What is FERA? An explanation of India’s first foreign exchange regulation law

The Foreign Exchange Regulation Act, 1973, or FERA, was a law passed to control foreign investments, securities, and payments in India. It was intended to preserve foreign currency and guarantee that it was only utilized for authorized purposes. In 2000, FEMA took the place of FERA in order to assist India’s liberalized economy.

Comprehending FERA: Context and Goals

India had little foreign exchange reserves after gaining independence, so the government had to enact stringent legislation to control capital flows and imports. This resulted in the 1947 Foreign Exchange Regulation Act, which was subsequently superseded by the 1973 FERA.

FERA’s primary goal was to manage and preserve foreign exchange while making sure that the country’s finite resources were used sparingly and exclusively for approved commercial endeavors.

Understanding FERA: Background and Objectives

At the time India became independent, there were limited foreign exchange reserves, and the government required stringent laws to manage imports and capital flow. This resulted in the Foreign Exchange Regulation Act, 1947, which was subsequently substituted by the FERA, 1973.

The primary objective of FERA was to regulate and save foreign exchange so that the country’s limited resources were utilized judiciously and only for allowed economic activity.

Significant Features of FERA, 1973

Absolute Control of Foreign Exchange

All foreign currency transactions – including trade, travel, etc

required clearing/proof from Reserve Bank of India, which was essentially the law and the law was arbitrary. 

Foreign Ownership Restrictions

Any and all non-resident ownership was limited to less than (40%) in an Indian company, without the express permission from the Reserve Bank of India. 

Criminalization of Non-Compliance

Any and all breaches, whether intentional or not, were violated through criminal offenses on non-compliance of FERA sections, and punishment often included imprisonment. 

Extensive Authority of RBI

The RBI had the authority to monitor transactions, restrict transactions, approve transactions, and inspect transactions in foreign exchange.

Critiques of FERA

 By the late 1980s, FERA was under significant publicity for being overly restrictive and bureaucratic: 

– It was regarded as pro-foreign and anti-business.

– Small procedural violations had the potential to be prosecuted criminally. 

– India’s image on the global stage suffered, making it increasingly difficult to attract foreign investors into the country. 

In summary, FERA represented the era of the License Raj – a time of extensive regulation and limited economic freedom.

Shifting from FERA to FEMA   

In 1991, India experienced an economic crisis, leading to reforms of liberalisation on a large scale. In line with the new open-market regime, FERA was replaced by the Foreign Exchange Management Act (FEMA) enacted in 1999, with its implementation starting on June 1, 2000.

Footprint and Legacy

Although FERA is no longer in operation, its legacy is still present in India’s regulatory policies. 

The courts continue to hear some pending cases under FERA. 

The Reserve Bank of India continues to be the principal authority for foreign exchange transactions. 

Ideas of caution remain in India in sensitive sectors like defense, media, and finance. 

The evolution of FERA illustrates how India evolved from an economy based on self-sufficiency to one that is connected to global trade and finance.

Conclusion

FERA exemplified India’s economic thinking during the pre-liberalisation era — conservative, control-oriented, and protective. The introduction of FEMA moved from control to confidence, paving the way for a more open and investment-friendly India. 

For anyone studying India’s legal or economic history, knowing about FERA is a necessity — it is not just a law, it is represents a watershed moment in India’s growth story.

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