rooted in a philosophy of restriction and regulation, FERA aimed to control and conserve foreign exchange reserves. On the other hand, FEMA embraces a management-oriented strategy that emphasizes the facilitation of external trade and payments while promoting an increasingly liberalized economic environment.

2. Enforcement and Penalties
The next FERA and FEMA difference lies in the penalties. Known for its stringent enforcement and severe penalties for non-compliance, FERA often prosecuted violations with the accused bearing the burden of proof. FEMA, on the other hand, prioritizes a civil approach and typically imposes monetary fines as penalties. The act emphasizes corrective actions and compliance over punitive measures.

3. FEMA FERA Transaction Approval
Most foreign exchange transactions under FERA necessitated prior approval from authorities, which created bureaucratic obstacles. However, FEMA ushered in a more liberalized regime that permitted numerous transactions to occur without the need for pre-approval. Instead of seeking permission, it placed emphasis on reporting and compliance.

4. FERA vs FEMA Control of Capital
Regarding the FEMA FERA control of capital, strict controls on capital movement imposed by FERA posed a challenge for businesses and individuals to participate in international transactions. However, FEMA takes the opposite approach. It relaxes these capital control measures, an action that encourages cross-border investments as well as trade through its more flexible framework.

5. FERA vs FEMA Adjudicating Authority
Adjudicating authorities, designated by FERA, settle disputes and violations. The Enforcement Directorate, empowered by FEMA, adjudicates matters related to foreign exchange violations, thus streamlining the process.

This is a major FEMA and FERA difference.

Here's the FERA and FEMA differences in a tabular chart -

The shift from FERA vs FEMA, a pivotal moment in India's economic policy, mirrored global trends towards liberalization and openness. Although essential during its era for safeguarding the nation's foreign exchange reserves, FERA gave way to the more dynamic and adaptable framework of FEMA due to changes in the current global economic landscape. The transition towards an approach centered on management has significantly contributed not only to fostering economic growth but also to stimulating foreign investments within India.