The Foreign Exchange Management Act, 1999 (FEMA) consolidates and amend the law relating to foreign exchange to facilitate external trade and payments in India. It also promotes the orderly development and maintenance of foreign exchange management in India”. The Foreign Exchange Control Act was replaced by the Indian parliament during the winter session of 1999. FEMA Compliance is required to exchange foreign currency in India. Noncompliance under FEMA can contribute to compounding under FEMA. It covers the whole India and replaces FERA, which had grown incompatible with the government of India’s pro-liberalization policy. FEMA made it possible to implement a new system of managing foreign currency that was in line with the WTO’s newly developed framework (WTO). The Prevention of Money Laundering Act, 2002, which went into force on July 1, 2005, was also made possible by this act.
This foreign currency exchange act aided in the smooth operation of cross-border trade, increased foreign investment, increased transparency of international financial transactions, and improved the balance of trade payments.
The importance of FEMA filing has grown for globalization and the rapid growth of international business investments. Hence, corporations must comply with the FEMA regulations India. Furthermore, this practice can help to smooth international business operations. Don’t let FEMA compliance be a headache for your business. Consult the most reputed chartered accountant firm in India today. They can help you in better foreign exchange transactions.
Compliance under FEMA is crucial for any business dealing with foreign currency transactions. It ensures that they are not in violation of the law. Some of the key reasons why compliance under FEMA is essential are:
Some important foreign exchange guidelines under FEMA Act are as follows:
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.
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.
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.
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 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.
Companies can establish a presence outside of India and expand their businesses worldwide.
Foreign investors must follow all FEMA rules to invest in a Non-Banking Financial Institution.
NRIs can open various bank accounts in India, such as NRE, NRO, and FCNR, which allow them to conduct essential transactions more easily.
The process of calculating the true value of a business/share is known as valuation. A chartered accountant performs valuation using internationally accepted methods.
Through this service, NRIs can easily obtain loans from a resident Indian and an Indian company based on their needs.
This service includes professional advice on various routes for investments made by an NRI under FEMA law.
Non-repatriable NRI Investments are investments that cannot be returned to the investor’s country.
This will include advice on foreign direct investment and routes to foreign direct investment.
This service provides advice on investment modes that allow foreign companies to invest in India.
Several significant compliances need to be followed Under the provisions of the FEMA Act. Some of the key compliances are:
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.
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.
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:
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.
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.
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.
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.
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.
Employee Stock Option Plan, or ESOP, is a form that must be filed by Indian businesses that offer shares to their employees.
Direct Investment Form, or DI, is a form that must be submitted by Indian businesses that make direct investments outside of India.
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.
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.
The organization has to inform the RBI about such a share allocation within 30 days. The company is required to utilize the FC-GPR form (Foreign Currency-Gross Provisional Return).
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.
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.
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.
The following persons are eligible to use foreign exchange and foreign currency services 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 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:
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.
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:
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.
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.
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.
We understand that complying with the (FEMA) requirements can be difficult, and time-consuming. process for businesses. That is why we offer our help with FEMA compliance. Our expert team has extensive knowledge of the procedural aspects of FEMA compliance. We keep ourselves up-to-date on the latest regulatory changes. We can guide you through the compliance process and ensure that all required filings and reports are completed correctly and on time. We also monitor the status of your application with the Reserve Bank of India (RBI) and other authorities so you don’t have to. We value your time and money and strive to provide services that are both cost-effective and efficient. You can rely on us to help you meet all of your FEMA requirements.
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.
FEMA stands for Foreign Exchange Management Act. It is a regulatory framework governing foreign exchange transactions in India, enacted in 1999.
FEMA compliance means following the rules and regulations of the FEMA act when doing foreign exchange transactions in India.
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.
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.
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.
A FEMA violation is a violation of the regulatory requirements established by India’s Foreign Exchange Management Act.
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.
Non-compliance with FEMA regulations can result in penalties ranging from fines to imprisonment, depending on the severity of the violation.
Yes, all foreign exchange transactions, including inward and outward remittances, need to be reported under FEMA.