Foreign Exchange Regulation Act (FERA)

Under FERA, violations were treated as criminal offenses, potentially leading to imprisonment. Under FEMA, violations are generally treated as civil offenses, with penalties primarily involving fines. This shift reflects a move towards a more liberalized economic environment. UPSC often tests this distinction to assess your understanding of India's economic reforms.

FERA was enacted in 1973 primarily due to India's severe foreign exchange constraints. The country had limited foreign exchange reserves and aimed to conserve them. The economic conditions included a closed economy, import substitution policies, and a general suspicion of foreign capital. The goal was to control the outflow of foreign exchange and promote exports.

FERA required foreign companies to obtain permission from the RBI to conduct business in India. This included restrictions on profit repatriation and operational activities. This led to a complex bureaucratic process, discouraging foreign investment due to delays and inefficiencies. Many MNCs found it difficult to operate under FERA's stringent rules.

Under FERA, the Enforcement Directorate (ED) was the primary agency responsible for enforcing its provisions. The ED had the power to investigate violations, conduct searches and seizures, and prosecute offenders. Since FERA's repeal, the ED's focus has shifted towards investigating money laundering and foreign exchange violations under the Prevention of Money Laundering Act (PMLA).

Transactions requiring RBI approval under FERA included payments to foreign entities, foreign investments by Indian residents, and holding foreign currency accounts abroad. These controls were considered necessary to prevent capital flight, conserve foreign exchange reserves, and ensure that foreign exchange was used for essential purposes.

FERA stifled economic growth by creating barriers to foreign investment and trade. The strict regulations and bureaucratic processes made it difficult for foreign companies to operate in India and for Indian companies to engage in international transactions. The main criticisms included excessive control, bureaucratic delays, and a focus on punishment rather than facilitation.

FERA regulated foreign exchange transactions and foreign companies operating in India, while the MRTP Act aimed to prevent monopolies and restrictive trade practices within India. FERA focused on external financial flows, while MRTP focused on internal market competition.

Without FERA, ordinary citizens would have had greater freedom to hold foreign currency and make payments abroad, but this could have led to capital flight and a depletion of India's already scarce foreign exchange reserves. Imports might have become more expensive, and the government would have had less control over the economy.

Critics argued that FERA stifled economic growth and discouraged foreign investment due to its excessive controls and bureaucratic processes. However, in the context of the 1970s, FERA was arguably necessary to conserve scarce foreign exchange reserves and protect India's economic interests during a period of economic vulnerability and a closed economy. It was a tool to ensure self-reliance.

Many developing countries in the 1970s also had strict foreign exchange controls to protect their economies. FERA was similar in its objectives but was often criticized for being more rigid and bureaucratic compared to some other countries. Some countries adopted more flexible approaches that encouraged exports and foreign investment while still maintaining control over capital flows. However, the specific context of each country's economy and political system influenced the design and implementation of these controls.

While no specific committee directly addressed FERA before the 1990s, the broader push for economic liberalization made its stringent controls increasingly untenable. The 1991 economic crisis, which exposed the limitations of the closed economy model, and the subsequent balance of payments crisis, finally triggered FERA's repeal and replacement with FEMA in 1999. Globalisation pressures also played a role.

The most common trap is confusing the penalties under FERA with those under FEMA. Examiners often present options that describe FEMA's civil penalties (fines) as being applicable under FERA, which actually involved criminal prosecution and potential imprisonment. Always remember that FERA had stricter penalties.