Samvaad: From FERA to FEMA

Past questions related to FEMA and foreign exchange market in India

Q 1 ) What is meant by NRI? What are the incentives provided to attract in investment by NRIs?

Q 2) Discuss the salient features of the foreign exchange market in India.

Q 3) Briefly discuss the main features of the RBI directives relating to acceptance of deposits by NBFCs.

Q 4 ) Briefly explain the salient features of the Foreign Exchange Management Act.

FERA or foreign exchange regulation act was introduced in 1973, with a view to control forex transaction in the economy. During 1970s there was a severe crunch on foreign reserves and strict laws were needed to curb the misuse of it. Besides, Indian economy was highly regulated and closed then. Therefore a law such as FERA was considered apt during the License Raj.

Objectives of FERA were

To conserve foreign exchange.
To utilize the same judiciously by rationing foreign exchange among competing claims.

The situation was so precarious that Mr Nandan Nilekani ( co-founder of Infosys) was almost rejected dollars for his business trip to USA as the RBI clerk couldn't fathom the need for such trips, as a result Infosys almost missed finalizing a client.

However the closed economy and financial profligacy of Indian government resulted in foreign exchange crisis in 1980 -1990. In 1991 the economy was liberalized, the liberalization was more due to external prodding by the IMF and less due to a change in our administration’s view. Following liberalization Indian rupee was devalued by around 20% with a view to protect domestic industries.

LERMS ie liberalized exchange rate management system was introduced in 1992 and a modified LERMS was put up in 1993. Finally the government accepted IMF’s article VIII status and put in a frame work for current account convertibility. By 2000 IMF loans were fully repaid and FEMA came into being replacing FERA.

FEMA was introduced with a view of consolidating the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. FEMA was introduced with a view to clearly demarcate the powers of GoI and RBI as far as foreign exchange transaction were concerned.

Differences between FERA and FEMA

The object of FERA was to conserve foreign exchange and to prevent its misuse. The objective of FEMA is to facilitate external trade and payments and maintenance of foreign exchange market in India.
Violation of FERA was a criminal offence whereas violation of FEMA is a civil offence.
Offences under FERA were not compoundable, while offences under FEMA are compoundable.
Citizenship was a criterion to determine the residential status of a person under FERA, while stay of more than 182 days in India is the criteria to decide residential status under FEMA.
Provision in respect of Basic Travel Quota (BTQ) business travel export commission, gifts, donation, etc., have been considerably enhanced in FEMA.
Almost all current account transactions are free, except a few.

Brief Scope of FEMA

· FEMA provides for

Free transactions on current account subject to reasonable restrictions that may be imposed.
RBI controls over capital account transactions.
Control over realisation of export proceeds.
Dealing in foreign exchange through authorised persons like authorised dealer/money changer/off shore banking unit.
Adjudication of Offences.
Appeal provision including Special Director (Appeals) and Appellate Tribunal.
Directorate of Enforcement.