FEMA Compliance: Checklist, Eligibility, Filings, & Process

Foreign Exchange Management Act (FEMA) is a comprehensive law that governs all kinds of foreign exchange transfers flowing in and out of India. This includes foreign direct investment (FDI), Overseas Direct Investment (ODI), and external commercial borrowings (ECB). The transactions must be reported to the RBI in annual, monthly, or other kinds of regular filings, with details of the remitter, remittee, and remittance amount.

Regardless of the nature of the transaction, it is always the Indian Resident or Indian Party which is liable to meet the FEMA compliances. Further, the reports are filed to the RBI, which is the apex authority in India governing and monitoring FEMA compliances across India. Looking for professional help in meeting your FEMA compliances? Consult our experts now!

What Are FEMA Compliance?

FEMA compliance refers to the regular filings made for reporting foreign exchange transactions between Indian Residents / Indian Parties and non-resident entities. These reports are categorized on the basis of the type of transactions and have distinct timelines as well as processes of filing. However, non-compliance or non-filing results in severe penalties and legal consequences.

FEMA Compliance Checklist

The FEMA Compliance Checklist covers essential regulatory filings for Indian entities engaged in foreign exchange transactions. These filings ensure compliance with RBI regulations, facilitating transparent and legally sound dealings with foreign entities. Here’s the complete list for your reference.

• FLA Returns
• ODI PART II Form
• ECB Form
• ECB 2 Monthly Returns
• FC-GPR
• FC-TRS
• Form ODI

Mandatory Compliances Under FEMA

Mandatory compliances under FEMA (Foreign Exchange Management Act) are crucial for ensuring transparency and regulatory adherence in all foreign exchange transactions involving Indian entities. These regulations are designed to safeguard national economic interests, maintain financial stability, and facilitate smooth cross-border transactions.

Foreign Liabilities and Assets Annual Return (FLA)

Foreign Liabilities and Assets Annual Return (FLA) is filed by a Company, LLP, and Partnership Firm in two cases - firstly, if they receive foreign investment as FDI from NRIs or foreign nationals, and secondly, if they invest in foreign companies or firms as ODI (overseas direct investment). The return is filed by the 15th of July every year, containing details from the audited account books of the business. However, if the account books have not been audited, the same can be filed based on the unaudited account details and later revised within the prescribed time period (preferably by the end of September).

Annual Performance Report (APR)

Annual Performance Report is required to be prepared and filed annually by a Resident Indian or an Indian Party. It provides details of the overseas direct investment (ODI) made by such entities to wholly-owned subsidiaries and joint ventures of foreign companies. Overseas Direct Investment in this context refers to investment in the company’s equity capital, including:

• Subscription to the equity capital of an unlisted entity as mentioned in its MOA.
• 10% or more investment in paid-up equity capital of a listed entity.
• 10% or less Investment in Control in the paid-up equity capital of a listed entity.

Annual Performance Report is submitted to the Authorised Dealer (AD bank) every year by the 31st of December in ODI Part II form.

External Commercial Borrowing (ECB)

ECB or External Commercial Borrowings refer to commercial loans raised by incorporated resident entities from their recognized foreign counterparts. Raising ECBs is not possible without the borrower having an LRN or Loan Registration Number. Once the LRN is obtained, the entity will have to file a monthly return to report all ECB transactions to the RBI in ECB 2 return form. During the months in which there are no transactions, Nil returns will have to be submitted. Additionally, any change in ECB transactions will also have to be reported through ECB 2 return forms. The due date for the same is 7th from the end of the month.

Advance Remittance Form (ARF)

Foreign Investment in any form received by a registered Indian entity shall be reported to the RBI (regional office) in Advance Remittance Form or ARF. The due date to file such a form is within 30 days from the date of receipt of such investment. Additionally, the details in the form include remitter’s details, receiver details, purpose, date, and amount of remittance along with any other contract details. Another purpose of ARF form is to seek approval for refund of the concerned investment from the RBI, if such a need arises. Any delay in the refund of funds may lead to additional interest charges.

Foreign Currency-Gross Provisional Return (FC-GPR)

Form FC-GPR (Foreign Currency-Gross Provisional Return) is a mandatory report for Indian companies issuing capital instruments to a person resident outside India. The company must report the issuance of capital instruments in Form FC-GPR to the Regional Office of the Reserve Bank of India (RBI) under whose jurisdiction the company's registered office operates. This reporting must be completed within 30 days from the date of issue of the capital instruments.

Foreign Currency Transfer of Shares (FC-TRS)

FC-TRS is an online reporting system under the FEMA guidelines. It is used to report the issuance of shares and convertible debentures by an Indian Resident or Indian Corporate to a non-resident and vice versa. The reporting is done to the AD Category I bank within 60 days from when the transfer is effected or investment is received, whichever is earlier. Additionally, even if the transfer is done as a gift and not through sale, the FC-TRS form will still remain applicable.

Overseas Direct Investment Form (ODI)

Form ODI is filed by an Indian Resident individual or an Indian Party when they make an overseas direct investment to a wholly-owned subsidiary or a joint venture of a foreign company. The form contains details of the investor, the investee, and the remittance transferred between the involved parties. The route of ODI—automatic or approval—must be clearly mentioned. If the investment is parked through the automatic route, the form can be submitted, and approval can be sought from the AD Category-I bank. However, for the approval route, the form must be submitted to the RBI office via online mode. The due date for filing this form extends up to 30 days from the date on which the investment is made.

Eligibility Criteria For FEMA Compliance

FEMA Compliance applies to Indian and offshore individuals as well as non-individual entities. Its eligibility encompasses every institution involved in foreign exchange transactions. The ultimate objective of FEMA is to regulate foreign exchange coming inside and going outside India. The list of entities eligible to avail FEMA compliance services includes:

• Indian Resident Individuals
• NRIs
• Indian Companies & LLPs
• Foreign Companies
• Non-Resident Indian Companies
• Partnership and Proprietorship Concerns
• Foreign Institutional Investors
• High Net Worth Individuals

Documents Required for FEMA Compliance

Complying with FEMA regulations requires an essential set of documents that validate financial transactions and ensure regulatory adherence. These include incorporation documents, audited financial statements, identity and address proofs of stakeholders, and affidavits declaring the timely meeting of compliance. Here’s the complete list:

• Certificate of Incorporation
• Memorandum of Association (MOA)
• Article of Association (AOA)
• Board Resolution
• Last Year’s Audited Financial Statements
• Details, Identity and Address Proofs of Investor and Investee
• Pre and Post-Investment Shareholding Pattern of the Investee
• An Affidavit Declaration by the Investee
• A Copy of Joint Venture or Shareholder’s Agreement, if Applicable
• Copy of Downstream Intimation
• Copy of Related FIPB/SIA/RBI Approvals
• Foreign Inward Remittance Certificate (FIRC)
• Copy of High Court Order in Case of Any Arrangement Scheme
• Valuation Certificate That’s Been Accepted

Penalties Under FEMA Compliance: Introduction of Late Submission Fees (LSF)

Late Submission Fees (LSF) were introduced by the Reserve Bank of India (RBI) as an alternative to compounding for reporting delays in foreign exchange transactions under the Foreign Exchange Management Act (FEMA). The calculation of LSF depends on the type of report and the delay period. If the LSF is not paid within 30 days of notification, the levy becomes invalid, and subsequent payments won't be considered. Entities can apply for LSF payment up to three years from the due date of reporting.

FEMA Compliance Services

At Bizfoc, we specialize in comprehensive FEMA Compliance services designed to guide businesses and individuals through the landscape of foreign exchange regulations in India. Our dedicated team offers a range of essential services, including Initial Consultation, Document Preparation, Filing Assistance & Compliance Reporting.

Conclusion

Adhering to FEMA compliance is not just a regulatory requirement but a strategic imperative for businesses navigating international transactions. Our comprehensive services are designed to ensure seamless adherence to RBI guidelines, from initial consultation to final submission. By partnering with us, businesses can navigate the complexities of FEMA with confidence, ensuring operational efficiency and regulatory integrity.

Frequently Asked Questions