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Foreign Exchange Regulation Act 1973 (FERA)

The Foreign Exchange Regulation Act (FERA) of 1973 is a significant introduction to the legislation in parlance of India’s Economy. This legislation came into existence at a critical juncture when India was struggling with a severe foreign exchange crisis.

FERA emerged as a response to this economic backdrop, aiming to address foreign exchange management and regulations. In this article, we delve into the objectives and key provisions of FERA, shedding light on its significance in India’s economic landscape during that era.

Foreign Exchange Management Act (FEMA)

Foreign Exchange Regulation Act 1973

The Foreign Exchange Regulation Act (FERA) was introduced in 1973 and became effective on 1 January 1974. This law came into being during a time when India was facing a significant foreign exchange crisis, as its reserves were less than USD 1 billion. The period marked the peak of Nehruvian socialism, characterised by extensive government control over various sectors of the economy.

Objectives of Foreign Exchange Regulation Act (FERA) 1973

The major objectives of the Foreign Exchange Regulation Act FERA, 1973 are as given below:

  • The primary goal of FERA was to ensure effective management and proper utilization of the country’s foreign exchange reserves to contribute to economic growth.
  • The act aimed to regulate various aspects such as the acquisition of foreign property, foreign investment, employment of foreign nationals, and more.

Key Provisions of Foreign Exchange Regulation Act (FERA), 1973

Below are the major provisions as per the Foreign Exchange Regulation Act, 1973

Conversion of Foreign Companies

Foreign companies, except those in shipping and airlines, were required to transform into Indian companies to gain approval under FERA.

Shareholding Restrictions

FERA imposed limitations on foreign shareholding percentages based on the type of business:

  • Up to 74% foreign shareholding is allowed for companies engaged in specific sectors such as producing certain items, export-oriented goods, state-of-the-art technology, tea production, or limited trading activities.
  • Companies that were 100% export-oriented could potentially have foreign shareholding exceeding 74%, contingent upon individual merit.
  • A foreign shareholding cap of 40% is applied to companies outside the sectors mentioned above.

Foreign Shareholding in Airlines and Shipping:

The extent of foreign shareholding in airlines and shipping companies was determined on a reciprocal basis.

Banking Companies’ Foreign Shareholding:

The foreign shareholding percentage for banking companies was determined by guidelines issued by the Reserve Bank of India (RBI) and the Banking Department of the Ministry of Finance.

Restrictions Imposed by FERA, 1973

Since Foreign Exchange and Regulation Act deals with the stringent rules and laws for regulating the exchange of foreign exchange. Below are the major restrictions imposed by FERA, 1973

  • Dealing in Foreign Exchange: Only authorized dealers were permitted to engage in foreign exchange transactions; others required prior approval from the RBI.
  • Payments: Payments to foreign entities were subject to restrictions and required approval from the RBI.
  • Currency and Bullion Import/Export: Importing or exporting foreign exchange or Indian currency was subject to RBI approval; unapproved currency had to be sold to the RBI.
  • Foreign Investment and Securities: Transferring or owning securities outside India requires RBI permission.
  • Immovable Property: Acquisition, transfer, or ownership of property outside India or in India by non-citizens requires approval from the RBI.
  • Employment of Foreign Nationals: Employing foreign nationals in India was subject to RBI permission.
  • Establishment of Business: Setting up business branches in India by non-citizens requires prior RBI approval.

Conclusion

The Foreign Exchange Regulation Act (FERA) of 1973 stands as a significant milestone in the legislative history of India’s economy. Born out of the urgent need to address a severe foreign exchange crisis, FERA played a vital role in safeguarding India’s foreign exchange reserves while simultaneously imposing stringent regulations on various aspects of foreign exchange management. During an era marked by extensive government control over the economy, this legislation aimed to bring about effective management and utilization of foreign exchange reserves to foster economic growth.

It introduced pivotal provisions, including restrictions on foreign shareholding, regulations on foreign investment, and guidelines for foreign exchange transactions. While FERA’s significance remains anchored in history, it also serves as a reminder of the evolving dynamics of India’s economic landscape and the measures undertaken to navigate through challenging economic times.

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FAQs

What is FERA, and when was it introduced?

FERA stands for the Foreign Exchange Regulation Act, a significant piece of legislation in India's economic history. It was introduced in 1973 and became effective on 1 January 1974.

Why was FERA introduced?

FERA was introduced during a severe foreign exchange crisis in India when its reserves were less than USD 1 billion. It aimed to regulate and manage foreign exchange effectively and address the crisis.

What were the primary objectives of FERA?

The major objectives of FERA included ensuring effective management and proper utilization of India's foreign exchange reserves to contribute to economic growth and regulating various aspects such as foreign property acquisition, foreign investment, and employment of foreign nationals.

What were the key provisions of FERA?

FERA had several key provisions, including regulations on foreign shareholding in Indian companies, restrictions on foreign exchange transactions, guidelines for foreign investment, and rules for employment of foreign nationals.

How did FERA impact foreign shareholding in Indian companies?

FERA imposed limitations on foreign shareholding percentages based on the type of business. It allowed up to 74% foreign shareholding in specific sectors, while companies that were 100% export-oriented could potentially exceed this limit based on merit.

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