Whether the exemption will hold up through the legislation process is unclear.
Primary Industries minister Nathan Guy said he had some concerns and would be seeking further advice.
Ngapuhi's Sonny Tau, who is the spokesman for iwi chairmen around the country on the issue, said the 2020 exemption was essential because without it Maori fishing interests guaranteed under the Sealords deal would be severely devalued.
Not a single iwi could afford to buy a ship, which was why fishing ventures with foreign vessels were key, Mr Tau said.
"If you reduce the capacity and you take out foreign chartered vessels in this country ... that will ... drive down quota prices. It will become uneconomic for a lot of the smaller iwi to even open an office to be involved in fishing."
Mr Banks, Act's leader, slammed the extension "for a privileged few iwi quota holders" and called for reflagging to be dropped totally.
Research by Auckland University Business School academic Glenn Simmons was responsible for revealing human rights violations on board foreign vessels.
He said it was a joke that fishing businesses in general were been given three years' grace period to reflag, let alone the 2020 exception.
"Parliament's known about this abuse going back to the early 1990s ... This committee, I think, has failed in its responsibilities to people who are not in a position to do anything about their own situation themselves and I just think it's bloody appalling."