How FEMA replaced FERA?

Sonal Pruthi

19 Dec, 2020

FERA stands for the Foreign Exchange Regulation Act, 1973, by the Indira Gandhi’s government; it came into effect from 1st January 1973. The FERA is an act that regulates and control of the flow of foreign exchange in India. The Act majorly brought impact on the dealings of foreign exchange, securities, and transactions which had a direct impact on the foreign exchange currency and export & Import of Currency.

The bill aimed to regulate the balance of payments and foreign exchange in India and the conservation of foreign exchange. The intention of the Government behind this Act was to increase the insufficient balance of foreign exchange.

Illustration

It can be explained as when an Indian travels to a foreign country, he will use his Currency and exchange to get the Currency of a particular country, and when the foreigner travels to India, he exchanges his Currency with the Indian Currency. This way, it creates a balance of payment of Indian Currency with foreign Currency. The Act aimed to regulate the flow this currency movement. Also, it wanted to attract more influx of Currency.

Read our article:Framework for Possession of Foreign Currency in India

Salient Features of FERA

1. The primary objective of bringing the Foreign Exchange Regulation Act, 1973, was to regularise the inflow of foreign capital in the form of branches, and concerns, with the substantial non-resident interest and the employment of foreigners.
2. This Act extends to the whole of India.
3. It applies to all citizens who are outside India and to branches, agencies outside India, companies, or bodies corporate outside India, registered in India.
4. The rule of FERA was that every foreign company has to convert itself into Indian Companies operating in India with at least 60 percent holding of local equity participation.
5. FERA regulates and controls the balance of payments.
6. FERA controls foreign exchange and securities.
7. FERA regularises the transactions directly or indirectly affecting foreign exchange.
8. Transaction affecting foreign exchange and Import and export of Currency
9. Conservation of foreign exchange resources for the country
10. The purpose of this Act was to increase the economic development of the country when the Forex reserves were lowest.
11. The objective was to bring the main focus on conservation of foreign exchange rather than regulation of foreign capital entry, which was obtained via amendment of 1973.

What FERA achieved?

a. Making of Indian Brands

The achievement of FERA was to retain companies that actually accepted the government demands, where it asked them the product and reduce the foreign shareholding. Though it was a controversial move of the Government were the 1000’s of the company went away from India, the big giants like Hindustan Lever, ITC, and Palmolive reduced its shareholding, and 400 other countries reduce their shareholding, and 100 were not affected by the new law of FERA. The Act later created a juggle and counter-productivity, but from the larger perspective, it made Indian Brands.

b. Reduction of equity holding of foreign companies and expansion of business in India

The only gain which could be realized by this decade law was that it ended the profits of many companies who were making crores of profit. It actually led them to expand to various other sectors. The exports were rising.

c. Regulation of Foreign Exchange

Since the RBI, while at the implementation of the FERA, wanted to increase foreign participation only when it is accompanied with high technology, exports, etc. Before FERA, there was no law there to regularise the foreign company investments in India. All to keep control of the specific business with Indian Companies.

Drawbacks of FERA

The fall down of FEMA came due to various reasons, but primarily it was considered by the experts as a draconian law due to its non-liberalisation policies and not favoring foreign investments.

• FERA Act, 1973^[1] ignored and jumped various violations where most of the offences were criminal offences with main element to include mens rea. The ED was empowered under the Act to arrest without even a warrant.
• In 1991, the Government brought the LPG Policy. LPG stands for liberalization, Privatisation, and Globalisation. Where foreign exchange flow increased in India. Hence, the old Act restricted the flow of foreign exchange and foreign investment because the aim was to regulate the foreign currency but with a lot of restrictions as per the Act.
• The idea shifted from conservation of foreign exchange to management of foreign exchange.
• With the increasing influx of foreign investments comings, the idea shifted to facilitating trade and payments as well as developing foreign exchange markets in India.

Why FEMA came/ Replacement of FERA TO FEMA?

1. Under the scheme of FERA, in most of the regulations, one has to take permission or prior approval of the RBI. The general permissions were granted by RBI via notifications from time to time. Special permissions were granted via submitting applications by particular individuals.
   While in FEMA the permission from RBI was reduced except in Section 3 dealing in foreign exchange. But most provisions were not required prior approval of the RBI.
2. FERA has the concept of exchange control.
   FEMA has the concept of exchange management.
3. The objective of the Act under FEMA is to facilitate external trade and payments and promoting the development and maintenance of the foreign exchange market in India. The Section 5 of FEMA has drawn down the approval of RBI in Current Account transactions. Here the external trade means to export and Import of goods and services and no RBI approval for remittance involving external trade.

Features of FEMA

1. Contains provision for current account convertibility and liberalization of capital account transactions
2. It has specified areas where the prior approval for RBI/ Government on acquisition and holding of foreign exchange.
3. Classification of foreign exchange transactions into current and capital transactions
4. FEMA does not apply to Indian Citizens resident outside India.
5. It gives full power to the Resident in India who was Resident outside India to hold/control/ foreign investment and immovable property.
6. It is a civil law, and any contravention with the law allows arrest in exceptional cases.

Conclusion

The FERA was the first initiative of the Government to increase foreign transactions and exchange but with certain restrictions. FEMA has been introduced as a replacement of FERA, as the Act could not survive the post- liberalization policies. The offences as in FERA which were criminal we shifted to civil offences in FEMA.

The similarities like governing bodies, RBI, and central Government would continue. Directorate of Enforcement will continue to operate for the search and seizure. It continues to do as extraterritorial operations.

A significant difference has been brought in the FEMA was that mens rea has been removed in the FEMA, now the offences has been made as civil offence.. The definition of an Authorised person has been amended; it includes banks, money changers, offshore banking units. The FEMA act has been made in accordance with the Income Tax Act, for the term Resident. The term resident incorporates that person Resident for 182 days in India has been brought in FEMA’s purview.

Read our article:FEMA Guidelines on Foreign Currency Accounts