Foreign Exchange Regulation Act (FERA)

The Foreign Exchange Regulation Act (FERA) was a central piece of legislation governing foreign exchange transactions in India during the period of a highly controlled economic regime. Enacted to conserve scarce foreign exchange resources, FERA shaped India’s banking, financial system, and external economic relations for several decades. Its provisions reflected the economic priorities of post-independence India, where self-reliance, import substitution, and strict state control over foreign exchange were considered essential for economic stability.

Historical Background and Enactment of FERA

FERA was first introduced in 1947, immediately after India gained independence, and was comprehensively revised and re-enacted in 1973. The Act emerged in a context of chronic foreign exchange shortages, limited export capacity, and heavy dependence on imports for industrial and developmental needs.
During this period, India followed a planned economic model with extensive government intervention. Foreign exchange was treated as a scarce national resource that needed strict regulation. FERA was thus designed as a control-oriented law aimed at conserving foreign exchange rather than facilitating international transactions.

Objectives and Philosophy of FERA

The primary objective of FERA was the conservation of foreign exchange and its judicious utilisation in accordance with national priorities. The Act sought to regulate payments, dealings in foreign exchange, and transactions involving foreign securities.
FERA was based on the presumption that foreign exchange transactions were inherently suspect unless expressly permitted. This restrictive philosophy reflected the economic realities of the time, where protecting the balance of payments was considered more important than promoting capital inflows or trade liberalisation.

Key Provisions of the Act

FERA imposed stringent controls on a wide range of economic activities involving foreign exchange. Its major provisions included:

• Mandatory approval for almost all foreign exchange transactions
• Strict regulation of imports and exports of currency and securities
• Controls on foreign investment and ownership in Indian companies
• Restrictions on holding foreign assets by residents
• Regulation of employment of foreign nationals in Indian firms

Violations under FERA were treated as criminal offences, attracting severe penalties including imprisonment. The burden of proof often lay on the accused, making compliance both complex and risk-intensive for businesses and individuals.

Role of the Reserve Bank of India under FERA

The administration of FERA was primarily entrusted to the Reserve Bank of India. The RBI acted as the central authority for granting permissions, monitoring transactions, and enforcing compliance.
Banks functioned as authorised dealers under RBI supervision, ensuring that foreign exchange transactions strictly adhered to regulatory approvals. This centralised control limited the operational flexibility of banks but ensured tight oversight of foreign exchange flows.

Impact on Banking and Financial Institutions

FERA significantly influenced the functioning of India’s banking and financial system. Banks were required to scrutinise transactions rigorously and ensure detailed documentation for every foreign exchange deal. This increased compliance burdens and reduced transaction efficiency.
While the Act helped conserve foreign exchange, it also constrained the growth of international banking operations, trade finance, and cross-border capital flows. Indian financial institutions remained largely insulated from global financial markets during the FERA regime.

Implications for Trade and Industrial Development

Under FERA, foreign trade was subject to extensive controls. Importers required approvals for payments, and exporters faced strict repatriation requirements. These measures helped manage limited foreign exchange reserves but often resulted in delays, higher transaction costs, and reduced competitiveness.
Foreign investment was tightly regulated, with limits on foreign equity participation and technology transfer agreements. While this protected domestic industries, it also restricted access to foreign capital, technology, and managerial expertise, slowing industrial modernisation.

FERA and the Indian Economy

At the macroeconomic level, FERA played a crucial role in maintaining external sector stability during periods of vulnerability. By restricting capital outflows and regulating imports, the Act helped prevent rapid depletion of foreign exchange reserves.
However, over time, the rigid controls became increasingly misaligned with India’s evolving economic needs. As the economy expanded and integration with global markets became necessary, FERA’s restrictive framework was seen as a barrier to growth, efficiency, and competitiveness.

Criticism and Limitations of FERA

FERA faced widespread criticism for being excessively stringent and punitive. The criminalisation of minor technical violations created an environment of fear and discouraged entrepreneurship and foreign participation. Complex procedures and discretionary approvals also increased the scope for delays and inefficiencies.
The Act was often criticised for focusing on control rather than development, treating foreign exchange as a problem to be restricted rather than a resource to be managed productively.

Transition from FERA to a Liberal Regime

The balance of payments crisis of 1991 marked a turning point in India’s economic policy. Economic reforms aimed at liberalisation, privatisation, and global integration necessitated a fundamental change in the foreign exchange regulatory framework.
As a result, FERA was repealed and replaced by a more facilitative law, reflecting the shift from scarcity-driven control to market-oriented management of foreign exchange. This transition symbolised India’s broader movement towards an open and globally connected economy.