What is FEMA?
FEMA stands for the Foreign Exchange Management Act. It is an Indian law enacted in 1999 to regulate foreign exchange and payments in the country. FEMA replaced the Foreign Exchange Regulation Act (FERA), which was seen as outdated and overly restrictive in the context of India’s liberalizing economy. FEMA aimed to liberalize and simplify foreign exchange regulations to promote foreign investment, facilitate trade, and encourage economic growth.
Key Characteristics of FEMA:
- Current Account Transactions: FEMA categorized foreign exchange transactions into current account transactions and capital account transactions. Current account transactions, such as trade-related payments, were made more accessible and subject to fewer restrictions.
- Capital Account Transactions: Capital account transactions, including investments and loans, were also liberalized under FEMA. It allowed for greater flexibility in foreign investment, both inbound and outbound.
- Authorized Dealers: FEMA established a system of authorized dealers, such as banks and financial institutions, to facilitate foreign exchange transactions and ensure compliance with regulations.
Difference between FERA and FEMA
FERA and FEMA are two sets of rules for managing money coming in and going out of a country. FERA started in 1973, was all about strict control over foreign money to protect India’s savings. Then, in 1999, FEMA came along, making things simpler and more open. Understanding the differences between FERA and FEMA is like peeking into how India’s economy changed over time to connect more with the rest of the world.