Model Answer
0 min readIntroduction
The Foreign Exchange Regulation Act (FERA), 1979, was enacted in a period marked by economic constraints and a balance of payments crisis. It aimed to regulate foreign exchange transactions and conserve foreign exchange reserves through stringent controls. However, with the initiation of economic liberalization in 1991, the need for a more flexible and facilitative legal framework became apparent. This led to the enactment of the Foreign Exchange Management Act (FEMA), 1999, which replaced FERA. FEMA represents a paradigm shift, moving from a restrictive ‘regulation’ approach to a more liberal ‘management’ approach towards foreign exchange. This answer will detail the extent to which FEMA deviates from its predecessor, FERA.
FERA, 1979: A Regulative Framework
FERA, 1979, was characterized by a highly restrictive regime. Its core principles included:
- Strict Control: All foreign exchange transactions required prior approval from the Reserve Bank of India (RBI).
- Presumption of Guilt: Accused individuals had to prove their innocence, shifting the burden of proof.
- Penalties: Severe penalties, including imprisonment, were prescribed for violations.
- Limited Permissible Transactions: Only essential transactions were allowed, with limited scope for investment abroad.
FERA aimed to prevent the outflow of foreign exchange and maintain a tight grip on external economic activities. It was often criticized for being bureaucratic and hindering economic growth.
FEMA, 1999: A Management Approach
FEMA, 1999, brought about a significant change in the approach to foreign exchange management. Key deviations from FERA include:
1. Current Account Transactions
Under FERA, even current account transactions (trade in goods and services) were subject to strict regulation. FEMA, however, liberalized current account transactions, allowing for free flow of payments for legitimate trade. While RBI retains the power to regulate, the presumption is now in favour of free flow.
2. Capital Account Transactions
FERA severely restricted capital account transactions (investments, loans, etc.). FEMA gradually liberalized these transactions, allowing for greater foreign investment and outward investment by Indian entities. The liberalization was phased, starting with portfolio investments and gradually extending to other forms of capital flows. For example, the automatic route for Foreign Direct Investment (FDI) was significantly expanded under FEMA.
3. Burden of Proof & Enforcement
A crucial deviation lies in the burden of proof. Under FERA, the onus was on the accused to prove their innocence. FEMA shifted this burden to the enforcement authorities, who now need to prove the violation. Furthermore, FEMA emphasizes civil remedies rather than criminal prosecution for most violations. The Directorate of Enforcement (ED) still investigates violations, but the focus is more on penalties and remedial measures.
4. Penalties
FERA prescribed stringent penalties, including imprisonment for even minor violations. FEMA significantly reduced the penalties, focusing more on monetary fines and compounding of offences. Imprisonment is now reserved for serious offences like smuggling or dealing in counterfeit currency.
5. Role of the RBI
While both Acts empower the RBI, FEMA grants the RBI greater flexibility in formulating regulations. The RBI can now issue directions based on economic conditions and policy objectives, allowing for a more dynamic and responsive regulatory framework.
6. Adjudication Process
FERA had a cumbersome adjudication process. FEMA streamlined this process by establishing Special Directors and Additional Special Directors for adjudication, ensuring faster resolution of cases.
Comparative Table: FERA vs. FEMA
| Feature | FERA, 1979 | FEMA, 1999 |
|---|---|---|
| Approach | Regulation | Management |
| Burden of Proof | Accused | Enforcement Authorities |
| Penalties | Severe (including imprisonment) | Moderate (primarily monetary fines) |
| Capital Account | Highly Restricted | Liberalized |
| Current Account | Regulated | Liberalized |
| Adjudication | Cumbersome | Streamlined |
The transition from FERA to FEMA was not immediate. It was a gradual process of liberalization, with the RBI issuing notifications and circulars to progressively ease restrictions. This phased approach allowed the economy to adjust to the new regime.
Conclusion
FEMA, 1999, represents a fundamental departure from the restrictive framework of FERA, 1979. The shift from ‘regulation’ to ‘management’ reflects a broader economic philosophy of liberalization and integration with the global economy. While the RBI retains regulatory powers, FEMA prioritizes facilitating foreign exchange transactions and promoting economic growth. The changes in burden of proof, penalties, and capital account liberalization have significantly improved the investment climate and fostered greater economic dynamism. The success of FEMA is evident in India’s increased foreign exchange reserves and its growing role in the global economy.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.