India’s economic policy transformed after liberalization. One of the most critical shifts came in foreign exchange regulations. The replacement of FERA by FEMA marked a move from control to management. Understanding the FERA vs FEMA transition helps law students grasp how India’s economy opened up to the world.
What Was FERA?
The Foreign Exchange Regulation Act (FERA), 1973 aimed to strictly regulate foreign exchange in India. The government enforced this law during an era of foreign exchange scarcity. FERA treated all foreign exchange dealings as suspicious unless proven otherwise. It assumed guilt and required the accused to prove innocence. This made it harsh and criminal in nature.
Problems with FERA
FERA imposed heavy restrictions on foreign investments, foreign trade, and currency transactions. It discouraged companies from bringing capital into India. Authorities could conduct raids and arrest individuals without strong evidence. The law hurt ease of doing business. It reflected a mindset of economic control, not growth.
What Is FEMA?
The Foreign Exchange Management Act (FEMA), 1999 replaced FERA. This law shifted the focus from restriction to facilitation. FEMA aimed to regulate foreign exchange in a liberalized economy. It treats foreign exchange transactions as permitted unless specifically restricted. It views violations as civil wrongs, not criminal offences.
Key Differences: FERA vs FEMA
| Feature | FERA | FEMA |
|---|---|---|
| Year Enacted | 1973 | 1999 |
| Nature of Law | Criminal | Civil |
| Presumption | Presumed guilty | Presumed innocent |
| Focus | Control foreign exchange | Manage and facilitate exchange |
| Enforcement | Stringent and fear-based | Friendly and reform-oriented |
| Penalties | Severe (imprisonment) | Monetary (fines only) |
FEMA reduced government interference and boosted investor confidence. It aligned India’s laws with WTO and IMF frameworks.
Why Did India Replace FERA?
India liberalized its economy in 1991 after a major financial crisis. FERA clashed with the new economic goals. Investors saw it as outdated. India needed a transparent, flexible, and business-friendly law. FEMA brought that change. It allowed freer movement of capital and streamlined trade practices.
Impact of FEMA on Foreign Trade and Investment
After the new law came into force, India saw a sharp rise in foreign direct investment (FDI) and cross-border trade. Businesses got clarity and fewer procedural hurdles. Regulatory bodies like RBI gained clearer roles. FEMA simplified compliance and created a stable legal framework.
Important Provisions
- Section 3: Deals with prohibited dealings in foreign exchange
- Section 4: Restricts holding of foreign exchange unless permitted
- Section 5: Allows current account transactions unless restricted
- Section 13: Provides for penalties, not imprisonment
- Section 37A: Empowers authorities to seize property abroad in serious violation cases
These sections show how FEMA encourages transactions but keeps safeguards intact.
Conclusion
The debate reflects India’s shift from suspicion to support, from control to confidence. FERA belonged to a closed economy. FEMA supports globalization. For law students and CLAT aspirants, this topic shows how legal change can power economic reform. A strong legal system builds trust—and trust builds growth.
