FEMA Compliance & Advisory

The Foreign Exchange Management Act, 1999 (FEMA) is the law that governs cross-border transactions involving India, covering foreign investment, external borrowing, trade payments, and the holding of foreign assets. The Reserve Bank of India administers FEMA and issues the rules and Master Directions under it, while the Enforcement Directorate handles enforcement and penalties. Transactions are grouped into current account dealings, such as trade and travel, and capital account dealings, such as investments and asset acquisitions.

FEMA applies to anyone whose dealings cross India's borders. This includes Indian companies that receive foreign direct investment, Indian entities and residents that invest abroad, importers and exporters handling foreign currency, and Non-Resident Indians who hold accounts, property, or investments in India. Compliance is transaction-driven, which means the obligation arises from the nature of the cross-border activity rather than the size of the business.

When an Indian company issues equity shares or other capital instruments to a person resident outside India, it reports the allotment in Form FC-GPR on the RBI's FIRMS portal within 30 days of the date of allotment. The shares must themselves be allotted within 60 days of receiving the funds. Before filing, the company registers its Entity Master and completes the Single Master Form on the same portal.

It depends on the sector. Most sectors fall under the Automatic Route, where no prior approval is needed and the investment is reported after it is made. Certain sectors, or investment beyond prescribed sectoral caps, fall under the Government (Approval) Route and require clearance before the investment proceeds. We check the applicable route, sectoral cap, and pricing norms for a specific transaction before it is executed.

Form FC-TRS reports the transfer of capital instruments of an Indian company between a person resident in India and a person resident outside India, such as when an NRI or foreign investor buys shares from, or sells shares to, a resident. It is filed on the FIRMS portal, generally within 60 days of the transfer or of the related receipt or remittance of funds. The person resident in India, whether buyer or seller, is usually responsible for the filing.

Investment abroad is governed by the Foreign Exchange Management (Overseas Investment) Rules and Regulations, 2022, which replaced the earlier framework from 22 August 2022. An Indian entity or resident making an overseas investment files Form FC, the financial commitment form, through its designated Authorised Dealer bank, both for the initial investment and for later events such as additional commitments, disinvestment, or restructuring. Form FC replaced the earlier Form ODI.

The Annual Performance Report records the yearly financial position of each overseas joint venture or wholly owned subsidiary in which an Indian party holds an overseas direct investment. It is prepared from the foreign entity's audited financial statements and filed through the Authorised Dealer bank by 31 December each year, regardless of the foreign entity's local accounting year. A separate report is required for each foreign entity, even one that is dormant, for as long as the investment continues.

An External Commercial Borrowing (ECB) is a loan raised by an eligible Indian entity from a recognised foreign lender. The Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, effective 16 February 2026, widened eligibility to any resident entity other than an individual, including LLPs, removed the all-in-cost ceiling so that pricing is market-determined, and raised the borrowing limit to the higher of USD 1 billion or 300% of net worth. Borrowings raised before the amendment continue under the earlier framework.

Before drawing down an ECB, the borrower files Form ECB through its Authorised Dealer bank to obtain a Loan Registration Number from the RBI, and any later change to loan terms is reported through the same form. Under the 2026 framework, the earlier monthly Form ECB-2 return was replaced by event-based, cashflow reporting. A return is now filed when a drawdown, repayment, interest payment, or other change to the outstanding balance occurs, rather than every calendar month.

An NRE (Non-Resident External) account holds income earned abroad and is fully repatriable, both principal and interest. An NRO (Non-Resident Ordinary) account holds income earned in India, such as rent, dividends, or pension, and carries repatriation limits. An FCNR(B) account is a foreign-currency term deposit that protects the principal from exchange-rate movement and is also fully repatriable. The right combination depends on the source of the funds and how you intend to use them.

Funds in NRE and FCNR(B) accounts are freely repatriable without a ceiling. From an NRO account, an NRI may repatriate up to USD 1 million per financial year, covering the sale proceeds of assets and other capital balances, after applicable taxes are paid. Current income such as rent, interest, dividends, and pension can be repatriated without counting towards that USD 1 million limit.

Before an Authorised Dealer bank processes an outward remittance, the remitter furnishes Form 15CA [ITR 2026: Form 145] under Rule 37BB [ITR 2026: r. 220]. Where the remittance is chargeable to tax, Form 15CB [ITR 2026: Form 146] is generally required if aggregate remittances exceed Rs 5 lakh in the financial year and no Assessing Officer certificate or order covers the payment. Tax on a payment to a non-resident is deducted under Section 195 [ITA 2025: s. 393(2)]. The applicable form and provision follow the payment/reporting period and repeal-and-savings rules.

The two definitions differ and are tested separately. Under FEMA, residential status turns mainly on whether a person resided in India for more than 182 days in the preceding financial year, read together with the purpose and intention of the stay, and it decides which accounts a person may hold and how they may invest. Under Section 6 [ITA 2025: s. 6], the general income-tax tests include 182 days in the year, or 60 days in the year together with 365 days across the preceding four years, but modified 182-day or 120-day tests can apply to specified Indian citizens and persons of Indian origin, and a separate deemed-resident rule can apply. A person can therefore be resident under one law and non-resident under the other.

The Foreign Liabilities and Assets (FLA) return is an annual filing that reports an entity's foreign investments and obligations as they stand on 31 March. It is filed on the RBI's FLAIR portal by 15 July each year. Every Indian company, LLP, or similar entity that has received foreign direct investment or made overseas investment must file it, even in a year with no fresh transactions, for as long as the foreign assets or liabilities remain outstanding.

Under Section 13 of FEMA, a contravention can attract a penalty of up to three times the amount involved where that amount is quantifiable, or up to Rs 2 lakh where it is not. For a continuing contravention, a further penalty of up to Rs 5,000 for each day the breach continues may apply. Beyond the monetary cost, unresolved contraventions can hold up future filings and approvals, which is why early correction matters.

Compounding is a voluntary route under Section 15 of FEMA to settle a contravention by admitting it and paying a specified amount, without prolonged enforcement. It is governed by the Foreign Exchange (Compounding Proceedings) Rules, 2024 and the RBI direction of 1 October 2024, which replaced the 2000 rules. An application carries a fee of Rs 10,000 plus applicable GST and can be filed through the RBI's PRAVAAH portal. The RBI is to dispose of the application within 180 days, and the compounding amount is paid within 15 days of the order.

The Late Submission Fee (LSF) is a way to regularise reporting that was filed late, such as FC-GPR, FC-TRS, Form FC, the Annual Performance Report, the ECB return, or the FLA return, without going through full compounding. The amount depends on the type of filing. For periodic returns such as the FLA return and the Annual Performance Report, a flat fee of Rs 7,500 per return applies. For transaction-based filings such as FC-GPR, FC-TRS, and ECB returns, the fee is Rs 7,500 plus 0.025% of the amount involved for each year of delay, subject to an overall cap of 100% of the amount involved. The LSF route is generally available within three years of the due date, and paying it closes the reporting default, while compounding remains the route for matters the LSF does not cover.