FERA
FERA – the four-letter acronym for Foreign Exchange Regulation Act – is a piece of legislation that was enacted in 1973 with the goal of regulating certain dealings in foreign exchange, imposing restrictions on certain types of payments, and monitoring transactions involving foreign exchange and currency import and export.
The Foreign Exchange Regulation Act (FERA) was passed in 1973 and went into effect on January 1, 1974. Section 29 of this Act specifically addressed MNC operations in India. The Section required all non-banking foreign branches and subsidiaries with foreign equity greater than 40% to obtain permission to establish new undertakings, purchase shares in existing companies, or acquire wholly or partially any other company.
An Act to consolidate and amend the law governing certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange, and currency import and export in order to conserve the country’s foreign exchange resources and properly utilize them in the interests of the country’s economic development.
Objectives of FERA
FERA primarily prohibited all transactions prohibited by the RBI. The goal of FERA was to regulate certain payment dealings in foreign exchange and securities transactions that indirectly affect the foreign exchange of currency import and export, as well as to conserve valuable foreign exchange and optimize the proper utilization of foreign exchange in order to promote the country’s economic development.
Features of FERA
The intent of FERA, which was applicable to all Indian citizens, was, among other things, to conserve the country’s foreign exchange resources. Among the main characteristics of the act are the following:
- The RBI grants permission to any individual or company to deal in foreign exchange.
- The Reserve Bank of India grants dealers permission to transact in foreign currencies, subject to review and revocation in the event of noncompliance.
- Money changers are granted permission to convert currencies at the rates set by the RBI.
- Currency import and export restrictions
- It is forbidden for anyone to deal in financial currencies other than authorized dealers.
- Restrictions on bearer securities issuing
- Restrictions on owning or acquiring real estate outside of India
- Payment restrictions to/from residents living outside India
- The RBI’s authority to request information and seize documents whenever and wherever it is necessary.
FEMA
The FEMA, which went into effect on January 1, 2000, applies to the entire country of India as well as all branches, offices, and agencies located outside of India that are owned or controlled by an Indian resident.
Objectives
The objectives of FEMA are:
- To simplify payments and trade with other countries
- To encourage the orderly development and upkeep of the foreign exchange market.
Features
Dealing in Foreign Exchange: Section 3 of the FEMA restricts dealings in foreign exchange and foreign securities, as well as payments to and receipts from anyone outside India. As a result, except as provided in the Act or with the Reserve Bank’s general or special permission, no one shall:
- deal in any foreign exchange or foreign security with anyone other than an authorized person;
- make any payment to or for the credit of any person resident outside India in any way;
- receive any payment by order or on behalf of any person resident outside India in any way;
- enter into any financial transaction in India as a consideration for or in connection with the acquisition, creation, or transfer of a right to acquire
Furthermore, except as otherwise provided in this Act, no person residing in India may acquire, hold, own, possess, or transfer any foreign currency, foreign security, or immovable property located outside of India.
Current Account Transactions: For current account transactions, FEMA allows dealings in foreign exchange through authorized persons. However, in the public interest, the Central Government can impose reasonable restrictions.
Capital Account Transactions: Anyone may sell or draw foreign exchange to or from an authorized person in connection with a capital account transaction approved by the Reserve Bank in consultation with the Central Government.
Export of Goods and Services: Every exporter of goods shall:
- provide to the Reserve Bank or such other authority a declaration containing true and correct material particulars, including the amount representing the full export value of the goods or, if the full export value of the goods is not ascertained at the time of export, the value which the exporter expects to receive on the sale of the goods in a market outside India;
- provide the Reserve Bank with any additional information that the Reserve Bank may require in order to ensure that the export proceeds are realized by such exporter.
The Reserve Bank may direct any exporter to comply with such requirements as it deems fit in order to ensure that the export value of the goods is received without delay. Every service exporter shall provide to the Reserve Bank or such other authorities as specified a declaration containing the true and correct material particulars relating to payment for such services.
Realization and Repatriation of Foreign Exchange: Where any amount of foreign exchange is owed or has accrued to any person, he must take all reasonable steps to realize and repatriate it to India within the time and manner specified by the RBI. This clause, however, is subject to a number of exceptions.
Contravention and Penalties: The penalty for any type of contravention under this Act is liable to a penalty of up to thrice the amount involved where it is quantifiable or up to 2 lakhs where it is not quantifiable, and where such contravention is continuing one, a further penalty of up to five thousand rupees for each day after the first day during which the contravention continues. This provision is diametrically opposed to the corresponding provision in the previous FERA, which provided for imprisonment and no maximum fine. Under FEMA, a person is only subject to civil imprisonment if he fails to pay the fine within 90 days of receiving notice, and only after the formalities of show-cause notice and personal appearance have been completed.
Administration of the Act: The FEMA has entrusted the administration of this Act to the Reserve Bank of India. The RBI, in consultation with the Central Government, will lay down the rules, regulations, and norms pertaining to various sections of the Act. The Act requires the Central Government to appoint as many Central Government officers as Adjudicating Authorities to conduct investigations into Act violations. There is also a provision for appointing one or more Special Directors (Appeals) to hear appeals from Adjudicating Authorities’ orders. The Central Government will also establish an Appellate Tribunal for Foreign Exchange to hear appeals from Adjudicating Authorities and the Special Director’s orders (Appeals). The FEMA authorizes the Central Government to appoint a Director of Enforcement, along with a Director and such other officers or classes of officers as it deems necessary for investigating violations of the Act.
FERA and FEMA
The Foreign Exchange Regulations Act (FERA) of 1973 governed foreign exchange transactions in India. This Act also attempted to regulate certain aspects of Indian companies’ conduct outside the country and foreign companies’ conduct in India. The FERA was widely regarded as a draconian and obnoxious piece of legislation. Following the economic liberalization that began in 1991, some changes to the FERA were made in 1993.
The main goal of FERA, which was framed against the backdrop of severe foreign exchange problems and a controlled economic regime, was the conservation and proper utilization of the country’s foreign exchange resources. In light of the ongoing economic liberalization and improving foreign exchange reserves position, there was a lot of demand for a significant change to FERA. As a result, the Foreign Exchange Management Act (FEMA) of 1999 replaced the FERA.
While FERA is a Parliamentary Act passed in 1973 with the intention of managing and conserving India’s foreign reserves, the Foreign Exchange Management Act (FEMA) is an extension of the existing law. The goal of enacting FEMA was not only to regulate and facilitate foreign exchange, but also to promote foreign trade and payments while increasing India’s foreign exchange reserves. Unlike the previous law, FEMA was promulgated in 1999 and significantly liberalized foreign exchange controls and restrictions on foreign investments..
Not only that, but the latter also emphasized systematic development and proper management of the country’s forex market. Unlike FERA, a violation of FEMA is a compoundable offense for which the charges can be dropped. Aside from that, there are various penalties for violating FERA and FEMA provisions.