Difference Between FERA and FEMA

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Last Updated: 23 Jul, 2025 06:59 PM IST

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India has experienced significant changes in its economic policies and regulations as the landscape continues to evolve. The FERA and FEMA, two vital legislations, have profoundly shaped the country's economic framework. These acts aim to regulate foreign exchange transactions. This article delves into the intricacies of FERA and FEMA, exploring their origins and provisions. It also highlights the difference between FEMA and FERA.

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 -

Aspect FERA FEMA
Year of Legislation 1973 1999
Number of Sections FERA had 81 sections, indicating a comprehensive and detailed set of regulations aimed at controlling and monitoring various aspects of foreign exchange transactions. FEMA has 49 sections, reflecting a streamlined and more concise legal framework that aligns with the principles of a liberalized and market-friendly approach.
Primary Purpose Preserve foreign reserves through regulation Facilitate foreign trade, payments, and efficient forex management
Regulatory Approach Restrictive and stringent Liberal, market-friendly, and flexible
Residential Status Defined residential status based on a 6-month criterion, determining the applicability of foreign exchange regulations to individuals. Extended the residential status criteria to 182 days, providing more flexibility and accommodating longer durations of stay without stringent regulatory implications.
Nature of Violations Considered violations as criminal offenses with severe penalties, reflecting the strict enforcement and punitive nature of the regulatory framework. Treats violations as civil offenses with monetary penalties, emphasizing a more corrective and less punitive approach to non-compliance.
Legal Safeguards Did not provide legal aid to individuals facing charges under the act, contributing to a more punitive enforcement approach. Offers legal assistance to individuals facing charges, incorporating a more balanced and fair approach to enforcement.
Regulatory Authorities The Reserve Bank of India (RBI) played a central role in enforcing and implementing FERA regulations. FEMA involves various entities, not solely relying on RBI, reflecting a more collaborative and decentralized approach to regulatory oversight.

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.

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Frequently Asked Questions

With a prevailing protectionist economic philosophy guiding its operations, FERA set out to regulate and control foreign exchange transactions for the conservation of reserves, currency stabilization, and proper functioning of the external sector. This is an important difference between FEMA and FERA in India.

Regarding the difference between FEMA and FERA Act, stringent provisions under FERA necessitated prior approval for most foreign exchange transactions, prosecution constituted penalties, and the accused bore the burden of proof. Severe consequences frequently followed violations.

A more liberalized approach receives emphasis from FEMA, where compliance requirements emphasize reporting and adherence to guidelines. Typically, penalties under the purview of FEMA take the form of monetary fines. The act further encourages corrective actions.

Playing a pivotal role in liberalizing the Indian economy, FEMA fostered a more conducive environment for foreign investments and cross-border transactions. It effectively shifted from a regulatory stance to one that was management-oriented. This approach, a driving force behind economic growth, facilitated integration into the global market.

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