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FERA vs. FEMA: India's Forex Laws Explained

The document discusses the Foreign Exchange Regulation Act (FERA) and the Foreign Exchange Management Act (FEMA) which manage foreign exchange and investments in India. FERA was replaced by FEMA in 1999 to simplify rules and encourage more foreign investment by making procedures easier. Key differences between the two acts include FEMA having fewer and simpler sections compared to FERA.

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8 views3 pages

FERA vs. FEMA: India's Forex Laws Explained

The document discusses the Foreign Exchange Regulation Act (FERA) and the Foreign Exchange Management Act (FEMA) which manage foreign exchange and investments in India. FERA was replaced by FEMA in 1999 to simplify rules and encourage more foreign investment by making procedures easier. Key differences between the two acts include FEMA having fewer and simpler sections compared to FERA.

Uploaded by

ayush
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FEMA and FERA Laws

The FERA (Foreign Exchange Regulation Act) and FEMA (Foreign Exchange
Management Act) deals with laws which relate to foreign exchange in India. The laws
were made to manage foreign investments in India.

Foreign Exchange Laws in India

Post-Independence FERA was a law passed in 1973, to control the flow of foreign
exchange in India. As the industrialization process grew in India, there was an increase
in the foreign exchange investments. As a result, there arose a need to protect it.

With the passage of time, it was found that the rules under FERA regarding foreign
investments were very stringent and were not in accordance with the pro-liberalization
policies of the Indian Government. They had to be simplified to encourage more foreign
investment in and to ensure better foreign cash flow. However, FERA Finally, in 1999
was replaced by FEMA.

FEMA came into effect from 1st June, 2000. Some structural changes were made. The
FEMA combines and improves the laws relating to foreign exchange. It makes the
procedure for foreign investment easy and consequently encourages foreign exchange in
India.

FEMA on NRI Money Exchanges

The FEMA mostly includes all the matters relating to foreign investments/exchange of
NRIs. The investments could be in the form of immovable property, bank deposits,
government bonds, investment in shares, units and other securities, and foreign direct
investment in India. The Reserve Bank of India is the authority controlling FEMA. It
can grant general or special permission for all foreign exchange related activities when
the need arises.
FERA vs. FEMA

Let us compare FEMA and FERA. There are some similarities and some differences
between the two.

The similarities between FEMA and FERA are:


1. The RBI and central government would continue to be the regulatory bodies.
2. Presumption of extra territorial jurisdiction as envisaged in section (1) of
FERA has been retained.
3. The Directorate of Enforcement continues to be the agency for enforcement of
the provisions of the law such as conducting search and seizure.

The major differences are between the two are:


4. FERA consists of 81 complex sections, while FEMA has only 49 which are
relatively simpler.
5. Definition of “Authorized person” as per FERA was limited while in FEMA it
has been extended to include banks, money changes, off shore banking Units
etc.
6. While defining “Resident”, FERA and Income Tax Act differed a lot. In
FEMA, the term has been defined in accordance with the act.
7. Under FERA, any offence was a criminal one which included imprisonment as
per code of criminal procedure, 1973. Under FEMA, offence is treated as civil
offence. A penalty has to be paid in terms of money and imprisonment is only
for those people who do not pay the penalty.
8. The amount of money paid as penalty was quite large in FERA. It was five
times the amount involved. In FEMA, the amount has been considerably
reduced to three times the amount involved.
9. Any appeal against the order of "Adjudicating office", before Foreign
Exchange Regulation Appellate Board went before High Court. The appellate
authority under FEMA is the special Director (Appeals). Appeal against the
order of Adjudicating Authorities and special Director (appeals) lies before
"Appellate Tribunal for Foreign Exchange”. An appeal from an order of
Appellate Tribunal would lie to the High Court.
10. FERA does not have any provision for the complainant to take any legal help
whereas FEMA clearly recognizes the right of the complainant to take help
from a lawyer or a chartered accountant.
11. With FERA, police officers (Deputy Superintendent of Police and above rank
officers) were granted extensive powers of search and seizure while FEMA
has restricted the power to a great extent.
The most important changes made from FERA to FEMA were regarding the laws which
deal with restrictions on withdrawals and transactions of foreign exchange. Most of them
have been removed. Yet, it may be noted that the Central Government (with consultation
with RBI) can still enforce restrictions on these transactions in public interest.

The main aim of FEMA is to control and regulate the forex market in India. It helps all
concerned people to make the financial transactions smoothly.

Common questions

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FERA consisted of 81 complex sections, making it more intricate compared to FEMA, which only consists of 49 simpler sections . Under FERA, violations were treated as criminal offenses with penalties reaching five times the amount involved, alongside the possibility of imprisonment for offenders . In contrast, FEMA treats offenses as civil matters, with penalties reduced to three times the amount involved and imprisonment is only applied to those failing to pay the penalty .

By reducing complexity, FEMA facilitates easier compliance and enhances transparency for foreign investors, which can increase foreign investment and improve the overall business environment. Simpler regulations help reduce administrative delays and lower the costs associated with compliance, making India a more attractive destination for foreign direct investments. This streamlining reflects a shift towards a market-friendly approach, crucial for sustaining economic growth in a liberalized economy .

FEMA provides a more favorable environment for NRI investments by simplifying and clarifying the legal framework around foreign exchange. It covers investments in immovable property, bank deposits, government bonds, shares, units, and foreign direct investment, which was less explicitly defined under FERA. FEMA permits better management of such investments with the Reserve Bank of India (RBI) facilitating permissions for foreign exchange activities when needed .

The reclassification of offenses from criminal to civil under FEMA has significantly altered the approach to foreign exchange violations. Offenses are now met with monetary penalties, simplifying the enforcement process by avoiding criminal prosecution and focusing on financial restitution. Imprisonment is only applied to individuals who fail to pay penalties, thus aligning penalties with civil procedures and possibly reducing the administrative burden on the legal system .

Under both FERA and FEMA, the Reserve Bank of India (RBI) serves as a regulatory body overseeing foreign exchange activities. However, under FEMA, the RBI's role is more encompassing, granting general or special permissions for foreign exchange transactions when required, thereby aiding in the smooth execution of financial transactions and aligning with contemporary economic policies .

The definition of 'Resident' in FEMA aligns with that of the Income Tax Act, ensuring consistency across legal frameworks and reducing confusion for stakeholders involved in foreign exchange activities. This coherence prevents discrepancies in determining residency status for tax and foreign exchange purposes, which was an issue under FERA . This alignment is significant as it facilitates clearer compliance and enforcement of regulations related to foreign exchange activities.

FEMA introduces the right for complainants to seek legal support, either through a lawyer or a chartered accountant, promoting fairer proceedings for involved parties. This right addresses a gap present in FERA, ensuring that the complainant can adequately represent their interests and navigate legal complexities, thus promoting a more equitable legal environment .

Under FEMA, the Central Government and the Reserve Bank of India continue to serve as regulatory authorities, similar to their roles under FERA. They hold the power to enforce regulations and restrictions on foreign exchange transactions, particularly in scenarios deemed necessary for public interest, ensuring a balance between liberalization and protective economic measures .

FEMA aimed at simplifying the procedure for foreign investments to encourage more inflow of foreign exchange, which aligned with India's pro-liberalization policies. Unlike the stringent controls under FERA, FEMA reduced the regulatory burden by decreasing the number of sections and treating violations as civil offenses. Additionally, FEMA removed many restrictions on withdrawals and transactions of foreign exchange, facilitating smoother financial transactions while still allowing for governmental restrictions in public interest .

With the transition to FEMA, the power of enforcement shifted to the special Director (Appeals), and appeals against the Adjudicating Authorities lie before the "Appellate Tribunal for Foreign Exchange." Furthermore, FEMA recognized the right of complainants to seek legal help, unlike FERA. The powers of search and seizure were also restricted compared to the extensive powers granted under FERA .

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