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Understanding FEMA Compliance
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Why FEMA Compliance Matters For Indian Businesses?

The Foreign Exchange Management Act (FEMA) has been the primary law for controlling financial transactions between India and other countries since 1999.

It not only manages funds but also specifies the rules that businesses must obey. FEMA improves worldwide trade, encourages more foreign investment, and makes international finance dealings clear. But why should you care about FEMA Compliance?

Well, with the world getting smaller and your business reaching international boundaries, following FEMA rules becomes crucial for your business. This helps you avoid breaking limits on investments, stay within sector rules, and prevent fines for not following FEMA properly.

So, if you want to play a fair game in International business or cross border transactions, contact our chartered accountant firm in India. Don't let FEMA compliance be a headache for your business!

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How FEMA Compliance Helps Your Business Shine?

Discover how following FEMA compliance for companies increases global trust, promotes growth, and ensures smooth success.

Global Trust

International partners and investors find it easier to do business with Indian companies who comply with FEMA rules, as it increases trust throughout the globe.

Smooth Transactions

Following FEMA guidelines ensures seamless and trouble-free cross-border financial transactions, which increases the efficiency of your business operations.

Increased Investments

Following guidelines for foreign exchange transactions invite more international investments and allow your firm to thrive and expand.

Transparent Finances

FEMA compliance improves transparency in financial dealings, creating a positive image of your business and promoting fair practices.

Penalty Prevention

Staying FEMA-compliant can help your business avoid penalties and it also allows you to focus on growth rather than legal difficulties.

Global Business Opportunities

Compliance opens doors to global business opportunities, allowing Indian companies to participate actively in the international marketplace.

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FEMA Compliance Rules In India
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Get An Expert Advice On FEMA Compliance Rules In India

Get top-notch advice on India's FEMA compliance rules from DSRV India, a trusted name with 35+ years in tax advisory. Our experts specialize in making FEMA regulations easy for your business.

We've served 25 sectors and 3000+ clients with a staff of professional CAs. Let us handle the complexity of compliance so that your company can easily run smooth international business activities and exchange international currency.

DSRV India is more than simply an advisor; we're your partners in success, giving clarity to complexity and ensuring your business succeeds in a transparent and courteous manner.

Whether you are a resident in India or outside India we can help you handle all your trademark needs in a proper way.

FEMA Compliance Guidelines and Features

Some important foreign exchange guidelines under FEMA Act are as follows:

  • FEMA only applies to Indian residents in India. It does not apply to Indian citizens living in countries other than India. The application criteria state that the applicant must have resided in India for at least 182 days during the previous fiscal year.
  • FEMA authorized the Central Government to impose restrictions and supervise three aspects of foreign exchange - payments made to people outside India, payments received from India, and foreign security arrangements.
  • FEMA also specifies areas like dealing in foreign exchange that need specific permissions from the Reserve Bank of India. 
  • FEMA has divided foreign exchange transactions into two categories. These two categories are capital accounts and current accounts.

1. Capital Account - 

Transactions involving the purchase or sale of assets between countries fall into the category of the capital account. This includes both fixed asset investments such as property or equipment and financial investments such as stocks, bonds, and other securities. Foreign direct investments, in which companies invest in overseas subsidiaries or acquire foreign businesses, are also examples of capital account transactions.

2. Current Account - 

It includes transactions involving the exchange of goods and services between countries. This includes trade in goods like raw materials and finished goods. Income from foreign investments, such as interest payments, is also included in the current account.

Non-compliances will be penalized up to three times the amount involved in the violation or Rs 2 lakh. The penalty may be increased to Rs 5,000 for each day after the first day if the violation continues. Hence, all companies and Indian residents involved in foreign currency transaction must follow FEMA laws.

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Why You Should Trust DSRV India To Resolve FEMA-Related Issues?

We are your friendly guides for solving out FEMA issues. We make it simple, and right. Trust us to handle it with care and expertise!

Free Legal Advice

DSRV India goes the extra mile by offering complimentary legal advice and helping you to understand FEMA-related concerns without any financial burden.

Transparent Pricing

Our pricing structure is transparent enough so that you have a comprehensive understanding of costs associated with resolving FEMA-related issues.

Professional CA Team

Trust our highly qualified team of Chartered Accountants, who are ready to handle even the most complicated FEMA challenges.

Specialization in FEMA

Our dedicated focus on FEMA compliance makes us specialists in navigating the complexities of regulations and providing tailored solutions for your specific needs.

Proven Track Record

With over 3000 clients in 25 sectors, our track record showcases a history of successful compliance issue resolution and client satisfaction.

Customized Solutions

Recognizing that every business is unique, we offer customized solutions tailored to your specific industry, ensuring that our advice can meet your operating needs.

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Activities Under FEMA

  • Activities such as payments made to any person outside India or receipts from them, along with deals in foreign exchange and foreign security are restricted. It is FEMA that gives the central government the power to impose the restrictions.
  • Without general or specific permission of the MA restricts the transactions involving a foreign exchange or foreign security and payments from outside the country to India – the transactions should be made only through an authorized person.
  • Deals in foreign exchange under the current account by an authorized person can be restricted by the Central Government, based on public interest generally.
  • Although selling or drawing of foreign exchange is done through an authorized person, the RBI is empowered by this Act to subject the capital account transactions to many restrictions.
  • Residents of India will be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immovable property abroad if the currency, security, or property was owned or acquired when he/she was living outside India, or when it was inherited by him/her from someone living outside India.

Rules and Regulation Under FEMA

  • Foreign Exchange Management (Current Account Transactions) Rule, 2000
  • Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000
  • Foreign Exchange Management (Transfer or Issue of any Foreign Security) regulations, 2004
  • Foreign Exchange Management (Foreign currency accounts by a person resident in India)Regulations, 2000
  • Foreign Exchange Management (Acquisition and transfer of immovable property in India) regulations, 2000
  • Foreign Exchange Management (Establishment in India of branch or office or other places of business) regulations, 2000
  • Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2000
  • Foreign Exchange Management (Export of Goods and Services) regulations, 2000
  • Foreign Exchange Management (Realisation, repatriation and surrender of Foreign Exchange)regulations, 2000
  • Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000
  • Foreign Exchange (g proceedings) rules, 2000
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Types Of Services Offered Under FEMA Act In India

ECB Compliance Advisory

This is a service provided by the RBI to assist Indian entities in complying with the rules governing external commercial borrowings (ECBs). It refers to borrowing in foreign currency by Indian entities from non-resident lenders. The ECB's interest rate is much higher than the interest rate on loans borrowed in India.

Acquisition of Immovable Property

Non-residents in India can buy land and buildings under the Foreign Exchange Management Act of 1999. FEMA regulates such transactions to ensure that all rules and regulations are followed.

Foreign Investor Exit Options

Foreign investors can exit their investment in India by selling their shares in an Indian company or winding up their business. Foreign investors, however, must complete a minimum lock-in period before using such options.

FEMA Global Business Establishment

Companies can establish a presence outside of India and expand their businesses worldwide..

NBFC Compliance under FEMA

Foreign investors must follow all FEMA rules to invest in a Non-Banking Financial Institution.

NRI Bank Accounts

NRIs can open various bank accounts in India, such as NRE, NRO, and FCNR, which allow them to conduct essential transactions more easily. 

FEMA Business/Share Valuation

The process of calculating the true value of a business/share is known as valuation. A chartered accountant performs valuation using internationally accepted methods.

Loan to NRIs

Through this service, NRIs can easily obtain loans from a resident Indian and an Indian company based on their needs.

Compliance with FEMA for NRI Investment

This service includes professional advice on various routes for investments made by an NRI under FEMA law.

Non-Repatriable NRI Investments

Non-repatriable NRI Investments are investments that cannot be returned to the investor's country.

Compliance with FEMA for Foreign Investment in India

This will include advice on foreign direct investment and routes to foreign direct investment.

Investment made by a Foreign Company

This service provides advice on investment modes that allow foreign companies to invest in India.

FEMA Exchange Management Act

Several significant compliances need to be followed Under the provisions of the FEMA Act. Some of the key compliances are:

Annual Return On Foreign Liabilities And Assets

An Annual Report for Foreign Liabilities and Assets must be filed by all India-based businesses that have received FDI or made ODI in any previous year, including the current year.

The FLA Return is not necessary for an Indian corporation if it has not made any FDI or ODI investments by the end of the reporting year. The FLA return must be submitted each year, though, if an Indian corporation has any unpaid FDI or ODI.


Annual Performance Report

Indian businesses that have received FDI or made investments abroad have to produce the Annual Performance Report under FEMA regulations. They must also submit an APR in FORM ODI Part II to the AD bank on or before the 31st of December of each year.

Appropriate To Software Companies

1. Directors and staff members of the business are permitted to purchase shares of the Promoters Company abroad (JV or WOS).

2. A constrained quantity of shares is available for purchase. For five calendar years, a $10,000 cap has been set.

3. The total value of these shares cannot exceed 5% of the issuing company's paid-up capital.

4. Post-allotment holdings shouldn't be higher than those before allocation.


External Commercial Borrowing

Borrowers are required to send the RBI a monthly "ECB 2 Report" outlining all ECB transactions made through an AD Category-I Bank.

 
Single Master Form (W.E.F 30.06.2018)

On September 1, 2018, the Reserve Bank of India ("RBI") released a client manual (the "SMF Manual"). It lays out the process for submitting a single master form (the "SMF"), which was introduced on June 7 of that year. The most updated detailing requirements for foreign investment in India can be found on this form.

Now, you may complete the following forms using a single SMF form:

FC-GPR

Indian businesses must submit Form FC-GPR, a FEMA compliance document, within 30 days of receiving foreign direct investment (FDI). Companies must fill out a document detailing FDI, including the amount of FDI, the type of FDI, the name and address of the foreign investor, and the percentage of foreign shareholding.

FC-TRS

A person in India can transfer capital assets from a foreign resident using this form. Indian corporations must file this form after 60 days of receiving any transfer of capital instruments by way of sale or transfer.

LLP-I & LLP-II

Limited Liability Partnerships (LLPs) are required to submit LLP-I and LLP-II compliance forms under FEMA guidelines. LLP-I must be filed within 30 days of receiving a foreign contribution or investment in the form of a capital participation or profit share. However, LLP-II must be presented within 60 days of receiving the consideration amount.

CN

Authorized dealers must submit the Current Account Transactions Form, or CN, which is a compliance document, for all current account-related transactions. It includes payments for imports and exports as well as other current account-related operations. The transfer of convertible notes must be disclosed within 60 days.

DRR

When an Indian company receives foreign investment and wishes to register a designated retention account with a bank, they must submit this form known as a DRR, which stands for Designated Retention Account.

ESOP

Employee Stock Option Plan, or ESOP, is a form that must be filed by Indian businesses that offer shares to their employees.

DI

Direct Investment Form, or DI, is a form that must be submitted by Indian businesses that make direct investments outside of India.

Advance Reporting Form

Within 30 days of the date the offers were issued, an Indian company that receives foreign investment for the issuance of shares or other qualified securities under the FDI Scheme is required to report the specifics of the amount of consideration to the Reserve Bank's concerned Regional Office via its AD Category I bank.

Form FC-GPR

The Foreign Exchange Management Act of 1999 authorizes the RBI to issue this form. The organization distributes its shares to outside investors in exchange for receiving foreign investment.

Form FC-TRS

The full form of FC-TRS is Foreign Currency Transfer. When shares or convertible debentures of an Indian firm are transferred from a resident to a non-resident, this form is required to be filled out.

Form ODI

Any Indian citizen or Indian entity interested in investing in the global market must complete Form ODI. If the investment is in a joint venture or totally owned subsidy, they must also send the share certificate or proof of investment against investment to the designated AD within 30 days.

Who Regulates Compliance under FEMA?
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Who Regulates Compliance under FEMA?

In India, compliance under the Foreign Exchange Management Act (FEMA) is regulated by the Reserve Bank of India (RBI). The RBI is in charge of enforcing FEMA provisions and issuing rules and guidelines.

The RBI has established a separate department known as the Foreign Exchange Department (FED). It handles FEMA's day-to-day administration. To ensure compliance with FEMA provisions, the FED issues circulars, notifications, and guidelines.

The Income Tax Act will apply to NRI accounts and Company accounts for tax purposes. Aside from the regulations listed above, the Companies Act of 2013 will apply to all transactions with the company. The Securities and Exchange Board of India (SEBI) would apply to capital instruments.

Eligibility criteria for Compliance under FEMA

The following persons are eligible to use foreign exchange and foreign currency services under FEMA:

  • Individuals
  • Companies
  • Non-Resident Indians
  • Foreign Individuals
  • Foreign Institutional Investors
  • High Net Worth Individuals
  • Partnerships/Proprietorships Concerns

Documents for Compliance under FEMA

The documents required for compliance under FEMA may vary based on the type of transaction and the relevant regulations. Some important documents that may be required are as follows:

  • The Incorporation Certificate
  • The Memorandum Of Association
  • Board Resolution
  • Article of Association
  • Audited Financial Statement of Last Financial Year
  • List of Names, identification proof, and addresses of all the foreign collaborators of the Investor entity or Company
  • The Investee Company's shareholding pattern before and after investment
  • An affidavit that states all the information provided- In case of existing ventures, copy of joint venture agreement/shareholders' agreement/ technology transfer/trademark/brand assignment agreement.
  • A copy of the downstream indication
  • Copy of any previous FIPB/SIA/RBI approvals related to the current proposal.
  • Relevant FIRC in case investment has already been done.
  • High court’s order in case of any arrangement scheme
  • Valuation certificate as approved

Documents Needed for FDI in LLP/ Start-ups and Companies 

The documents required for FDI (Foreign Direct Investment) in LLP/Start-ups and Companies may vary based on the type of investment. Mentioned below are some of the common documents are required for FDI in LLP:

  • Report by the LLP receiving the amount of consideration for the acquisition
  • Other important documents include the registration of the LLP or the company.
  • Information of Director and shareholder
FEMA Compliance
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Compliance Procedure under FEMA

Foreign currency investment in India can be either through foreign direct investment (FDI), foreign portfolio investment (FPI), or foreign direct investment (FDI). Fema compliance is very essential for any individual or business. Foreign direct investment (FDI) transactions are capital in nature. As a result, they face severe penalties. In India, there are two paths for foreign direct investment: the automatic route and the approval route. The automatic route allows for 100% foreign investment by an investor. To carry out a specific transaction, no prior permission from the government is required. However, under the government route, the investor would need to get government approval before conducting a transaction in India.

Reporting Requirements- Compliance under FEMA

There are certain reporting requirements related to FEMA compliance that need to be met by individuals, and companies engaging in foreign currency exchange. Here are some of the reporting requirements related to compliance under FEMA:

  • Annual Performance Report

    When an Indian company makes Overseas Direct Investment, it must also submit an Annual Performance Report (ODI). This payment would be made to the Joint Venture/Wholly Owned Subsidiary located outside of India. The Annual Performance Report is included in Form-ODI Part II. This form must be returned to the Authorised Bank. Every year, the Annual Performance Report must be submitted on or before December 31st. APR must be certified by a Chartered Accountant (CA) or the Indian Party's statutory auditor. For FEMA compliance, an annual performance report must be submitted to the Authorised Bank.

  • RBI Single Master Form

    The Reserve Bank of India (RBI) introduced the RBI Single Master Form (SMF) for all foreign exchange investment reporting requirements under FEMA. The SMF combines all foreign investment reporting requirements into a single form. It eliminates the need for multiple forms and reduces the reporting burden on Indian companies. The SMF addresses both foreign direct investment (FDI) and foreign portfolio investment (FPI). It aims to improve the ease of doing business in India and provides a streamlined process for Indian companies to comply with FEMA reporting requirements.

  • Filing of the Annual Return on FLA

    Every Indian resident company that received foreign investment (both direct and indirect) in any of the previous years, including the current year, is required to file the FLA return with the Reserve Bank of India (RBI). This return is filed annually and is due on July 15th of each year.

HOW Does DSRV India Help With FEMA Compliance Solutions
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How We Can Help Your Business WIth Foreign Money Exchange?

Making your journey of foreign exchange in India or abroad stress-free is our mission! Let's begin the process by meeting our friendly tax experts who will help you understand everything about exchanging money abroad.

Then, you get your own personal guide, your account manager, who is like a helpful friend guiding you through each step.

Are you curious about the state of your finances? To keep you informed at all times, we'll provide you with real-time updates. And the best part? Your official certificates will be sent to you either by email or regular mail, so you have proof of everything you've done.

Partner with us today to learn the guidelines for foreign exchange transactions and run your international business smoothly.

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Frequently Asked Questions Related To FEMA compliance

Curious about FEMA compliance? Find answers to your most concerning questions in our comprehensive FAQs. Simplify regulations and gain confidence today!

What is FEMA compliance for inward remittance?

The process of adhering to the regulatory requirements of the FEMA when receiving money from a foreign source is known as FEMA compliance for inward remittance.

What FEMA means?

FEMA stands for Foreign Exchange Management Act. It is a regulatory framework governing foreign exchange transactions in India, enacted in 1999.

What is FEMA compliance?

FEMA compliance means following the rules and regulations of the FEMA act when doing foreign exchange transactions in India.

What are the features of FEMA?

FEMA's functions include regulating foreign exchange transactions and promoting external trade and payments. It also aims to prevent unauthorized transactions and ensure reporting and documentation requirements are met.

What is The FEMA limit?

The LSR plan of FEMA allows an Indian resident, NRI, or overseas citizen to send funds from India to other countries worth up to USD 250,000 in a single fiscal year without the need for RBI approval.

Which other institutions regulate FEMA other than the RBI?

Apart from the RBI, the authorized dealer, the ministry of corporate affairs, SEBI, the ministry of home affairs, and the revenue department is involved in FEMA activities.

What is a FEMA Violation?

A FEMA violation is a violation of the regulatory requirements established by India's Foreign Exchange Management Act. 

What is the main objective of FEMA?

The main objectives of FEMA are to regulate foreign exchange transactions, promote external trade and payments, facilitate foreign exchange market development, and safeguard the country's foreign exchange reserves.

What is the penalty for non-compliance with FEMA regulations?

Non-compliance with FEMA regulations can result in penalties ranging from fines to imprisonment, depending on the severity of the violation.

Do all foreign exchange transactions need to be reported under FEMA?

Yes, all foreign exchange transactions, including inward and outward remittances, need to be reported under FEMA.

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