Conditions for Change from FERA to FEMA

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Questions and Answers

What was one of the primary reasons for the transition from FERA to FEMA?

FERA became ineffective and incompatible with changing economic policies. (correct)

FEMA required more permissions for foreign transactions.

FERA was too lenient in regulating foreign exchange.

FERA promoted a more aggressive exchange control system.

In what year did FEMA come into effect?

2000

1974

1999 (correct)

1990

Which section of FEMA still requires obtaining permission from the Reserve Bank of India?

Section 1

Section 3 (correct)

Section 5

Section 4

What major shift does FEMA represent in the handling of foreign exchange regulations?

From permissions to regulations. Signup and view all the answers

What is primarily emphasized in the preamble of FEMA?

Facilitating external trade and payments. Signup and view all the answers

How does FEMA change the way foreign exchange transactions are approached compared to FERA?

It focuses on the management of exchange rather than strict controls. Signup and view all the answers

What aspect of foreign exchange management does section 5 of FEMA address?

Removing restrictions on drawl of foreign exchange for current account transactions. Signup and view all the answers

What was a key characteristic of FERA that FEMA aimed to change?

Requirement of special permissions for numerous transactions. Signup and view all the answers

Why was the need to remove restrictions on current account transactions created?

The country had attained Article VIII status. Signup and view all the answers

What does the proviso in Section 5 allow the Central Government to do?

Consult with the Reserve Bank and impose reasonable restrictions on current account transactions. Signup and view all the answers

What lesson was considered when adding the proviso for possible future restrictions?

Knowledge gained from the 1997-98 South-East Asian crisis. Signup and view all the answers

How many sections are contained in FEMA compared to FERA?

FEMA has fewer sections than FERA. Signup and view all the answers

What aspect of FERA has been addressed differently in FEMA?

Import of foreign currency and foreign securities restrictions. Signup and view all the answers

What is a significant goal mentioned in the preamble to FEMA?

Promoting the orderly development and maintenance of the foreign exchange market. Signup and view all the answers

How does FEMA compare to FERA in terms of operational sections?

FEMA has fewer operational sections compared to FERA. Signup and view all the answers

What is indicated by the phrase 'real quality of liberalization' in the context of FEMA?

Completion of all related notifications and circulars. Signup and view all the answers

Study Notes

Transition from FERA to FEMA

FERA (Foreign Exchange Regulation Act, 1973) became ineffective due to changes in India's economic policy in the early 1990s.
The call for a less aggressive framework led to the establishment of FEMA (Foreign Exchange Management Act, 1999).
FERA required significant reserve bank permissions for most transactions, making it cumbersome. FEMA streamlined this by removing most permission requirements.
The focus shifted from "exchange control" in FERA to "exchange management" under FEMA.

Objectives of FEMA

The preamble of FEMA aims to consolidate and amend foreign exchange laws to facilitate external trade and maintain a healthy foreign exchange market in India.
Section 5 of FEMA eliminates restrictions on drawing foreign exchange for current account transactions, aligning with India’s Article VIII status obtained from the IMF in August 1994.

Provisions and Structure

While FEMA promotes less restrictive current account transactions, it includes a provision allowing the Central Government to impose reasonable restrictions when necessary.
Section 7 maintains controls specifically over exporters to protect interests during economic instabilities.
FERA contained 81 sections, with the operational part involving 32 sections. FEMA simplifies this with only 49 sections, where 12 cover operational aspects.

Changes in Restrictions

Restrictions on foreign currency or securities import previously under Section 13 of FERA are now included in a sub-clause 6(3)(g) of FEMA.
The limitations on Indian residents holding immovable properties abroad from Section 25 of FERA are reflected in sub-clause 6(4) of FEMA.
The reduction in sections indicates a potential shift towards a more liberal framework, but the true outcomes will depend on the final implementation details.

Historical Context and Learning

The changes reflect lessons learned from economic crises, particularly from Southeast Asia during the 1997-98 financial turmoil.
The intent behind these legislative changes stresses the importance of adapting to evolving global economic conditions and ensuring a more flexible regulatory environment.

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Description

Explore the critical conditions that led to the transition from the Foreign Exchange Regulation Act (FERA) of 1973 to the Foreign Exchange Management Act (FEMA) of 1999. Understand the economic policy shifts in the early 1990s and how they influenced these changes in foreign exchange regulation. This quiz will deepen your comprehension of India’s financial legislative evolution.