Distinctive Features of Fera and Fema

The Foreign Exchange Regulation Act (FERA) was legislated in 1973 to impose strict limitations for foreign exchange dealings and securities. The law also dealt with transactions indirectly affecting foreign exchange. The legislation was formulated to preserve the country's foreign trade and subsequently use it for the economic development of people. The FERA was replaced by Foreign Exchange Management Act (FERA) in 1999. Let us learn what are the differences between FERA and FEMA.

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When FERA was legislated in 1973, the country was suffering from an acute shortage of foreign reserves (forex). To engage with this issue, the Indian government took some stern steps; all Indians living inside the country or abroad earning forex must be yielded to RBI; the resource earned belonged to the government of India. FERA strictly regulated all monetary transactions that directly, indirectly affected the forex of India, but the objective with which was implemented remains futile. The 1997-98 Budget was planned to replace FERA with FEMA, which came into effect on 1st June 2000.

FERA

FERA full form is Foreign Exchange Regulation Act, 1973. It was introduced to mop up all foreign exchanges earned by Indian residents and declare it lawfully belonged to the government of India. FERA was applied to all Indian citizens and regulated any transaction involving foreign exchange and securities. Authorized dealers (endorsed to deal in foreign exchange by RBI) were only allowed to transact on forex. Reserve Bank of India (RBI) was given the power to review and revoke authorized dealers in non-observance.  

What is FERA? 

FERA is the Foreign Exchange Regulation Act, where authorized forex dealers would convert one fiat currency to another at an exchange rate determined by RBI. If the purpose of foreign exchange was medical, the user could use it for that purpose only. If not to spend for a pre-defined aim, the citizen would have to redeem it with an authorized dealer within thirty calendar days. The FERA full form itself reveals a lot about what it is.

The Guidelines of FERA 

• Certain currencies were constrained from import and export.

• Illegal payments were curbed.

• Foreign exchange dealings were restricted.

• Payment for exported goods facilitates through RBI only.

• The issue of bearer securities was controlled.

• Settlements in other countries were limited.

• Possessing immovable property outside India was controlled.

• Practicing foreign professionals required permission from the RBI to work within the sovereignty of India.

• It authorized RBI to question anyone and seek documents regarding Indian, foreign currencies, and bank accounts. 

• Power to search and seize suspected persons' documents and property.

There were several issues about FERA, which were horrific. Financial violators were treated as criminals; FERA gave extensive powers to the Enforcement Directorate to arrest any person and seize any property. Any transaction related to forex dealing was aimed with suspicion. Ultimately, FERA was outlawed by FEMA, keeping because of the open economy of India and worldwide. FERA and FEMA both are laws relating to the foreign exchange of India.

FEMA

FEMA (Foreign Exchange Management Act) is a governing body to consolidate and amend laws associated with India's foreign exchange. The salient features of this act were to facilitate external trade and payment, promote well-regulated development, and maintain the forex market in India. The act was legislated in the winter session of parliament of 1999 and enforced on 1st June 2020. Vide this act, the forex market is regulated by RBI and paved the way for establishing PMLA.

The two most crucial objectives were to assist bilateral payment and trade and promote India's foreign exchange market. Defining norms and procedures relating to Forex trade in India was also inclusive of the objective. The difference between FERA and FEMA is that forex-related offenses were treated as a criminal breach in the former case. Still, in the latter case, the forex offense is treated as a civil offense.

Number of Days the Person Stays

FEMA does not apply to citizens who reside outside India. The eligibility for applicability of the law depends on the number of days the person stays with the sovereignty of India in the preceding financial year. If an individual stays for one hundred eighty-two days or more in India, the person will be treated as a resident. Even an office, branch, or agency can be treated as a resident based on the number of days stay within India. 

According to FEMA law, the central government can supervise, impose restrictions on payment made to any entity outside India, foreign aid, the payment received from outside India, and foreign security deals. The law clearly states areas where specific permission from RBI is required to facilitate the acquisition/holding of forex. 

The legislation categorizes foreign exchange transactions into two broad segments; capital account and current account. A capital account transaction affects liabilities/assets outside India but is effective for a resident outside India. Thus, the law encompasses any transactions that modify or alter overseas investments, liabilities for an Indian resident, and vice versa. Any other transactions are categorized under the current account. Expand FEMA implies any Bangladeshi, Pakistani citizen or entity registered in Bangladesh and Pakistan cannot purchase capital instruments without prior government approval. 

FERA vs FEMA

• FERA was introduced in 1973, whereas FEMA was effective in 2020.

• FERA has eighty-one sections, FEMA has forty-one branches.

• FERA was introduced to regulate foreign exchange, FEMA was enforced to promote foreign trade, payment and develop forex reserves.

• Under FERA, citizenship was the sole criterion to determine the residential status of a person; under FEMA, a person staying for the last six months in a financial year is regarded as a resident.

Expand FERA implies anyone convicted under the law could be directly imprisoned; under FEMA, a person could be detained if the individual does not deposit the prescribed fine within ninety days. 

Under FERA, the charged person was considered guilty and had the burden to prove their incorruptibility in court. In FEMA, the investigating officer has the responsibility to verify the person violated the law.

In the FERA era, persons needed approval for the remittance of the fund; now, there is no such requirement of permission for remittance and external trade.

What are FEMA and FERA? 

Both are laws relating to the foreign exchange of India. FEMA headquarters also known as Enforcement Directorate; it is further divided into five zonal offices; Delhi, Mumbai, Kolkata, Chennai, and Jalandhar, each office headed by a deputy director. Each zone is further bifurcated into seven sub-zones led by assistant directors and five field units commanded by officers.