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Fema Compliance

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Fema Compliance

FEMA COMPLIANCES Strict precautions must be followed when conducting cross-border transactions. When it comes to cross-border transactions, corporates must endure a laborious procedure. A higher degree of compliance is required when the inbound and outbound processes are expanded. In order to maintain a healthy foreign exchange market, facilitate seamless external transactions, and promote the significance of the balance of payments, the Foreign Exchange Management Act, 1999 (FEMA) was enacted.

FDI can be brought through

Foreign investment can be made in India through:
1. Automated route
Foreign investors do not need previous RBI or Government of India approval when using the automated route. Up to the allowed limits, investments can be made in specific industries without going through a drawn-out approval process. Foreign investment is encouraged and the investment process is made simpler by requiring only post-investment notification to the RBI.

2. Approval route
The Foreign Investment Promotion Board (FIPB) or the appropriate ministries must give their prior approval before taking the approval route, also referred to as the government route. Sectors with more sensitivity or strategic significance to the nation must go this approach.

Industries where 100% FDI is permitted automatically:
i) Agriculture industry
ii) Animal husbandry
iii) Online shopping
iv) The healthcare industry
v) Textile clothing
vi) Capital goods

Industries where FDI is permitted through the approval process i) Government agencies and banks (public banks): 20%
ii) 100% core investment company
iii) 100% retail trading in food products

The following industries are restricted from receiving foreign direct investment (FDI), either automatically or through approval:
i) Lottery operations, such as online, public, and private lottery.
ii) Gambling and betting, including in casinos
iii)Chit funds
iv)Nidhi Company
v) Transferable development rights (TDR) trading
vi) Real estate enterprise
vii) Production of cigarettes, cigars, tobacco, or tobacco alternatives
viii) Industries that are closed to private sector investment include railway operations and atomic energy (except from those that are allowed under the Consolidated FDI policy).

Role of RBI and Ministry of Finance

The role of RBI:
All foreign exchange transactions in India are governed and overseen by the RBI. Additionally, the RBI gives authorized banks instructions on how to handle foreign exchange transactions. The RBI's involvement in the automatic route is limited; all that is needed is notification within predetermined timeframes. Based on the suggestions of the pertinent ministries, the RBI examines and approves applications through the approval procedure.

Finance Ministry: In order to control and facilitate foreign investments, the RBI collaborates with the Ministry of Finance through its many divisions. In order to protect the nation's economic interests, it manages sectoral FDI caps and policy decisions.

Mandatory Compliances

Return on Foreign Assets and Liabilities per Year

The Foreign Liabilities and Assets (FLA) Return must be filed by every Indian resident business that has made a foreign direct investment (FDI) in the year prior, including the current year. The company is not required to submit the FLA if no such investment is made. This type of return needs to be filed annually.

Report on Annual Performance

A resident who has made an overseas direct investment (ODI) is required to submit this report. On or before December 31st of each year, information about joint ventures or wholly owned subsidiaries outside of India must be sent in Form ODI Part II to the AD (Authorized Dealer) bank.

Commercial Borrowings from Outside (ECB)

Every month, all ECB transactions must be reported to the RBI by an AD Category I bank using the "ECB 2 Return" form.

One Master Form (effective June 30, 2018)

The following forms need to be completed and turned in under the Single Master Form.
-FC  The Foreign Exchange-Gross Provisional Return, or GPR.
-FC -TRS (Transfer of Shares in Foreign Currency)
- Limited Liability Partnership (LLP-I)
- Convertible Notes (CN)
-ESOP (Plan for Employee Stock Options)
-Downstream Investment, or DI
-Depository Receipts (DRR)
-Investment vehicle InVi (which has given its units to an individual who does not reside in India)
The RBI has established a process for filing a single master form and worked to unify the current reporting standards.

Advance Remittance Form

Within 30 days of the share issuance date, an Indian company that receives foreign investment for the issuance of shares or other eligible securities under the FDI scheme must report all relevant information regarding the amount of consideration to the relevant Reserve Bank of India Regional Office via its AD category I bank.

Form FC-GPR

When an Indian company obtains foreign investment and issues shares in exchange for that investment, it must submit the allocation to the RBI. Within 30 days of the allocation, the company must submit the Form FC-GPR (Foreign Currency – Gross Provisional Return) to the RBI with the details of the allocation.

Form FC- TRS

This form must be filed by the shareholder resident outside India or resident Indian when they transfer the shares of the Indian company from a resident to non-resident Indian or vice versa. The form FC- TRS (Foreign Currency Transfer) is submitted along with the Form FC- GPR to the authorised dealer bank, who in turn submits to the RBI.

Form ODI

A resident Indian individual who makes an overseas investment is required to submit Form ODI. Share certificates or any other documentary evidence received for investment in a foreign Joint Venture or Wholly owned subsidiary must be submitted to the designated AD within 30 days.

FEMA Guidelines

In contrast to FERA (Foreign Exchange Regulation Act), where all offenses were regarded as criminal offenses, FEMA treats all forex-related offenses as civil offenses. The following are the additional features:

i) Only Indian citizens living in India are covered under FEMA. Indian nationals living abroad are exempt from it. The person or entity must have resided in India for at least 182 days during the previous financial year in order to be eligible.
ii) FEMA gave the Central Government permission to oversee and apply limitations on three aspects of foreign exchange: payments and receipts made to individuals outside of India.
iii) FEMA also identifies the sectors, such as foreign exchange trading, that need for certain authorizations from the government or the Reserve Bank of India (RBI).
iv) The capital account and current account are the two categories into which FEMA has divided foreign exchange transactions.
Capital Account and Current Account: The capital account's goal is to balance the assets and liabilities of foreigners living in India with those of Indian citizens. Therefore, any transaction that alters an Indian resident's overseas assets and liabilities in India or that affects an Indian resident's overseas assets and liabilities will be categorized under the capital account. The current account is the category for all other transactions.

i) The maximum penalty for non-compliance is Rs 2 lakh, which is three times the amount involved in the violation. For every day after the first day that the violation occurs, the penalty might be up to Rs 5,000. As a result, all businesses and Indian citizens who conduct business abroad are required to make sure that the FEMA regulations are followed.

  • FAQ
1. What is FEMA?

The goal of the 1999 Foreign Exchange Management Act (FEMA) is to control and oversee foreign exchange transactions in India. It establishes the framework for cross-border foreign exchange transfers and regulates foreign exchange markets.

In order to facilitate trade, payments, and the efficient operation of foreign currency markets, FEMA was established to manage foreign exchange in India. In addition, the act seeks to promote financial stability, economic expansion, and external commerce by liberalizing the foreign exchange regime.

i) IThe goal of foreign exchange regulation is to make international payments and trade easier.
ii)Liberalization: Promoting less restrictive foreign exchange transactions.
iii) The balanced growth of India's foreign exchange markets.

i) All Indian people, businesses, and residents are subject to FEMA, as are foreigners doing foreign exchange operations.
ii)It is applicable to people, companies, and organizations that engage in cross-border financial transactions, such as remittances, foreign loans, and foreign direct investment.

i) Regulation of foreign exchange transactions: Specifies who is authorized to undertake them and how they should be carried out.
ii) Current Account transactions: Transactions pertaining to trade, services, remittances, etc. that are typically free but might need to be reported are known as current account transactions.
iii) Capital Account transactions: Transactions involving capital accounts are those that change a person's assets or liabilities, whether they are in India or elsewhere. These transactions are subject to stricter regulations and need for consent or adherence to set restrictions.
iv)RBI and Government Powers: Under FEMA, the Reserve Bank of India (RBI) and the Indian government have the power to enforce rules, provide approvals, and levy fines for infractions.

The RBI is essential to the FEMA's implementation because it issues rules, guidelines, and approvals for foreign exchange transactions. In addition, the RBI oversees foreign exchange markets, provides guidance for international investment and commerce, and keeps an eye on Act compliance.

i) Current Account Transaction: Trade in products and services, import and export payments, remittances, and other routine foreign exchange transactions are all considered current account transactions. Although they must adhere to reporting standards, these are typically free.
ii) Capital Account Transaction: Investments, borrowings, lending, and other operations involving the movement of assets between India and other countries are all considered capital account transactions. These are subject to more stringent regulations and frequently need RBI prior clearance.

i) Reporting: The RBI must be notified of all foreign exchange transactions using certain forms, such as Form A2 for remittances, Form 15CA/15CB for overseas remittances, and other forms that are required for foreign investments.
ii) Tax Compliance: Foreign exchange transactions must adhere to tax rules, including income tax, GST, and other regulatory bodies.
iii) Permissible Transactions: People and companies should make sure that the foreign exchange transactions serve purposes that are allowed by FEMA, such as trade, investment, remittances for medical or educational costs, etc.

i) Permitted Transactions: These are transactions that are necessary for the running of a business, such as international investments, purchases of products and services, transfers for medical or educational expenses, and external commercial borrowings (ECBs) .
ii) For transactions to be in keeping with the interests of the national economy, they must fulfil certain requirements set forth by the government or RBI.

Penalty for Violation: If the FEMA provisions are broken, there might be a fine equal to three times the amount that was violated. If the violation involves no money, the punishment could be ₹2,00,000 or the same amount as the offense. Every day of non-compliance in the event of persistent offenses carries an extra penalty.

i) People or organizations must make sure that their foreign exchange application complies with the rules established by the RBI.
ii) They must make sure the foreign exchange is utilized for approved reasons and submit the necessary documents (Form A2 for individuals, Form 15CA for businesses, etc.).
iii) People or organizations must make sure that their foreign exchange application complies with the rules established by the RBI.
iv) They must make sure the foreign exchange is utilized for approved reasons and submit the necessary documents (Form A2 for individuals, Form 15CA for businesses, etc.).

i) Foreign Investment Reporting: Businesses are required to record any foreign investment, whether it takes the form of foreign loans or foreign direct investment, and to make sure that it complies with sectoral restrictions and regulations.
ii) Overseas Remittances: All overseas remittances, including dividends and foreign payments, must be recorded to the RBI and adhere to the rules established by the government.
iii) Lending and External Borrowings: Indian businesses must apply for RBI approval before making any external commercial borrowings (ECBs) and make sure that the limitations are followed.

i) Foreign Investment Reporting: Businesses are required to record any foreign investment, whether it takes the form of foreign loans or foreign direct investment, and to make sure that it complies with sectoral restrictions and regulations.
ii) Overseas Remittances: All overseas remittances, including dividends and foreign payments, must be recorded to the RBI and adhere to the rules established by the government.
iii) Lending and External Borrowings: Indian businesses must apply for RBI approval before making any external commercial borrowings (ECBs) and make sure that the limitations are followed.

When conducting international business, Indian companies are required to abide by FEMA, which includes reporting requirements for overseas loans, investments, and payments. Businesses may lawfully trade internationally, stay out of trouble, and take advantage of foreign investments and other trade possibilities when they comply.