FEMA vs FERA: Key Differences You Must Know
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- Published 21 Jan 2026
Money moving in and out of a country needs rules. Without them, things can get messy very fast. India has seen two major laws handling foreign exchange over the years - the Foreign Exchange Regulation Act (FERA) and the Foreign Exchange Management Act (FEMA). While they may sound similar, they are very different in spirit and approach.
FERA belonged to a time when India was cautious, inward-looking, and short on foreign currency. FEMA came later, when the country opened up and started trusting businesses more. One focused on control. The other focused on management.
People often confuse the two or assume FEMA is just a renamed version of FERA. However, it isn’t. FEMA changed how India looks at foreign money altogether.
This blog explains the meaning as well as the difference between FEMA and FERA. You will understand how India’s foreign exchange laws have evolved over the years.
What is FERA (Foreign Exchange Regulation Act)?
As mentioned, FERA stands for the Foreign Exchange Regulation Act. It was introduced in the Indian Parliament in 1973 and was implemented from 1 January 1974. Its primary objective was to control India’s foreign exchange resources so that they could be used for the development of the nation. At that time, India was struggling with low foreign exchange reserves. Thus, the government wanted tight control over every dollar coming in or going out of the economy.
Under FERA, foreign exchange was treated as a scarce resource. For example, the conversion of Indian currency into a foreign currency, the transfer of funds to a foreign bank account, the purchase of property in a foreign country, and trade dealings with foreign companies. The Act enforced strict restrictions on such transactions. They were permitted only under special circumstances.
Businesses had very limited freedom. Foreign investments were closely monitored. Indian citizens needed permission for many basic foreign transactions. Even small violations were taken seriously. Many offences were criminal in nature, which meant fines, penalties, and even jail time.
The FERA Act was later repealed in 1998. It was replaced by the FEMA Act to support India’s economic liberalisation.
What is FEMA (Foreign Exchange Management Act)?
FEMA, or the Foreign Exchange Management Act, was introduced in 1999 to replace the outgoing FERA Act. It came into effect on 1 June 2000. This was the time when India’s economy started expanding. Trade was growing. Foreign investment was increasing. The old law no longer fits the new reality.
The objective of the FEMA Act was to regulate and manage India’s foreign exchange rather than restricting it. FEMA took a softer, more practical approach. Foreign transactions were allowed unless specifically restricted. The violations were considered civil, not criminal. The objective was to correct, not punish. This shift made a huge difference for businesses and investors.
FEMA simplified rules, improved transparency, and reduced fear. It made India more welcoming to global trade and capital. The primary roles included:
- Establishing a regulated framework for foreign exchange transactions
- Define transparent guidelines, rules, and regulations for the Forex market
- Simplify the in and out movement of money from India to abroad, and vice versa
- Abolish the government restrictions and monitoring of foreign investments
- Lay down a clear legal structure for law violations
Introduced in 1973 and implemented in 1974. | Introduced in 1999 and implemented in 2000. |
It was later repealed in 1998. | It replaced the outgoing FERA Act. |
It comprised 81 sections | It comprised 49 sections. |
The objective was to restrict Forex transactions and conserve India’s foreign reserves. | The objective is to promote foreign trade and enhance India’s foreign reserves. |
Violations were treated as criminal offences. | Violations are treated as civil offences. |
“Authorised Person” has a limited scope. | “Authorised Person” enjoys an expanded scope. |
Banks and financial institutions were excluded from the “Authorised Person” definition. | Banks and financial institutions were included in the “Authorised Person” definition. |
Accused individuals were not even provided legal assistance. Direct punishment. | Accused individuals are entitled to legal rights. |
Impact of FEMA on the Indian Economy
FEMA played a major role in India’s economic transformation. It made foreign investment smoother and more predictable. Businesses found it easier to trade across borders.
The law improved India’s image globally. Investors felt safer entering the Indian market. This led to increased capital inflows and stronger foreign exchange reserves.
By reducing criminal penalties, FEMA encouraged voluntary compliance. It also supported India’s shift toward a market-driven economy.
Overall, FEMA helped India move from survival mode to growth mode.
Why was FERA repealed?
FERA was repealed in 1998 because it no longer matched India’s economic direction. The country had changed, but the law hadn’t. FERA’s strict nature discouraged foreign investment. Businesses found it rigid and outdated. Criminalising minor violations created unnecessary fear.
India needed a law that supported growth, not one that slowed it down. FEMA was designed to do exactly that. By replacing FERA with FEMA, India signalled that it was ready to engage with the world on fair and modern terms. This shift marked a turning point in India’s financial journey.
