Overview of Compliance under FEMA

The Government of India introduced the Foreign Exchange Management Act 1999 (FEMA) to regulate foreign exchange transactions within India and outside India. With the development of foreign exchange reserves in India, compliances have also increased. Indian, international companies and individuals intending to conduct services outside India must comply with the relevant laws related to foreign regulations in India. Such individuals and entities need to comply with FEMA to avoid any penalties of non-compliance and facilitate better foreign exchange transactions within India and outside India, as well as render services by businesses outside India.

Need of Compliance under FEMA

• Compliance under FEMA is needed due to the following reasons- 
• FEMA regulation ensures that businesses are compliant with relevant foreign exchange laws.
• FEMA will monitor business dealings abroad by companies established in India.
• Being compliant with FEMA will help your business run smoothly outside India.
• Foreign Companies can set up offices in India by complying with foreign exchange regulations.

Types of Services Offered under FEMA

The following services are offered under FEMA. 

ECB Compliance Advisory

External Commercial Borrowings are commercial loans taken by Companies and Public Sector Undertakings. These loans are borrowed from foreign institutional investors and foreign companies. ECB offers a high rate of interest compared to loans that are borrowed in India.

Acquisition-Of-Immovable-Property

An individual resident outside India can acquire property in India as this is allowed under the Foreign Exchange Management Act, 1999 (FEMA). RBI and FEMA are also responsible for regulating the purchase of property outside the boundaries of India.

Exit Options By Foreign Investors

Exit options are used by foreign investors when there is no sufficient rate of return on their investment. Foreign investors have to complete a minimum lock-in period for utilising such options.

Global Business Establishment under FEMA

Companies can establish their presence outside India and expand their businesses across nations, fostering the business's growth worldwide.

NBFC Compliance under FEMA 

Foreign investors must comply with all the  regulations related to FEMA in order to invest in a Non-Banking Financial Institutions (NBFC)

NRI Bank Accounts

NRI can set up different bank accounts in India, such as NRE, NRO, and FCNR, which can help them to carry out essential transactions conveniently. Business/Share Valuation under FEMA

Business /share valuation is the process in which the real value of the business/share is calculated. Valuation is carried out according to internationally accepted methods by a chartered accountant or SEBI registered merchant banker.

Loan to NRIs

NRIs can conveniently receive loans from a resident Indian and Indian Company as per their requirement.

NRI Investment FEMA Compliance

This service involves advice by professionals on various routes for investments that an NRI makes in compliance with FEMA law.

NRI Investments- Non-Repatriable Basis

The NRI Investments - non-repatriable basis refers to the investments that cannot be sent back to the investor's home country

FEMA Compliance For Foreign Investment In India

This will cover advisory on matters related to foreign direct investment and routes under foreign direct investment.

Investment by a Foreign Company/ Partnership in India

 This service deals with advisory on modes of investment which is allowed foreign companies to invest in India.

Who Regulates Compliance under FEMA?

The primary regulatory authority for Foreign Exchange in India is the Reserve Bank of India (RBI).

The ITA will apply to NRI Accounts/ Company Accounts for tax treatment.

Apart from the above regulations, the Companies Act 2013 would apply to transactions with companies.

Securities Law (SEBI) would be applicable to capital instruments.

Eligibility criteria for Compliance under FEMA

The following are eligible to use services under FEMA:

• Individuals.
• High Net Worth Individuals.
• Companies.
• Partnerships/ proprietorship concerns.
• Non-Resident Indians (NRIs).
• Foreign Individuals.
• Foreign Institutional Investors

Documents for Compliance under FEMA

Documents would depend on the type of service the client requires for Compliance under FEMA.

Government Route/ Approval Route-

• From both Investee & Investor Companies/Entities:
• Certificate of Incorporation.
• Memorandum of Association (MOA)
• Board Resolution.
• Audited Financial Statement of Last Financial Year.
• Article of Association.
• List of Names, addresses and identification proof of all foreign collaborators of the Investor Company/Entity.
• Pre-and Post-investment shareholding pattern of the Investee Company.
• An Affidavit stating that all information provided.
• In case of existing ventures, copy of joint venture agreement/shareholders' agreement/ technology transfer/trademark/brand assignment agreement (as applicable).
• Copy of Downstream Intimation.
• Copy of relevant past FIPB/SIA/RBI approvals connected with the current proposal.
• Relevant Foreign Inward Remittance Certificate (FIRC) in case investment has already flowed in.
• High Court order in case of a scheme of arrangement.
• Valuation certificate as approved.

Documents for FDI in LLP/ Start-ups and Companies 

There are different documents required for FDI in LLP / Start-up, which are 

• Report by the Limited Liability Partnerships (LLPs) receiving the amount of consideration for acquisition/transfer of profit shares capital contribution.
• Other essential documents such as registration of the LLP or the company.
• Details of Directors and Shareholders.

However, most documents will be submitted to the RBI for Compliance under FEMA Services.

Process / Procedure for Compliance under FEMA

• Foreign investment can be either through Foreign Direct Investment (FDI) in India, Foreign Investment (FI) or Foreign Portfolio Investment (FPI). 
• Compliance under FEMA is essential for an individual or an entity, and FDI transactions are taken as capital in nature, attracting stringent penalties. 
• There are 2 routes for FDI in India- i.e. the automatic route and the approval route. The automatic route allows 100 % foreign investment for FDI by an investor. Prior permissions are not required from the government to carry out a particular transaction. On the other hand, the government route requires the investor to obtain consent from the government before carrying out a transaction in India.

FDI -Automatic Route

• This Route allows 100% foreign direct investment. 
• No particular due date for such investment, However, the investor has to make the same within a stipulated period.
• There are 11 categories of investments that do not require prior approval from the government.
• The categories are E-Commerce, Certain Agricultural Activities, Animal Husbandry, Health Care, Manufacturing, Textiles, Garments and the Capital Goods Sector, Plantation Sector, Petroleum and Natural Gas Sector, Minerals Sector, Non News Current Affairs and Television Channels, Broadcasting, Construction Sector- such as the development of townships and Duty-Free Shops.
• Other sectors require approval from the government.
•  No compliance under FEMA is required for investment in the above sectors.

FDI under the Government Route/ Approval Route

• Specific Sectors require prior approval from the government for FDI activities in India. Investments from certain countries also require prior approval from the government for FDI Based Activities.
• No Particular Time limit is present under this route.
• Investment from the following countries has to go through the approval route: China, Bhutan, Nepal, Pakistan, Bangladesh, Pakistan, and Afghanistan.

Procedure for investment-

• The applicant must fill out the application form in the prescribed format. The application form shall be reviewed by DIPP (Department of Industrial Policy and Promotion) and forwarded to RBI for FEMA compliance.
• Other concerned authorities would also be contacted for particular sectors. Approvals or rejections for an application would take about 6 to 8 weeks.
• Clearances would be required for specific applications. For sectors that fall under the Government route, compliance under FEMA is crucial.

FDI - Sole Proprietorship or Partnership Firm

• Partnership Firms/ Sole Proprietorship firms can receive foreign investments in capital instruments from Non-Resident Indians (NRI) and Persons of Indian Origin (PIO).
• There is no time limit to perform these transactions.
• Investment in these corporate structures allows 100% investment under the Automatic Route. However, the following have to be adhered to:

1. Contribution must be made on a non-repatriable basis. This means an investment made in capital instruments of a sole proprietorship or partnership firm would not be allowed to transfer back to the investor's home country. Such investments would be treated on par with domestic investments.
2. Funds must be transferred through the NRE/ FCNR/ NRO account maintained by the NRI/ PIO. The transfer would be made through the authorized bank.

• The firm receiving the investment from an NRI/PIO must not be engaged in real estate and agricultural-related activities.
• Government approval would be required in the following circumstances.

1. When the investment is repatriable.
2. When the investment is not from a Non-Resident Indian or A Person of Indian Origin.

• Investment in the above corporate structures does not require prior approval from the government. Compliance under FEMA is crucial when the applicant has to repatriate investments back to the home country.

FDI in Limited Liability Partnerships (LLP)

• FDI norms for LLP have been relaxed. NRI and PIO can invest in Limited Liability Partnerships.
• No Specific Time limits for conducting investment activity.
• The government has made significant relaxations in this form of corporate structure. In 2015, FDI investment in an LLP had come under the purview of the automatic route. There are specific criteria for FDI in an LLP:

• Specific sectors only allow FDI for LLPs.
• There should be no conditions related to linked performance for Foreign Direct Investments.
• Individuals (NRI/PIO) or foreign entities should be appointed as designated partners of the LLP. This is a mandatory requirement under Section 7 of the Limited Liability Partnership Act 2008.
• LLP can use ECB (External Commercial Borrowings).

FDI in a Start-Up

• Compliance under FEMA is required for a Start-up. A Start-up can issue convertible Notes to Foreign investors.
• No particular time limit for foreign direct investment in a start-up. A start-up company that issues convertible notes to individuals outside India has to submit reports to the RBI.
• FDI can be invested in a Start-up through some form of capital instruments. A start-up can issue the following capital instruments:

• Equity instruments.
• Linked instruments comprising equity and preference shares.
• Debt-based instruments.
• Convertible notes.

The following criteria are required for the issue of convertible notes to an individual resident outside India:

• The investment amount must be more than 25 Lakh rupees, which can be in a single tranche.
• The transfer of investment must be through proper banking channels.
• Transfer can be done either through the NRE/ FCNR/ NRO account. This would be according to the Foreign Exchange Management (Deposit) Regulations, 2016.
• The transfer can be through an Escrow account; however, the account must be closed after six months of transfer.

FDI in Small Scale Industries

• Small Scale Industries are allowed to secure FDI. Compliance under FEMA is also required for small-scale industries.
• There aren't any prescribed time limits required for small-scale industries.
•  The following conditions have to be adhered to for Compliance under FEMA for a Small Scale Industry, 

1. Small Scale Industries can receive up to 24% from foreign investors.
2. This investment would be made on the paid-up capital of the small-scale industry.
3. If a foreign investor wants to invest more than 24% in the paid-up capital of a small-scale industry, then the Small Scale Industry must be converted into some other corporate structure.
4. The above requirement is under the Micro, Small and Medium Enterprises Development Act, 2006.
5. The small-scale unit must follow the guidelines related to sector caps.
6. The small-scale unit must not manufacture any form of reserved items.

Setting Up a Project Office/ Liaison Office and Branch Office in India

• FDI can be received in India when a foreign company registered under the companies act sets up one of the following offices.
• No time limit is prescribed for the same the time limit in the case of project offices would be till the project is completed. Branch offices and liaison offices are permitted to operate for a specific period.
• A foreign entity can adhere to the compliance under FEMA by setting up a branch office, and project office, liaison office.

Branch Office-

• For the purpose of setting up a branch office in India, it is mandatory for the company to be present abroad. 
•  The Track Record of the Company- Preceding five years of profit and track record is considered.
• The company's net worth has to be more than USD 1, 00,000 or equivalent.
• Activities of the Branch office are not restricted.

Liaison Office-

• Liaison Office must not carry out any commercial activity.
• A foreign company in India must set up Liaison Office.
• Track Record of the Company- Preceding three years of profit and track record is required.
• The company's net worth has to be more than USD 50,000 or equivalent.

Project Office

• It can be started only if a contract is present with the company.
• Foreign companies must provide the funding required for starting a project office.
• International Financial agencies can also fund the development of the project office.
• A foreign company can follow compliance under FEMA through the above modes.

FDI in a Private Limited Company

• Foreign companies can invest in India.
• No prescribed time limit for investment.
• Foreign companies can invest in India by entering into a (JVA) Joint Venture Agreement with an Indian company or setting up a wholly-owned subsidiary. Compliance under FEMA would be applicable when a foreign company wants to set up its business in India.

Reporting Requirements- Compliance under FEMA

Foreign investors and Indian companies must follow reporting requirements related to several compliances. The following reporting requirements-

• Foreign Liabilities and Assets (FLA) - Indian Companies have to make a report on the amount of foreign liabilities and assets. This report would be annually submitted every 31 March in a financial year. This would apply to Indian companies that receive foreign direct investment (FDI) or overseas direct investment (ODI). This would be required only where the company has an outstanding amount of assets and liabilities. Any form of FDI or Overseas Direct Investment (ODI) received in the previous year by the Indian company would have to submit Foreign Liabilities and Assets Annual Return (FLA Return). Outstanding FDI or ODI must be paid by 15 July every year. Foreign Assets and Liabilities have to be submitted for Compliance under FEMA.

• Annual Performance Report (APR) - An Indian Company would also have to submit the Annual Performance Report when the Indian company makes Overseas Direct Investment (ODI). This would be made to the Joint Venture / Wholly Owned Subsidiary outside India. Annual Performance Report is presented on Form- ODI Part II, which must be submitted to the Authorized Bank. The annual Performance report must be submitted on or before 31 December. APR has to be certified by a Chartered Accountant (CA) or statutory auditor of the Indian Party. Annual Performance Report must be submitted to the Authorized Bank for compliance under FEMA.
• RBI Single Master Form (SMF) - The SMF comprises all the reporting requirements for FDI in India. The following forms consist of the reporting requirements of different corporate structures in India:

1. FC-GPR- The form which is used for the issue of capital instruments by an Indian Company to a person resident outside India. FDI under this form must be reported within 30 days of allotment.
2. FC-TRS - The form is used to transfer capital instruments from a foreign resident to a person in India.

• Submission of FC-TRS under the SMF must be made within 60 days of the transfer of capital instruments or the remittance of funds, whichever is earlier.

1. LLP-I- The form is used for Foreign Direct Investment, which an LLP requires.
2. LLP-II- The form which is used for Divestment or transfer of capital contribution in an LLP.
3. CN -The form which is used for the transfer or issue of convertible notes. The reporting of the same must be completed within 60 days from the transfer of the notes. 

• DRR-The form deals with the issue or transfer of depository receipts.
• ESOP-The ESOP form is used for issuing employee stock options or sweat equity shares.

1. DI-The form is used for reporting downstream investment or some form of foreign indirect investment with regard to the business. 
2. The SMF must be submitted within the stipulated period to adhere to the compliance requirements of the Foreign Exchange Management Act.
3. ECB Form-All the External Commercial Borrowings (ECB) borrowed from an Indian Company must be reported on a monthly basis to the Reserve bank of India, which must be done through an Authorized Bank in ECB 2 Return.

• Form ODI- Indian Party must also submit this form for the purpose of investment in the Joint Venture of Wholly Owned Subsidiary. Any share certificates or documents in respect of the investment must also be submitted to the Authorized bank. The submission of form ODI has to be within six months.

How can Tap Global help?

Tap Global can help in the following ways- 

• Assistance in the procedural aspects regarding the requirements of FEMA Compliance.
• Monitoring the application status with the RBI and other authorities.
• Post compliance service with RBI and FEMA.