On this page you will read detailed information about Foreign Exchange Regulation Act (FERA).
As you seek to expand your business into international markets, you must understand the complex regulations that govern foreign exchange and overseas investments. A key law in India is the Foreign Exchange Regulation Act, known as FERA. In this 100-word article, you will learn the history and purpose of FERA, key provisions related to foreign exchange transactions, and recent amendments that liberalized foreign investment. With clear knowledge of FERA’s regulations, you can make wise decisions when pursuing opportunities abroad and avoid costly compliance mistakes. Equipped with this overview, you will have confidence as you navigate the regulatory landscape for foreign exchange and take steps toward global growth.
What Is the Foreign Exchange Regulation Act (FERA)?
The Foreign Exchange Regulation Act (FERA) was enacted in India in 1973 to regulate foreign exchange transactions. Its goal was to conserve and regulate the flow of foreign exchange in the country. FERA made it mandatory for foreign exchange transactions to be routed through authorized dealers like banks. It gave wide powers to the Reserve Bank of India (RBI) over foreign exchange dealings.
Restrictions Imposed
FERA placed several restrictions on foreign exchange transactions. It prohibited payments from India to non-residents, except with RBI permission. Residents could not make payments to non-residents for any purpose without approval from the RBI. Furthermore, FERA restricted companies in India from investing abroad or borrowing from non-residents. It also prohibited companies from issuing shares to non-residents or allowing non-residents to acquire control over Indian companies.
Liberalization of Controls
By the 1990s, India started liberalizing its economy. FERA’s stringent controls on foreign exchange proved counterproductive. They discouraged foreign companies from investing in India and made it difficult for Indian companies to compete globally. In response, India repealed FERA in 1999 and replaced it with the Foreign Exchange Management Act (FEMA).
FEMA significantly liberalized foreign exchange controls. It lifted curbs on payments and investments abroad. It allowed companies to borrow money from non-residents, issue shares to foreigners and make overseas investments without excessive restrictions. The shift from FERA to FEMA made foreign exchange transactions much easier and helped boost foreign investment in India’s economy.
In summary, FERA was enacted to regulate foreign exchange dealings but its stringent controls proved restrictive. Its repeal and replacement by FEMA in 1999 liberalized foreign exchange transactions and promoted foreign investment in India. FERA highlighted India’s closed economy policies while FEMA marked its transition to becoming a more open and globalized economy.
Objectives of FERA
The Foreign Exchange Regulation Act of 1973 (FERA) was established to regulate transactions involving foreign exchange and securities and prevent the use of the Indian financial system for the purpose of money laundering.
Control Capital Outflow
A primary objective of FERA was to control the outflow of capital from India. It aimed to conserve India’s foreign exchange reserves and ensure that domestic companies reinvested profits within the country rather than repatriating them abroad. FERA stipulated that Indian residents and companies could not invest in foreign firms or make foreign currency payments without RBI approval.
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Curb Money Laundering
FERA sought to curb the practice of money laundering through foreign currency accounts and shell companies. It required Indian residents to declare foreign exchange assets and obtain RBI permission to hold foreign currency accounts. FERA also placed restrictions on the opening and maintenance of non-resident external (NRE) and non-resident ordinary (NRO) accounts.
Promote Foreign Investment
While limiting capital outflows, FERA aimed to promote inflows of foreign investment into India. It allowed foreign investors to invest in Indian companies and offered incentives for technology transfers and collaboration. FERA’s restrictions on capital outflows provided foreign investors a captive market and stable investment environment in India.
Improve Balance of Payments
By regulating cross-border financial flows, FERA sought to stabilize India’s balance of payments situation. Its capital controls ensured India had sufficient foreign exchange reserves to pay for essential imports and service external debt obligations. This allowed India to avoid defaulting on sovereign debt payments, which would have severely damaged its international credit rating and access to foreign capital.
In summary, the objectives of FERA were to institute capital controls, curb money laundering, promote foreign investment, and improve India’s balance of payments situation. While controversial, FERA achieved these objectives and contributed to stabilizing India’s macroeconomic situation during a tumultuous period.
Key Provisions Under FERA
Restrictions on Foreign Exchange Dealings
FERA placed restrictions on dealings in foreign exchange and securities and dealings which had the effect of directly or indirectly altering the value of currency. It prohibited unauthorized holding of foreign exchange. No person could acquire, hold, own, possess or deal in any foreign exchange, foreign security or any immovable property situated outside India, except with the general or specific permission of the Reserve Bank of India (RBI).
Restrictions on Import and Export of Currency
FERA imposed restrictions on importing and exporting currency and currency notes. No person could import or bring into India any currency or currency notes or take out or export out of India any currency or currency notes except with the permission of RBI. Violation was punishable with imprisonment or fine or both.
Regulation of Foreign Companies
FERA regulated the functioning of foreign companies in India. Foreign companies were required to obtain license from RBI for setting up and conducting business in India. Such companies were prohibited from issuing shares to non-residents and borrowing money from non-residents without the permission of RBI. They had to maintain certain accounts and records and furnish information as required by RBI.
Powers to Search, Seize and Arrest
FERA gave wide powers to search, seize and arrest. The Directorate of Enforcement and authorized officers under FERA were empowered to carry out search and seizure operations for evidence of violations of FERA. They could arrest any person who committed or was suspected to have committed, any contravention under FERA. They were also empowered to seize any document, currency, security or any other article which were suspected to be involved in any contravention under FERA.
In summary, FERA was enacted to regulate certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency and bullion. It provided the RBI and Enforcement Directorate necessary powers to regulate and monitor these foreign exchange transactions and ensure compliance.
Differences Between FERA and FEMA
The Foreign Exchange Regulation Act (FERA) was replaced by the Foreign Exchange Management Act (FEMA) in 2000. While FERA focused on regulating foreign exchange transactions, FEMA aims to facilitate external trade and payments.
Regulation vs Management
FERA was restrictive, regulating foreign exchange transactions and the inflow and outflow of foreign currencies. FEMA has a liberal approach, managing foreign exchange transactions to develop trade relations.
Restrictions vs Relaxations
FERA imposed strict restrictions on foreign exchange transactions and investments to conserve foreign exchange reserves. In contrast, FEMA relaxed restrictions on current account transactions and eased procedures for foreign investments and technology collaborations.
Licensing
Under FERA, firms required licenses for all foreign exchange transactions. FEMA introduced the concept of “Authorized Dealers” like banks, exempting most current account transactions from licensing. Only transactions under the capital account require RBI approval.
Repatriation of Profits
FERA allowed repatriation of profits only in certain cases. FEMA lifted restrictions on repatriation of profits, allowing repatriation freely for approved investments and technology collaborations. However, repatriation of some profits may be subject to taxation.
In summary, FEMA marked a shift from the restrictive FERA to a more liberal policy, facilitating foreign trade and investment flows. By easing restrictions and simplifying procedures, FEMA aims to integrate the Indian economy with global markets. At the same time, it monitors transactions to ensure they do not adversely impact India’s economy.
Amendments to FERA Over the Years
The Foreign Exchange Regulation Act (FERA) has undergone various amendments since its inception in 1947 to adapt to the changing economic landscape of India. In 1993, FERA was repealed and replaced by the Foreign Exchange Management Act (FEMA) to liberalize foreign exchange controls and promote foreign investment.
Relaxation of Controls (1993)
The 1993 amendment significantly diluted FERA’s restrictive provisions. It increased the foreign equity participation limit in Indian companies and expanded the scope of non-resident investments. Restrictions on technology transfers and royalty payments were also relaxed. These amendments pivoted India towards a liberalized economy and aimed to attract greater foreign investment.
Shift to FEMA (1999)
In 1999, the Indian government repealed FERA and enacted FEMA to further liberalize foreign exchange controls. FEMA aimed to facilitate external trade and payments, promote orderly development of foreign exchange markets in India, and foster global economic relationships.
Unlike FERA’s stringent controls, FEMA adopted a progressive approach based on rule-making and compliance. It provided greater flexibility in structuring investments and technology collaborations with non-residents. FEMA also permitted free pricing of foreign exchange transactions based on market forces. These bold reforms accelerated the integration of the Indian economy into the global market.
FEMA marked a watershed moment, transitioning India to a liberalized regime for foreign exchange transactions. Its business-friendly regulations and open policies paved the way for higher capital inflows and cross-border trade over the following decades. FEMA’s enactment was a bold step in India’s economic history that shaped its emergence as an attractive destination for foreign investment.
In summary, the evolution of India’s foreign exchange laws from FERA to FEMA mirrored the country’s shift to a globalized, market-oriented economy. The progressive relaxations and eventual repeal of FERA ignited India’s foreign trade and investment, spurring decades of rapid economic growth. FEMA’s liberal and transparent policies continue to govern India’s foreign exchange transactions today.
Effects of FERA on the Indian Economy
The Foreign Exchange Regulation Act (FERA) of 1973 had a significant impact on India’s economy. FERA imposed strict restrictions on foreign exchange and investments to prevent capital flight. However, it also limited foreign companies and investments in India, hindering economic growth.
FERA limited foreign companies to 40% ownership of Indian subsidiaries and required special permission for larger stakes. This discouraged foreign direct investment (FDI) in India. FDI is essential for technology transfer, job creation, and boosting GDP. The limits on foreign ownership prevented India from fully benefiting from FDI.
FERA also placed restrictions on Indian companies investing abroad and limited individuals from owning foreign exchange or property. These constraints prevented Indian businesses from expanding globally and diversifying their assets. The regulations restricted economic freedom and opportunity.
In addition, FERA’s complex rules and licensing requirements increased bureaucracy and “red tape.” The time and money required to navigate the regulations imposed large costs on businesses. The inefficiencies and hassles of complying with FERA made India a less attractive place to invest and do business.
FERA aimed to address India’s balance of payments crisis but ended up hindering growth. By limiting foreign exchange, investment, and trade, FERA constrained India’s economy. In response, India liberalized its economy in 1991 by replacing FERA with the Foreign Exchange Management Act (FEMA). FEMA significantly relaxed restrictions on foreign exchange and investment, helping to unleash India’s economic potential.
The effects of FERA highlight the importance of an open economy and regulatory efficiency. Strict controls on capital flows and foreign participation can severely limit a country’s economic prosperity. Excessive bureaucracy and “red tape” impose substantial costs. Liberalization and facilitating business attract investment and accelerate growth.
FERA Cases in India
The Foreign Exchange Regulation Act (FERA) of 1973 was enacted to regulate foreign exchange dealings and transactions in India. Under FERA, the RBI was empowered to regulate foreign exchange transactions and monitor foreign investments in India. Several cases were filed under FERA for violations of foreign exchange laws.
One prominent case was the Suresh Nanda FERA violation case. Suresh Nanda was accused of transferring $8 million from India to Switzerland illegally in 1990. The Delhi High Court found him guilty under FERA and sentenced him to 2 years rigorous imprisonment with a fine of ₹2 crores. However, the Supreme Court acquitted him due to lack of evidence in 2008.
Another high-profile case was the Harshad Mehta FERA violation case. Mehta was a stockbroker accused of manipulating the Bombay Stock Exchange, causing a loss of ₹4000 crores to various nationalized banks. He was also charged under FERA for illegally transferring $10 million to a Swiss bank account. Mehta was arrested in 1992 and the case was pending in court at the time of his death in 2001.
FERA also covered foreign entities operating in India. In 1976, IBM was charged under FERA for allegedly transferring technology and software from India to its parent company in the US at an undervalued price. IBM challenged the RBI order in the Bombay High Court and the Supreme Court before paying ₹7.5 crores as compounding fees to settle the matter in 1996.
With economic liberalization in the 1990s, FERA was repealed and replaced by the Foreign Exchange Management Act (FEMA) in 2000, which focuses on facilitating foreign exchange transactions subject to reasonable restrictions. However, FERA cases that were pending in courts or on appeal continued to be dealt with under the provisions of FERA.
FERA was a key milestone in India’s foreign exchange regulation and several of its controversial cases highlighted the need for a progressive foreign exchange law like FEMA for an emerging market economy.
Repeal of FERA and Enactment of FEMA
Prior to 1999, foreign exchange transactions in India were primarily governed by the Foreign Exchange Regulation Act (FERA), 1973. However, FERA was repealed and replaced by the Foreign Exchange Management Act (FEMA) in 1999 to facilitate external trade and payments. FEMA aimed to simplify foreign exchange laws and procedures to promote orderly development and maintenance of the foreign exchange market in India.
FEMA relaxed several restrictions placed on foreign exchange transactions under FERA. For example, FERA imposed strict controls on capital account transactions, especially outward remittances. In contrast, FEMA granted greater freedom for current account transactions like payments for imports and exports of goods and services. FEMA also lifted prohibitions on foreign direct investment in several sectors.
Under FEMA, the Reserve Bank of India was granted authority to regulate foreign exchange transactions. The main objectives of FEMA are to facilitate external trade and payments, promote orderly development and maintenance of foreign exchange market in India, and regulate capital account transactions. FEMA applies to all branches, offices and agencies outside India owned or controlled by a person resident in India. It also applies to any contravention committed outside India by any person to whom FEMA applies.
In summary, FEMA introduced a liberal and transparent policy framework for foreign exchange transactions in India. It shifted focus from regulating capital account transactions to facilitating them. The transition from FERA to FEMA marked a paradigm shift in India’s foreign exchange regulatory regime towards greater liberalization and global integration of the economy. Overall, FEMA has created a conducive environment for foreign investments and trade transactions in India.
FERA Act FAQs: Answering Common Queries
As an Indian resident or entity, you may have questions regarding the Foreign Exchange Regulation Act (FERA) and how it impacts you. Here we address some of the most frequently asked questions about FERA.
The Foreign Exchange Regulation Act (FERA) regulates foreign exchange transactions in India. Enacted in 1973, FERA established restrictions and regulations on certain kinds of foreign exchange transactions. The objective of FERA was to facilitate external trade and payments while regulating foreign exchange transactions to prevent undesirable foreign exchange transactions.
FERA regulates several types of foreign exchange transactions including:
I) Payments for imports and exports of goods and services.
II) Remittances for living and travel expenses.
III) Investment in foreign securities.
IV) Loans to non-residents.
V) Establishment of foreign currency accounts in India and abroad.
As an Indian resident, FERA impacts you in several ways:
I) You must obtain RBI approval for making payments exceeding $10,000 for imports, travel, medical treatment abroad, and education.
II) You can only hold foreign exchange up to $2,000 when traveling abroad for business or tourism. Any amount in excess of $2,000 must be surrendered to an authorized foreign exchange dealer.
III) You must repatriate any foreign exchange earned or acquired from outside India within a stipulated period. Failure to do so can result in penalties under FERA.
For companies in India, FERA stipulates that:
I) Payments for imports must be made within 6 months from the date of shipment. Advance payments for imports are restricted.
II) Export proceeds must be repatriated within 6 months from the date of export.
III) Foreign equity in Indian companies cannot exceed 40% without government approval.
IV) Foreign companies require RBI approval for establishing a place of business in India.
In summary, FERA aims to regulate foreign exchange transactions with the goal of facilitating external trade and payments while preventing undesirable foreign exchange outflows from India. By understanding FERA and how it applies to you or your business, you can avoid penalties and ensure compliance with India’s foreign exchange regulations.
Conclusion
As we have seen, the Foreign Exchange Regulation Act (FERA) plays a crucial role in regulating foreign exchange and preventing violations in India. By understanding FERA’s key objectives, provisions, and evolution over the years, you can gain important insight into this complex legislation. While elements of FERA have changed, its core mission remains regulating foreign exchange to support India’s development. Looking ahead, further reforms and developments in policy may continue to shape FERA. With the knowledge you have gained here, you are now better equipped to grasp the purpose and mechanics of this vital economic regulation in India’s financial landscape. Equipped with a grasp of FERA’s past and present, you can thoughtfully participate in discussions on its future evolution.
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