Foreign Exchange Management Act,1999
(FEMA)
Foreign exchange Regulation Act,1973(FERA)
Background
The 1973 law was created during the tenure of Prime Minister Indira
Gandhi with the goal of conserving India's foreign exchange resources.
The country was facing a trade deficit, which was followed by a
devaluation of the currency and an increase in the price of imported oil.
The act specified which foreign exchange transactions were permitted,
including those between Indian residents and nonresident .
The FERA has its origin at the time of Indian Independence. In the
beginning, it was a temporary arrangement to control the flow of foreign
exchange. In 1957 the act was made permanent. As the industrialization
grew in India, there was an increase in the foreign exchange investments.
As a result, there arose a need to protect it. Accordingly, in 1973 the
Foreign Exchange Regulation Act was amended. FERA consists 7
Chapter and 81 sections .Under FERA, any offence was a criminal one
which included imprisonment as per code of criminal procedure, 1973.
Objective of FERA,1973
o Conservation and proper utilisation of India foreign exchange.
o To issue guidelines to the foreign companies investing in India.
o Act came in when India’s ForEx Reserves were low at US $1325
million .
o Under FERA, 1973, it was required to take necessary permission
from the government in respect of transactions those involved
foreign exchange dealings.
o The Enforcement Directorate had unlimited powers to search,
arrest and seize.
o Any offence under the law was considered as Criminal offence.
Foreign Exchange Mangement Act,1999
Need for FEMA
1. The FERA was introduced in 1974 when India’s foreign exchange
reserves position was not satisfactory. It required stringent controls
to conserve foreign exchange and to utilize in the best interest of
the country. Very strict restrictions have outlived their utility in the
current changed scenario.
2. There was a need to remove the draconian provisions of FERA and
have a forward-looking legislation covering foreign exchange
matters.
3. FERA was not suitable for liberalization policy.
Objectives of FEMA
1. To facilitate the external trade and payments .
2. To promote orderly development and maintenance of foreign
exchange market .
3. Regulation of foreign capital in india .
4. To remove imbalance of payment .
5. Regulation of employment business and investment of non-
residents and payment of foreign payments .
6. Offences under the law were considered as civil offences.
Provision of compounding is there.
Main Provisions of FEMA,1999
o It gives powers to the Central Government to regulate the flow of
payments to and from a person situated outside the country.
o All financial transactions concerning foreign securities or exchange
cannot be carried out without the approval of FEMA. All
transactions must be carried out through “Authorised Persons.”
o In the general interest of the public, the Government of India can
restrict an authorized individual from carrying out foreign
exchange deals within the current account.
o Empowers RBI to place restrictions on transactions from capital
Account even if it is carried out via an authorized individual.
o Any person may sell or draw foreign exchange to or from an
authorized person if such sale is in Current Account (sec 5).
o Any person may sell or draw foreign exchange to or from an
authorized person for a capital transaction (sec 6) .
