Difference Between FERA and FEMA – Everything You Must Know

What is FERA?

The Foreign Exchange Regulation Act (FERA), 1973, was a stringent legislation implemented to regulate foreign exchange and to conserve India's foreign exchange reserves. FERA came into force during a time when India faced a serious balance of payments crisis, and every bit of foreign currency was critical. The Act was enacted against the backdrop of a socialist economic model where foreign exchange was treated as a scarce resource.

FERA was a criminal law, meaning violations were treated as criminal offences, and those found guilty could face imprisonment. It granted sweeping powers to the Enforcement Directorate (ED), allowing for arrests, searches, seizures, and prosecutions without many checks and balances. FERA controlled not just transactions involving foreign exchange but also foreign ownership of assets and companies in India.

What is FEMA?

The Foreign Exchange Management Act (FEMA), 1999, replaced the Foreign Exchange Regulation Act (FERA) in the post-liberalisation era. Enacted in 1999 and effective from June 1, 2000, FEMA aligned India with global financial markets and WTO norms. Unlike FERA, FEMA is a civil law where offences are compoundable and treated as civil violations rather than criminal offences.

FEMA's primary objective is to facilitate external trade and payments and to promote the orderly development and maintenance of the foreign exchange market in India. It is less regulatory and more management-oriented, focusing on administrative control and compliance through authorised dealers, banks, and financial institutions. The shift from FERA to FEMA marked a critical transformation in India's economic legislation framework.
 

FERA vs FEMA

Here is a detailed comparison of the two legislations on multiple parameters:

FERA imposed restrictions even on trivial foreign exchange transactions and required prior approval for most outward remittances. In contrast, FEMA provides specific classifications for current and capital account transactions and introduces automatic routes for many capital flows, subject to particular sectoral caps.

FERA vs FEMA: Which Is More Important?

Determining the importance of FERA and FEMA requires contextual understanding. FERA was indispensable in an era when India had negligible foreign exchange reserves and a closed economy. It protected the country's economic interests during critical periods and discouraged unregulated forex dealings.

However, FEMA is more relevant in the current globalised context. It reflects the principles of economic liberalisation and global integration. FEMA has facilitated ease of doing business, promoted FDI inflows, streamlined capital account transactions, and encouraged international trade.

From a modern regulatory and economic perspective, FEMA is significantly more aligned with contemporary needs. It supports India’s ambition of becoming a $5 trillion economy by reducing regulatory burdens and fostering a business-friendly environment.
 

Conclusion

The transition from FERA to FEMA is a clear reflection of India’s economic evolution. While FERA served its purpose during a conservative economic period, FEMA has rightly taken over to support a liberalised, growth-oriented economy. Understanding the nuanced difference between FEMA and FERA is crucial for financial analysts, policymakers, corporate advisors, and legal practitioners involved in cross-border transactions and compliance.

As global capital becomes increasingly mobile, the relevance of a flexible and pragmatic foreign exchange law becomes ever more critical. FEMA, with its civil nature and emphasis on facilitation rather than restriction, stands as a testament to India’s shift towards economic openness.