We are diving into the history of foreign exchange regulation in India, starting with FERA (Foreign Exchange Regulation Act). Enacted in September 1973 and implemented on January 1, 1974, this legislation aimed to control foreign exchange dealings, restrict specific foreign payments, and oversee transactions impacting foreign exchange and currency import/export. It's important to note that FERA was later re-established by the Foreign Exchange Regulation (Amendment) Act in 1993 and ultimately replaced by the Foreign Exchange Management Act (FEMA) in 2000, though it initially applied to all Indian citizens.
Foreign exchange has always been a significant domain, primarily handled by banks and large corporations, representing the world's largest market.
Key Features of FERA
FERA's primary objective was to safeguard India's foreign exchange reserves. Here's a breakdown of its core components:
- RBI's Authority over Money Changers: The Reserve Bank of India (RBI) had the power to authorize money changers and determine currency exchange rates.
- Regulation of Foreign Currency Dealers: The RBI also authorized and regulated foreign currency dealers, with the ability to review and revoke authorization for non-compliance.
- Broad Authorization Power: The RBI could authorize any individual or company to engage in foreign exchange dealings.
- Control Over Cross-Border Payments: The RBI restricted payments to or from residents outside India.
- Information and Document Retrieval: The RBI possessed the authority to demand information and seize documents as needed.
- Restrictions on Financial Currency Transactions: Transactions involving financial currency were restricted to authorized dealers.
- Restrictions on Conveyor Securities: The issuance of conveyor securities was subject to restrictions.
- Restrictions on Foreign Property Ownership: Acquiring and holding immovable property outside India was restricted.
- Restrictions on Currency Import/Export: FERA imposed limitations on the import and export of currencies.
FERA vs. FEMA: A Comparison
While FERA focused on managing and preserving India's foreign reserves, FEMA evolved as a more comprehensive approach. FEMA not only regulates foreign exchange but also facilitates foreign trade and payments while bolstering India's foreign exchange reserves. Enacted in 1999, FEMA significantly liberalized foreign exchange controls compared to FERA, particularly regarding foreign investments.
Property Acquisition Under FERA and FEMA
A notable distinction between FERA and FEMA lies in property acquisition criteria. FERA used 'citizenship' as the determining factor, allowing only Indian citizens to acquire property in India (with exceptions for NRIs). FEMA shifted the focus to 'residency,' permitting Indian residents but not non-residents to acquire property. However, foreign companies with branch offices or business establishments in India could acquire property necessary for their operations under both FERA and FEMA.
In essence, FERA comprehensively regulated all aspects of foreign exchange but its stringent restrictions hindered the growth of Indian industries. FEMA's introduction marked a shift from control to management, fostering the development and regulation of the foreign exchange market in India. I hope this detailed exploration of FERA and FEMA provides valuable insights.