FEMA

Global Business Establishment under FEMA

Entrepreneurs and companies establish their business globally to get many benefits of the foreign market. Some of the advantages which they receive are access to international institutions, dealing in foreign currencies and new customers. However, there are particular challenges also faced while establishing a business in a foreign country. Entrepreneurs/Individuals and Companies have to be compliant with the relevant Foreign Exchange Laws of India before setting an international footprint.

Purposes of Global Business Establishment under FEMA

Global Business establishment under FEMA has the following purposes:

• Access to new markets
• Access to finance available from various institutions
• Access to new customers
• Increased Global Market Penetration
• Increasing the GDP and Economy of India

Challenges under Global Business Establishment under FEMA

• Cultural Challenges
• Increase in Competition
• Marketing Strategies
• Increased compliance of international laws
• The above challenges are faced at an international level. However, for Global Business Establishment compliance with FEMA is one of the main criteria. Global Business establishment under FEMA is essential for both entrepreneurs and businesses.

Routes for Investment 

Under Global Business Establishment under FEMA, the RBI provides two routes for Foreign Direct Investment routes are:

• Automatic Route
• Approval/ Government Route

There is no process for investing in a foreign country when it comes to the purview of the automatic route. No requirement of any approval under the Automatic Route from the Reserve Bank of India. Under the following routes, there is no requirement for any form of approval:

• Liberalised Scheme (LRS) for Individuals up to $250000 per annum.
• General Permission for funds that are held in foreign currency accounts.
• Funds held in the RFC account.
• Bonus shares on existing holding of foreign currency shares.
• Automatic Approval Route- not exceeding 400% of net worth.

How Investments are made under the Automatic Route under Global Business Establishment under FEMA

• An Indian party can make investments in a Joint Venture/ Wholly Owned Subsidiary under the automatic route.
• For this, the Indian party includes the following:
  1. Company Incorporated in India 2. Partnership Firms 3. Limited Liability Partnership Firms (LLP)
• Individuals are not allowed to invest through the automatic route, and this route is only applicable for companies/ LLP and partnership.

Who Regulates Global business Establishment under FEMA

The main regulatory authority is the Reserve Bank of India (RBI). The Authorised Dealers (AD) which are banks will deal with the individual/companies to liaise with the RBI for requirements under the relevant schemes. The other concerned law is FEMA.

Eligibility criteria for Global Business Establishment

Under the Liberalised Scheme the eligibility criteria for Global Business Establishment under FEMA:

For Individuals and Entrepreneurs

• PAN Number must be given to the authorised dealer to the remittance.
• Bank branch receives the remittance.
• TDS requirements for income tax purposes.
• Payments have to be done in one transaction only.
• Fill the form which applies to remittances under Form A2.

Under the Automatic route for Companies:

• The Indian Party must be as per the status holder according to the foreign trade policy.
• KYC compliant.
• Exporter has proven track record, i.e. overdue exports do not exceed 10 per cent of the average export realization of the previous three financial years.
• The exporter has not come under adverse notice of any Government agency like Directorate of Enforcement, CBI and does not appear in the exporters’ caution list of the Reserve Bank or the list of defaulters to the banking system in India. 
• The amount of investment outside India does not exceed 10 per cent of the average export realisation of the preceding three financial years or 200 per cent of the net owned funds of the firm, whichever is lower.

Procedure for Global Business Establishment under FEMA 

For Entrepreneurs and Individuals (Liberalised  Scheme LRS)

The Liberalised Scheme has improved and allowed individuals and companies to invest in many sectors. Up to $250000 is permitted under this scheme. This scheme is available for both capital account as well as current account transactions.  It has to be noted that an Indian resident cannot provide a gift under this Liberalised Scheme.

Foreign Currency Accounts can be opened and maintained by an individual who is present in India under this scheme.

Capital Account Restrictions are not present for the countries categorised as high risk under the Financial Action Task Force. However, when it comes to revenue account three are no restrictions.

This scheme is not available for corporate, partnerships and Hindu Undivided Family (HUF).

Automatic Route (For Companies)

A company can invest up to 400% of its net worth as per the last audited balance sheet. This limit of net worth will not be applicable if the investment is made out of the Exchange Earner’s Foreign Currency Account of the Indian party or out of the funds that are raised through ADR/GDR (American Depository Receipts/ Global Depository Receipts)

The Indian Party must not be on the exporters’ caution list or any other applicable list. The value of investment shall not be more than 400%. The following contributions can be made in a joint venture or the wholly-owned subsidiary:

• Contribution to the equity shares in the Joint Venture or the Wholly owned subsidiary.
• Corporate Guarantee issued to the Joint Venture or the wholly-owned subsidiary abroad.
• Loan or Guarantee is considered if there is equity participation by the Indian company. If there is no form of equity participation, then prior permission has to be taken from the Reserve Bank of India via the approval route.
• If there is a partial acquisition / full acquisition of the company and the valuation is more than 5 Million, then the valuation of shares of the company must be done by an Authorised Dealer who is registered with the SEBI.
• Existing company acquisition and the investment is less than 5 Million, then the valuation of shares must be done by a Chartered Accountant /Certified Public Accountant.

Documents required for Global Business Establishment under FEMA

For Individuals and Entrepreneurs

• PAN Card
• KYC documentation
• Application Form for Investing
• Remittance form Form -A2
• TDS documents for the purposes of Income-tax Purposes.

For Companies under the Automatic Route

• Application for Investing
• KYC compliance documentation
• PAN Card

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