The Foreign Exchange Regulation Act, 1947, was enacted as a temporary measure and later placed permanently in the

year 1957. At that time the limited objective of the Act was to regulate the inflow of foreign capital in the form of branches and concerns with the substantial non-resident interest, and the the employment of foreigners. The country attained freedom in 1947, after two centuries of foreign rule and protracted freedom struggle stretched over decades. The prevailing mood then was one of preserving and consolidating the freedom and not to permit once again any type of foreign domination, political or economic. Initial approach on foreign capital was negative to a not-interested attitude. However after initiation of a process of rapid industrialisation of the country, the need to conserve foreign exchange was keenly felt. Exports were not picking up and imports were surging, putting the country to severe balance of trade and balance of payment crisis. This induced the Government of India to re-focus the FERA act with the main aim of conservation of foreign exchange rather than regulation of entry of foreign capital. The Foreign Exchange Regulation Act, 1973, (hereinafter referred to as FERA) was drafted with the object of introducing the changes felt necessary for the effective implementation of the Government policy and removing the difficulties faced in the working of the previous enactment. FERA is crisis-driven regulation. Upon review of the Foreign Exchange Regulation Act, 1973 (FERA) in 1993, it was realised that significant changes had taken place since the promulgation of FERA. Among the major changes noticed were: Large increase in countrys Foreign Exchange Reserves, substantial growth in Foreign Trade, rationalisation of tariffs, current account convertibility, and liberalization of Indian Investments abroad, enhanced access to external commercial borrowings by Indian corporates and active and significant participation of Foreign Institutional Investors in Indian stock market. The Central Govt. looking at such significant developments, decided to bring in Fresh Amendments in the law relating to Foreign Exchange to suit the new environments. The objective was to facilitate the external trade, ease receipts and payments pertaining thereto and promoting orderly and fully organised Foreign Exchange markets. Differences between FERA and FEMA

FERA
FERA sought to 'control' foreign exchange transactions Objective was to conserve forex and prevent its misuse FERA, in its substantive form, prohibited all foreign exchange transactions unless there was a general or specific permission to do so An offence under FERA attracted criminal proceedings Maximum penalty would be five times the sum involved Under FERA there is presumption of existence of a guilty mind, unless the accused person proves otherwise Section 35 of FERA empowers the Enforcement Officers to arrest a person, if they had reasons to believe that the person was guilty of FERA violations

FEMA
FEMA seeks to 'regulate' and 'manage' such transactions Objective is to facilitate external trade and payments and maintenance of forex market in India Under FEMA, however, all current account transactions are permissible by the law itself Offence under FEMA is considered as one of a civil nature Maximum penalty would be thrice the sum involved Under FEMA, it is for the prosecution to prove that a person has committed the offence FEMA provides such power of arrest only if penalty levied under section 13 of FEMA is not paid by the guilty within the given time

Transition from FERA to FEMA A cut-off period of two years has been stipulated for transition from FERA to FEMA, which means that cases in which proceedings have already begun under FERA will continue to be governed by it. All such cases must be disposed of within the period of two years from the date of enforcement of FEMA, after which time they shall become invalid under FERA. Salient features of FEMA: It will facilitate trade rather than prevent misuse of foreign exchange Definitions of capital account transaction and current account transaction have been introduced keeping in mind the possibility of introduction of capital account convertibility in the near future All current account transactions shall be allowed (subject to reasonable restrictions). Reserve Bank to classify those capital account transactions that are to be permitted and to regulate transfer and issue of foreign securities by a resident in/outside India as well as setting up of branches/offices by foreign companies in India. All key sections relating to dealings, holding and payments in foreign exchange and exports have been simplified. Liberalization in enforcement provisions reflects that the attitude is of putting trust in the persons covered