Compliances under FEMA

1. Mandatory Compliances under FEMA

To conduct business dealings within India, all transactions have to be compliant with relevant foreign exchange law. From setting up a bank account for an NRI to adjudication of disputes under FEMA, all the services have to be compliant with FEMA.

2. Why is Compliance under FEMA required?

The main aim of FEMA regulation is to ensure 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.

3. Types of Services Offered- Compliance under FEMA

ECB Compliance Advisory

• External Commercial Borrowings:- These are the 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:- A individual resident outside India can acquire property in India. Under the Foreign Exchange Management Act, 1999 (FEMA) acquisition of immovable property is allowed. RBI and FEMA also regulate the purchase of property outside 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 utilizing such options.

4. Global Business Establishment Under FEMA

Companies can Establish their Presence outside India.

• NBFC Compliance Under FEMA: Foreign investors have to be compliant with the relevant regulations related to Foreign Exchange Management Act to invest in an NBFC.
• NRI Bank Accounts: Non-Resident Indians can set up different bank accounts in India, such as NRE, NRO, and FCNR Accounts.
• 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 are allowed to receive loans from a resident Indian and Indian Company.

5. NRI Investment FEMA Compliance

• Routes for investments that are made by an NRI in compliance with FEMA law.
• NRI Investments- Non-Repatriable Basis
• Investments that cannot be sent back to the investors home country.

6. FEMA Compliance For Foreign Investment In India

This will cover foreign direct investment and routes under foreign direct investment.

7. Investment by a Foreign Company/ Partnership in India

Modes of investment, which is allowed for the foreign company to invest in India.

8. Who Regulates Compliance under FEMA?

The primary regulatory authority for Foreign Exchange in India is the Reserve Bank of India (RBI). For tax treatment, the Income Tax Act will also apply to NRI Accounts/ Company Accounts. Apart from the above regulations, the Companies Act 2013 would apply to transactions with companies.

9. 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.

10. Types of Compliances Under FEMA

• FDI in a Sole Proprietorship/ Partnership Concern
• FDI in a LLP
• FDI in a Start-up
• FDI in a SSI
• FDI under the Automatic Route
• FDI under the Approval Route
• Setting Up a Branch/Liaison/Project Office
• Compliances Under FEMA

11. Process / Procedure for Compliance under FEMA

Foreign investment can be either through Foreign Direct Investment (FDI) in India, Foreign Portfolio Investment (FPI), and Foreign Investment (FI). Compliance under FEMA is crucial for an individual or a company. FDI transactions are considered capital in nature. Hence they attract strict penalties.

There are two routes for foreign direct investment in India- the automatic route and the approval route.

Under the automatic route, 100 % foreign investment is allowed for FDI by an investor.

There is no requirement of prior permission from the government to carry out a particular transaction.

However, under the government route, the investor would require consent from the government before carrying out a transaction in India.

12. Compliance under FEMA is required for the following transactions

Procedure for Compliance under FEMA:-

• FDI -Automatic Route
• Under Automatic Route, 100% foreign direct is allowed.

No particular due date for this. However, the investor has to make such investments within a stipulated period.

13. There are 11 categories of investments that do not require prior approval from the government as follows

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
• 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.

14. 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.)

15. Procedure for investment

The application form has to be filled on the SOP (Standard Operating Procedure) form. This will be required for the FIFP (Foreign Investment Facilitation Portal) Online.

DIPP (Department of Industrial Policy and Promotion) will view the application and forward the same 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.

16. FDI in 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. However, Investment in these corporate structures allows 100% investment under the Automatic Route.

These are 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.

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

• When the investment is repatriable.
• 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.

17. 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

1. There are specific sectors which only allow FDI for limited Liability partnerships.
2. There should be no conditions related to linked performance for FDI.
3. Individuals (NRI/PIO) or foreign companies should be appointed as a Designated Partner of the Limited Liability partnership. This is required under Section 7 of the Limited Liability Partnership Act 2008.
4. LLP can use External Commercial Borrowings (ECB).
5. Companies can be converted to Limited liability Partnerships. However, the Investments must be within the prescribed sector limits and come under the category of 100%automatic route. By following the above conditions, compliance under FEMA would be crucial for FDI in an LLP.

18. FDI in a Start-Up

Compliance under FEMA is required for a Start-up. Convertible Notes can be issued by a Start-up to Foreign investors.

No particular time limit for foreign direct investment in a start-up. A start-up company which issues convertible notes to individuals’ resident outside India have 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:-

1. Equity instruments
2. Linked instruments comprising equity and preference shares
3. Debt-based instruments
4. Convertible notes

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

1. The amount of investment must be more than 25 Lakhs rupees, and this can be in a single tranche.

2. 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.

3. The transfer can be through an Escrow account; however, the account must be closed after six months of transfer.

(Compliance under FEMA is possible for a start-up if the above conditions are followed.)

19. FDI in Small Scale Industries

Small Scale Industries are allowed to secure FDI. Compliance under FEMA is also required for a small scale industry. No prescribed time limits are required for a small scale industry.

For Compliance under FEMA for a Small Scale Industry, the following conditions have to be adhered:-

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.

(Compliance under FEMA law would be adhered to by following the above criteria.)

20. 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 prescribed for the above.
• For project offices, the time limit would be until the completion of the project. Branch offices and liaison offices are allowed to operate for a specific period.
• A foreign company can follow compliance under FEMA by setting up a branch office, liaison office, and project office.
• Branch Office- A company has to be present abroad to set up a branch office in India. Track Record of the Company- Preceding five years profit and track record is considered. Net worth of the company 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. Liaison Office must be set up by a foreign company in India. Track Record of the Company must be Preceding three years of profit and track record is required. The net worth of the company 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.

21. 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 setting up a wholly-owned subsidiary or enter into a Joint Venture Agreement with an Indian company. Compliance under FEMA would be applicable when a foreign company wants to set its business in India.

22. Reporting Requirements- (Compliance under FEMA)

Foreign investors and Indian Companies have to follow reporting requirements related to several compliances. The following reporting requirements

a. 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 would be required to be paid by 15 July every year. Foreign Assets and Liabilities have to be submitted for Compliance under FEMA.

b. 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 present on Form- ODI Part II. This form has to be submitted to the Authorised Bank. Annual Performance report has to be submitted on or before 31 December every year. 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 Authorised Bank for compliance under FEMA.

c. 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:

• FC-GPR- The form which is used for the issue of capital instruments by an Indian Company to a person resident outside India. Reporting of FDI under this form must be done within 30 days of allotment.
• FC-TRS - The form is used for the transfer of 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.
• LLP-I- The form is used for Foreign Direct Investment, which is required by an LLP.
• LLP-II-The form which is used for Divestment or transfer of capital contribution in an LLP.
• CN - The form which is used for the issue or to transfer convertible notes. Reporting of Convertible notes must be done within 60 days of such transfer.
• DRR- The form which is used for the issue of transfer of depository receipts.
• ESOP- The form which is used for issuing employee stock options or sweat equity shares.
• DI- The form which is used for reporting of downstream investment or some form of foreign indirect investment in a business.
• The SMF must be submitted within the stipulated period for compliance under FEMA.
• ECB Form- All External Commercial Borrowings (ECB) borrowed from an Indian Company must be reported monthly to the RBI. The reporting must be done through the Authorised Bank in ECB 2 Return.
• Form ODI- Indian Party would also have to submit form ODI for investing in the Joint Venture of Wholly Owned Subsidiary. Any share certificates or documents regarding the investment would also be required to be submitted to the Authorised bank. The submission of form ODI has to be within six months.

23. Documents/Checklists for Compliance under FEMA

Documents would depend on the type of service that you require under 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 Down-stream 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/NCLT order in case of scheme of arrangement.
• Valuation certificate as approved.

24. FDI in LLP/ Start-ups and Companies would need different documents

Report by the Limited Liability Partnerships (LLPs) receiving amount of consideration for capital contribution and acquisition / transfer of profit shares.

Other Important documents such as registration of the LLP or the company.

Details of Directors and Shareholders.

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