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(Origin and Scope) : Heena M. Shaikh

FERA regulated all foreign exchange transactions and required Indians to surrender foreign currency earnings to the government to rebuild low forex reserves. However, FERA did not achieve its goals and the economy continued declining. In the 1990s, economic liberalization policies led to increased foreign exchange flows. FEMA was introduced in 2000 to replace FERA and align with liberalization. FEMA aims to simplify foreign trade, promote foreign investment and capital flows, and encourage development of foreign exchange markets in India. It makes foreign exchange offenses civil rather than criminal.

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Heena Shaikh
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149 views14 pages

(Origin and Scope) : Heena M. Shaikh

FERA regulated all foreign exchange transactions and required Indians to surrender foreign currency earnings to the government to rebuild low forex reserves. However, FERA did not achieve its goals and the economy continued declining. In the 1990s, economic liberalization policies led to increased foreign exchange flows. FEMA was introduced in 2000 to replace FERA and align with liberalization. FEMA aims to simplify foreign trade, promote foreign investment and capital flows, and encourage development of foreign exchange markets in India. It makes foreign exchange offenses civil rather than criminal.

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Heena Shaikh
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Presented by-

Heena M. Shaikh
M-Com part 2, Sem 3
(Origin and Scope) Roll no- 31
2020-2021
WHAT WAS THE NEED OF FEMA WHEN
FERA WAS THERE?
• When FERA was introduced in 1973, the Indian economy was suffering
from an all-time low of foreign exchange (forex) reserves. To rebuild these
reserves, the government took a stance that all forex earned by Indian
residents living within India or abroad belonged to the Government of India
and had to be surrendered to the Reserve Bank of India (RBI). FERA, thus,
severely regulated all forex transactions that had a direct or indirect impact
on India’s forex reserves, which included the import and/or export of
currency. However, the objective of FERA did not quite have the effect that
was envisioned and the Indian economy continued to decline. The
government decided to move from “currency regulation” to “currency
management”, and set up FEMA. And so, FERA in India was replaced by
FEMA.
INTRODUCTION
The Foreign Exchange Management Act (FEMA),
which came into effect from June 1, 2000 extends to
the whole of India and also applies to all the
branches, offices, and agencies outside India, owned
or controlled by a person resident in India. After this
Foreign Exchange Regulation act (FERA) 1973 was
closed. FEMA was most suitable for India corporate
sector instead of FERA. In India, Extensive
economics reforms were undertaken in the early
1990s and this led to the deregulation and
liberalization of the country’s economy. Therefore,
Foreign Exchange Management Act (FEMA) was
formulated in order to be compatible with the policies
of pro-liberalization of the Indian Government.
HOW THE FEMA ACT WAS FORMED?
• In 1990’s, there was a change relating to the broad approach to reform in the
external sector. In 1991, government of India initiated the policy of economic
liberalization. This resulted in increased flow of foreign exchange reserves. In
1997, the Tarapore Committee indicated the three crucial preconditions i.e.
Fiscal consolidation, a mandatory inflation target and strengthening of the
financial system. It also recommended change in the legislative framework
governing foreign exchange transactions.
• The bill was introduced in the lok sabha on 4 Aug’98. The standing
th

committee submitted its report with suggestion and modifications on 23 rd


Dec’98. But, the 12th lok sabha was dissolved and thus the bill was lapsed. The
bill was reintroduced in the 12th lok sabha on 25th Oct’99 and was passed in the
winter session of parliament in 1999. The presidential assent was received on
29th Dec’99. Finally, FEMA came into operation w.e.f 1st June 2000.
Accordingly, the FERA was repealed and replaced by FEMA w.e.f June 2000.
WHAT IS FEMA ACT?
• In the budget of 1997-98, the government had proposed to
replace FERA-1973 by FEMA (Foreign Exchange
Management Act). It came into force on June 1,
2000. Under the FEMA, provisions related to foreign
exchange have been modified and liberalized so as to
simplify foreign trade and payments.
• The important goal of FEMA is to amend and integrate all
laws related to foreign currency in India. In addition to
this, FEMA aims to promote foreign payments, export of
the country and promote foreign capital and investment in
the country to promote holistic development of India.
• FEMA also encourages the maintenance and improvement
of the foreign exchange market in India. FEMA provides
complete independence to a person living in India that
he/she can buy property outside India.
OBJECTIVES OF FEMA ACT 2000
• The main objective behind the FEMA (1999) is to consolidate and
amend the law relating to foreign exchange with the objective of
facilitating external trade and payments and to promote the orderly
development and maintenance of foreign exchange market.
• To Reduce the Restriction on Foreign Exchange i.e. any offense in
foreign exchange will be civil offense not criminal offense.
• To Increase the Flow of Foreign Exchange i.e. foreign currency can
be bought in India without any legal barrier .
• To Encourage Maintenance and Development of the Foreign
Exchange Market in India.
• To Unite and Revise all the Laws that Relate to Foreign Exchange.
SCOPE OF THE FEMA ACT
• The overall structure of FEMA is covered by legislations,
rules and regulations. FEMA contains 7 chapters divided
into 49 sections.
• 5 set of rules made by Ministry under section 46 of
FEMA. 23 sets of Regulations made by RBI under section
47 of FEMA.
• Foreign Direct Investment policy issued by Department of
Industrial Policy.
Machinery Responsible for Various Aspects of FEMA:
• Enforcement Directorate : To investigate provisions of the
act, the central government have established the
Directorate of Enforcement with Directors and other
officer as officers of the Enforcement.
• Adjudicating Authorities : It will issue a notice to
the person who has contravened the provisions of
the FEMA Rules, Regulations, Notifications or any
directions issued by the RBI.
• Special Director (Appeals) : Any person aggrieved
by an order made by the Adjudicating Authority,
being an Assistant Director of Enforcement or a
Deputy Director of Enforcement can prefer an
appeal to the Special Director.
• Appellate Tribunal : Any person aggrieved by an
order made by the adjudicating Authority, or the
Special Director can prefer an appeal to the
Appellate Tribunal. FEMA envisages that RBI shall
have controlling role in management of foreign
Exchange.
IMPACT OF FEMA ON MONEY SUPPLY
• In context of the Indian financial system, the relevant factor is that the
increase in foreign currency reserve as a result of the larger foreign
inward remittances, lead to increase in money supply, finding its way
into the market and capital market through the banking system.
• Banks create credit and any inflow into the banking system gets
multiplies by the factor. This factor depends on the reserved
maintained by banks. If banks maintains an average reserve of 25%,
any inflow into the banking system will increase money supply four
times. Similarly, any contraction of funds available with the banks will
result in a four fold reduction in money supply. Increase and decrease
in the foreign exchange reserves of the country impact the financial
system through increase and decrease in money supply.
DATA
WHAT IS THE DIFFERENCE?
FEMA
CONCLUSION
• FEMA only permits an authorized person to
deal in Foreign exchange or foreign security
(shares, stocks, bonds etc.) FEMA became
the need of an hour to be replaced by an old
act which was FERA as FERA was stringent
and FEMA is liberal and also more flexible
than FERA. 
• FEMA’s replacement with FERA to an
extent has boosted the Indian economy as it
is flexible and also a civil offence in
comparison with FERA.
THANK YOU.

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