Why Is Compliance Under FEMA Needed?

Compliance Under FEMA

The Foreign Exchange Management Act of 1999, governed by the Reserve Bank of India, governs Foreign Direct Investment policy in India. An investment from abroad that is 10% or more is regarded as a foreign direct investment (FDI), according to the Organization for Economic Co-Operation and Development (OCED). The primary goal of the foreign exchange management act is to encourage orderly development, facilitate balanced payments, and maintain the foreign exchange market in India.
The main objective of the foreign exchange management system is to enhance all foreign exchange-related laws in order to encourage international payments and trade and to develop the foreign exchange market in India. It has acted as a significant source in the expansion and development of numerous Indian industries.

Objectives of Foreign Exchange Management Act

Facilitating international trade and payments is the main objective and the reason for the implementation of FEMA. In addition, it was developed to aid in the orderly development and maintenance of the Indian forex market.

The processes and procedures for all foreign exchange transactions in India are outlined by FEMA. The foreign exchange transactions are classified into two accounts.

  1. Capital Account Transactions.
  2. Current Account Transactions.

The balance of payment is a record of transactions involving assets, goods, and services between citizens of various nations as defined by the Foreign Exchange Management Act. The capital account and current account are the two main divisions. All financial transactions are included in the capital account, whereas trade in goods is included in the current account. Current account transactions are those that include money into and out of a country over the course of a year as a result of trading or providing goods, services, and income.

The Need for Compliance Under FEMA

The following factors make compliance with Foreign Exchange Management Act requirements necessary:

  • Foreign Exchange Management Act[1] regulation ensures that businesses are in compliance with relevant foreign exchange laws.
  • It will keep an eye on Indian-based companies’ international business transactions.
  • A company can operate more efficiently outside of India when it complies with the regulation of foreign exchange procedures.
  • Foreign companies may expand their offices in India if foreign exchange regulations are followed.

The Requirement of compliance Under FEMA

Compliances have increased together with the growth of India’s foreign exchange reserves. The rules pertaining to foreign regulations in India should be followed by Indian and international businesses and people who plan to undertake services outside India. The main objectives of these regulations are to make sure that companies adhere to applicable foreign exchange legislation. Such individuals and entities should comply with the act to reduce penalties for non-compliance and facilitate better foreign exchange transactions in India and outside India. Even foreign companies can set up offices in India by complying with foreign exchange regulations. 

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Mandatory Compliances Under FEMA

All transactions must comply with applicable foreign exchange law in order to conduct business dealings in India. All services must be compliant, from opening a bank account for an NRI to adjudicating disputes under FEMA. These are some of the significant compliance that should be followed.

Annual Return on Foreign Liabilities & Assets – All India-based businesses that receive FDI or made ODI in any prior years, including the current year, are mandated to submit an annual return for foreign liabilities and assets or DLA return. The Indian company is not required to submit the report of the FLA return if it has no outstanding FDI or ODI investments at the end of the reporting year. Similar to the previous one, if an Indian company has outstanding FDI and ODI but has not received any new FDI or ODI in the recent year, the company is still obligated to submit the FLA return by the deadline of 15 July each year. 

Annual Performance Report – A joint venture or wholly owned subsidiary (WOS) outside of India that is an Indian Party or Resident Individual must submit an Annual performance report (APR) in Form II to the AD bank on or before 31 December of each year.

Advance Reporting Form – Within 30 days of the date the shares were issued, an Indian company receiving investment from outside India for the issuance of shares or other eligible securities under the FDI scheme is required to report the specifies of the value of consideration to the Regional Office of the Reserve Bank concerned through its AD category I bank.

External Commercial Borrowings – All ECB transactions must be reported by borrowers to the RBI every month through an AD category I bank in the form of an “ECB 2 Return”.

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Single Master Form – The Reserve Bank of India introduced the single master form on 7 June 2018 to integrate the existing reporting standards for foreign investment in India. On 1 September 2018, the RBI published a user manual outlining the process for filing the SMF.

These are the forms to be filled out as part of a single master form.

  • FC-GPR – A person living outside of India may receive capital instruments from an Indian company using the FC-GPR form. After funds have been allocated, FDI must be reported on this form within 30 days. 
  • To transfer capital instruments from a foreign resident to an Indian person, utilise the FC-TRS form.
  • According to the SMF, the FC-TRS must be submitted within 60 days of sending money or transferring capital instruments, whichever occurs first.
  • This form, LLP-I- Foreign Direct Investment, is used when an LLP is involved.
  • Convertible Notes (CN) – This is the format in which convertible notes are issued or transferred. Notes that are convertible must be notified within 60 days of the transfer.
  • Depository receipt transfers are made using this form, which is designated as DRR.
  • Employee Stock Option Plans (ESOPs) are the legal structure that grants employee stock options or sweat equity shares.
  • This form is used to report downstream or other types of foreign indirect investment in businesses.

Advance Reporting Form – Within 30 days of the date the shares were issued, an Indian company receiving investment from outside India for the issuance of shares or other eligible securities under the FDI scheme is required to report the specifies of the value of consideration to the Regional Office of the Reserve Bank concerned through its AD category I bank.

Form FC-GPR – According to the Foreign Exchange Management Act of 1999, the RBI published this form. When a company receives a foreign investment and allots shares to the investor in exchange for the investment, the company is required to notify the RBI of the allotment of shares within 30 days. The company must use the FC-GPR (Foreign Currency- Gross Provisional Return) form to do this.

Form FC-TRS – A shareholder who lives outside of India or a resident Indian may utilise this form to transfer their shares. The FC-TRS (Foreign Currency Transfers) form should be sent to the authorised dealer bank, and they will submit them to the RBI. 

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Form ODI– It must be submitted by both an Indian party and a resident individual making an overseas investment. When they get share certificates or any other documentation proof of investment in the foreign JV or WOS, they have to provide it to the designated AD within 30 days.

FEMA Compliance Guidelines and Features

Most importantly, FEMA considered all Forex-related offences to be civil violations, while FERA considered them to be criminal violations. There were other crucial rules, including – 

  • Foreign-based Indian citizens are exempt from FEMA. This condition was verified by counting the days a person spent living in India during the preceding Financial year (182 days or more to be a resident). For the purposes of determining residency, it was stated that even an office, a branch, or an agency might be considered a person.
  • It allowed the central government to place limitations on and supervise three things- foreign currency and security transactions and payments made to or received from anyone outside India.
  • It outlines the circumstances around the purchase or holding of foreign exchange for specific authorisation from the Reserve Bank of India or the government.
  • According to FEMA, foreign exchange transactions are categorised into two, namely, Capital Account and Current Account.

Penalty for Non-compliance

Penalties apply to individuals and businesses who violate the regulations, directives, and instructions set forth by FEMA. The penalty is provided according to the amount involved in the violation by tripling the amount. The penalty is set up to Rs. 2 lakhs if the amount is not quantifiable. Additional penalties may also be applied, with the highest fine amounting to Rs.5000 for each additional day of violation. It is advisable to follow the rules and regulations as mentioned.


To promote international trade and payments as well as to maintain the Indian foreign exchange market, FEMA came into force by replacing FERA. Its primary goal was to consolidate and amend the rules governing foreign exchange. It only enables authorised individuals to trade in foreign currency or securities. The Indian economy has benefited from FERA’s replacement of FEMA since it is more flexible and treats offences as civil offences instead of criminal offences. 

Also Read: FEMA Compliance Checklist for Startups

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