Introduction
Regulation of the Indian economy in the current globalised era has ever been a challenge that has posed several questions in the minds of the leading economists all over the world. One of the infamous questions has always been between FERA (Foreign Exchange Regulation Act, 1973) and FEMA (Foreign Exchange Management Act, 1999) which has proven to be the most advantageous in both regulating and managing the incoming and outgoing foreign economy in the economic administration of India. Analysis into this question shall always be initiated by diving deep into the post-independence era wherein the Parliament felt a dire need for a stable Foreign Exchange System in the country; a field that demanded considerable attention to conserve international trade attract foreign investors and facilitate a free flow of cross border trade. During post-independence, the economic stability was completely shaken from the core and under this scenario; it was considered that the exchange system would be a meager resource hence should be conserved with considerable care. This belief system paved the way for the formulation of FERA in 1973. However, on 1st June 2000, FERA was replaced by FEMA. The dynamicity in the economic administration demanded a more liberal and flexible approach in the foreign exchange system wherein the need arose to manage as also to enhance the free flow of foreign exchange, payments and international and other cross-border trades. The need is no more to conserve but to manage, regulate and enhance the reserves. FEMA has appropriately fulfilled such gaps and facilitated a stabilised global economy and boosted the economic stability of the Nation. In this article, we shall discuss in length the differences between the two Acts and the modifications that the successor Act has brought about impacting the global economy at its best.
FERA and FEMA
FERA came into force on 1st January 1974. FERA was introduced in the background of the post-independence era while there was a considerable dearth of economic stability. FERA had the sole objective of conserving and controlling the outflow and inflow of foreign exchange resources; preventing the unlawful utilization of the resources as also keeping track of the foreign investments which shall strictly comply with the prescribed regulations. In a word, FERA imposed strict and rigid regulations considering the economic condition of India and considerably curbed the outflow of Indian currency which was then a necessary evil. FERA applies to every Indian citizen and business entities residing in India as well as the Indian citizens residing abroad. FERA had empowered RBI (Reserve Bank of India) to impose a specific percentage on the foreign exchange income that the Indian Companies are required to surrender to RBI annually; to seize and confiscate the foreign exchange resources that are in violation of the Act or have been acquired by not complying with the set regulations; to inspect documents, individuals and business premises. To impose stricter sanctions, crimes under FERA were considered criminal offences punishable with imprisonment or fines or both.[1]
Liberalization of international and cross-border trades would not have been possible during the reign of FERA owing to its escalation in the black market of foreign currency. In the year 2000 when the era of globalisation began, it demanded a much more lenient regulation to succeed FERA which shall facilitate international investments and boost the economy of India. Rigid restrictions of FERA which was repelling the foreign investors changed the scenario after the implementation of FEMA. FEMA aimed at easing foreign exchange transactions and investments by limiting the restrictions imposed on international transactions by FERA. Rules regulating cross-border investments, acquisition of foreign assets, currency conversion, non-residential transactions, and remittances which were rigid during the reign of FERA were made flexible with the implementation of FEMA which in turn boosted the Indian economy in the era of globalisation.
Comparative Analysis of FERA and FEMA
i. Objective
FERA was introduced to conserve foreign exchange resources and curb the outflow of the Indian economy. FEMA was introduced to enhance and promote foreign exchange transactions and foreign investments to keep up with the needs of the global economy.
ii. Nature of Regulation
Regulations imposed by FERA were conservative and rigid which hindered the growth of the Indian economy in the era of globalisation. FERA contained lengthy and complex provisions covering a total of 81 Sections. However, FERA met the needs of the then economic circumstances of India, right after post-independence. FERA mainly aimed at preventing the misuse of foreign exchange resources which led to the restriction of certain activities relating to international trade. FEMA on the contrary contributed to a more liberal approach that facilitated both the inflow and outflow of the foreign exchange resources at ease. FEMA comprised relatively of simple provisions covering a total of 49 Sections.
iii. Determination of Residential Status
FERA determines the residential status of an individual if they have stayed in India for 6 months. However, FEMA determines the residential status of an individual if they have resided in India for 182 days.
iv. Interpretation of the Term “Authorized Person”
The term “Authorized Person” under FERA has not been interpreted under a broader vision. Only the currency exchangers and government-authorized dealers were considered authorized persons. However, under FEMA the term has a precise definition and even included the overseas banking units.[2]
v. Definite Authority
Under FERA, the appeals relating to the disputes concerning the matters of FERA were being directed to the High Court. Under FERA, an appeal against the order of the adjudicating officer had to be put up before the Appellate Board of the Foreign Exchange Regulation and thereafter before the High Court. However, subsequent to the implementation of the FEMA, any appeal against the decision of the adjudicating officer shall be directed to the Special Directorate as has been established under the Act which is the responsible authority for adjudicating the appeals in the matters of FEMA. The appeal against the order of the Special Directorate shall be forwarded to the Appellate Tribunal established under the FEMA and thereafter before the High Court.
vi. Power of RBI
FERA had empowered the RBI to approve or grant any application concerning foreign transactions and to even turn down such transactions which can pose a potential threat to the Indian economy. However, under FEMA no permit from the RBI is required to initiate an international transaction.
vii. Right of the Accused
Under FERA the provisions relating to the right of the accused to avail the legal assistance in the disputes concerning to FERA have not been mentioned. However, under Section 32 of FEMA accused has the right to call for a lawyer of their choice.
viii. Penal Provision
Any offence committed in contravention of FERA was considered a criminal offence and is non-compoundable. In the event of such contravention, the offence was punishable with imprisonment in accordance with the procedure mentioned in The Criminal Procedure Code, 1973. An individual being a resident of India and being governed by the FERA if and when commits any offence outside India that is in contravention to FERA, shall be punished in accordance with the regulation of FERA.
FERA when replaced by FEMA, known for a more liberal approach has amended the nature of the punishment in the event of any contravention to be treated as a civil offence which is compoundable. Under Section 15 of the FEMA, the Enforcement Directorate is empowered to compound the offence. Section 13 of the FEMA determines any act in violation of FEMA to be a civil offence and punishable with a penalty. As per Section 14 of the FEMA, imprisonment under FEMA comes into the scenario only in the event the party defaults in the payment of the fine charged against him within 90 days from the day payment becomes due.[3]
ix. Role of Information Technology
The role of information technology was never recognised in FERA. However, with the advancement in the global economy, it was a mandate to pace up with the information technology for a smooth and efficient management of the foreign exchange system and such demand was fulfilled by the FEMA.
x. Power to the Enforcement Authority
FERA empowers the police officer not below the rank of Deputy Superintendent to search and seize any foreign exchange resources that have been acquired or transacted in violation of the regulations under FERA. The ambit of such power was considerably wide and a limitation was necessary to make the law a bit lenient. FEMA in turn has limited such power of the enforcement authority concerning the search and seizure.
xi. Limitations in Foreign Exchange Transactions
FERA prohibited any random foreign transactions unless it has been specifically permitted by the RBI. However, FEMA in turn facilitated the current account transactions unless specifically prohibited considering the public interest and imposed prohibition on the capital account transactions which includes foreign investments and capital transfers that are subject to reasonable permit if and when considered to put up with.[4]
xii. Restrictions on Re-Investment of Foreign Assets
FERA attains an advantageous position in this particular aspect of granting the returning NRIs a right to hold on to their investments and assets outside India which they are entitled to utilise after attaining their residential status. However, such right comes with two conditions, i.e., firstly, such NRI (Non-Resident Indian) shall have lawfully acquired the assets without contravening the regulations of FERA; secondly, such NRI has stayed in India for at least 1 year without any interruptions. However, FEMA lacks such a condition of 1 year. Moreover, under Section 6(4) of the FEMA, there is no mention of any right provided to the returning NRI regarding re-investment of foreign assets and incomes after he attains the residential status. On the contrary, FEMA requires the returning NRIs to surrender their foreign assets and income to the authorized person within 7 days of receiving the same.
Conclusion
The change in the regulatory framework of the Foreign Exchange Regulations in India has ever been determined as dynamic and a response to the desired need to boost the Indian economy in the global market. FERA with its rigid rules and unnecessary restrictions had failed to meet the requirements of economic liberalisation and thereby ended up hampering the industrial growth in India concerning international transactions and other cross-border trades. Thereafter, a replacement became indispensable. FEMA replaced the FERA and the former has brought a drastic change in the Indian economy even in the foreign market. A smooth inflow and outflow of foreign currency; cross-border investments and overseas transactions enhanced the access of the foreign investors in the Indian market. FEMA never attempted to conserve the foreign exchange system but rather endeavoured to manage the process. FEMA has advantageously differentiated between the current and capital account transactions wherein, the current account transactions comprise the trade in goods and services which do not require any special permit and are free from restrictions. However, considering the public interest if and when the necessity arises, the Central Government in consultation with the RBI are very much empowered to impose reasonable restrictions. The replacement of FERA by FEMA has even acted as a protective sheath towards the Indian economy against money laundering and other illegal transactions. FEMA is no doubt a much more market-oriented approach than FERA.
Albeit, FEMA has always attempted to simplify foreign exchange regulations, certain capital account transactions concerning cross-border investments require a specific regulatory framework and involve immense complicacies. Besides, exchange rate fluctuations are the eminent risk that the businesses dealing in international trade and other foreign investors are likely to face which can directly or indirectly affect the return for the investors and FEMA attains a disadvantageous position in this scenario. Although both the regulatory frameworks aimed at boosting the Indian economy in the International market and both have their respective advantages and disadvantages, FEMA has surpassed FERA; and when we conduct a comparative analysis between the two we consider FEMA under the parameter of the maximum benefit that FEMA has attributed towards the trade facilitation and free flow of foreign exchange resources and transactions contributing towards the progress and development of Indian economy.
[1]Sudip Chaudhuri, FERA: Appearance and Reality, Economic and Political Weekly Vol. 14, No. 16 (21.4.1979).
[2]Foreign Exchange Management Act, 1999.
[3]Shaji Vikraman, Express Economic History Series- 3: How Draconian FERA Clause Triggered Flush of Retail Investors, The Indian Express, (5.4.2017).
[4]Davinder Kumar Madaan, India’s New Economic Policy – A Macro Study, Indian Journal of Asian Affairs Vols. 8/9 (1995-1996).
