Foreign Direct Investment: FEMA Compliance Checklist for startups

Last Updated at: November 08, 2019
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Foreign Direct Investment: FEMA Compliance Checklist for startups

Foreign Direct Investment (FDI) is one of the important sources of funds for an Indian company. Under FDI, money from individuals or foreign companies is invested in Indian startups and established companies.  An overseas investment that is more than 10% is considered as FDI. The FDI Policy is regulated under the Foreign Exchange Management Act (FEMA) 2000 under the Reserve Bank of India (RBI).  

There are two ways through which foreign investment could be made:

Automatic route: Under Automatic route, the non-resident investor does not require any prior approval from Govt. of India or RBI. 

Government route: Under Govt route, approval from the Govt authorities or Ministries is required through the Foreign Investment Facilitation Portal (FIFB). FIFB is regulated by the Dept of Industrial Policy & Promotion (DIPP). 

Sectors where FDI is allowed under 100% Automatic route:

  • Agriculture
  • Animal Husbandry
  • E-commerce activities
  • Healthcare 
  • Manufacturing
  • Textiles & Garments
  • Capital Goods

Sectors where up to 100% FDI is allowed under Govt route

  • Banking & Public Sector – 20%
  • Core investment company – 100%
  • Food Products Retail Trading – 100%
  • Multi Brand Retail Trading – 15%

Sectors where FDI is not allowed through both Automatic and Government routes:

  • Lottery business, including private lottery, online lottery, etc.
  • Nidhi company
  • Chit funds
  • Real estate business
  • Construction companies
  • Casinos (gambling and betting)
  • Atomic energy

Get the complete list of sectors from the DIPP website.

Get a FREE legal advice

The following is a checklist that startups and established companies need to ensure before going in for FDI.   

Checklist on Foreign Direct Investment under Automatic route

  1. Check the eligibility of the individuals investing in FDI.
  2. Check whether the total FDI is within the sectoral cap and not under prohibited sectors
  3. Ensure that any rights/bonus issue has not resulted in FDI exceeding sectoral cap  
  4. Check whether the company has complied with issue of shares if any against pre-operative/pre-incorporation expenses
  5. Check whether the guidelines are followed while calculating total foreign investment.
  6. Check if annual returns on foreign liabilities & assets are filed every year on or before 15th July. The return is to be filed even if there is no fresh inflow or outflow of funds in the particular year. 

Checklist for Foreign Direct Investment under Govt Approval route

  1. Check whether there is any transfer of shares from resident to a non-resident which requires Government approval
  2. Check whether prior approval of the Foreign Investment Promotion Board is obtained for FDI which are in excess of sectoral cap

  Checklist for the establishment of a branch/liaison/project office in India

  1. Check if the company is carrying any activity which would be deemed to be having a place of business in India as per provisions of the Companies Act, 2013 and if compliance under both CA, 2013 & FEMA has been done.

For Direct Investment outside India– Automatic route:

  1. In cases of investment by way of swap of shares ensure that the approval of the Government was taken. It is a prerequisite for investment by swap of shares.
  2. Check in cases where Domestic Venture Capital Funds/Alternative Investment Funds, registered with SEBI, has invested in equity and equity-linked instruments of off-shore Venture Capital Undertakings, the investment is within the overall limit of USD 500 million. 
  3. Check whether the obligation of Indian party is fulfilled such as reporting of remittances, Annual Performance Report.

Note: The above checklist does not cover the entire list of all the mandatory, important compliances laid down by the FMEA. To know more about it, please get in touch with Vakilsearch experts.

Foreign Direct Investment: FEMA Compliance Checklist for startups

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Foreign Direct Investment (FDI) is one of the important sources of funds for an Indian company. Under FDI, money from individuals or foreign companies is invested in Indian startups and established companies.  An overseas investment that is more than 10% is considered as FDI. The FDI Policy is regulated under the Foreign Exchange Management Act (FEMA) 2000 under the Reserve Bank of India (RBI).  

There are two ways through which foreign investment could be made:

Automatic route: Under Automatic route, the non-resident investor does not require any prior approval from Govt. of India or RBI. 

Government route: Under Govt route, approval from the Govt authorities or Ministries is required through the Foreign Investment Facilitation Portal (FIFB). FIFB is regulated by the Dept of Industrial Policy & Promotion (DIPP). 

Sectors where FDI is allowed under 100% Automatic route:

  • Agriculture
  • Animal Husbandry
  • E-commerce activities
  • Healthcare 
  • Manufacturing
  • Textiles & Garments
  • Capital Goods

Sectors where up to 100% FDI is allowed under Govt route

  • Banking & Public Sector – 20%
  • Core investment company – 100%
  • Food Products Retail Trading – 100%
  • Multi Brand Retail Trading – 15%

Sectors where FDI is not allowed through both Automatic and Government routes:

  • Lottery business, including private lottery, online lottery, etc.
  • Nidhi company
  • Chit funds
  • Real estate business
  • Construction companies
  • Casinos (gambling and betting)
  • Atomic energy

Get the complete list of sectors from the DIPP website.

Get a FREE legal advice

The following is a checklist that startups and established companies need to ensure before going in for FDI.   

Checklist on Foreign Direct Investment under Automatic route

  1. Check the eligibility of the individuals investing in FDI.
  2. Check whether the total FDI is within the sectoral cap and not under prohibited sectors
  3. Ensure that any rights/bonus issue has not resulted in FDI exceeding sectoral cap  
  4. Check whether the company has complied with issue of shares if any against pre-operative/pre-incorporation expenses
  5. Check whether the guidelines are followed while calculating total foreign investment.
  6. Check if annual returns on foreign liabilities & assets are filed every year on or before 15th July. The return is to be filed even if there is no fresh inflow or outflow of funds in the particular year. 

Checklist for Foreign Direct Investment under Govt Approval route

  1. Check whether there is any transfer of shares from resident to a non-resident which requires Government approval
  2. Check whether prior approval of the Foreign Investment Promotion Board is obtained for FDI which are in excess of sectoral cap

  Checklist for the establishment of a branch/liaison/project office in India

  1. Check if the company is carrying any activity which would be deemed to be having a place of business in India as per provisions of the Companies Act, 2013 and if compliance under both CA, 2013 & FEMA has been done.

For Direct Investment outside India– Automatic route:

  1. In cases of investment by way of swap of shares ensure that the approval of the Government was taken. It is a prerequisite for investment by swap of shares.
  2. Check in cases where Domestic Venture Capital Funds/Alternative Investment Funds, registered with SEBI, has invested in equity and equity-linked instruments of off-shore Venture Capital Undertakings, the investment is within the overall limit of USD 500 million. 
  3. Check whether the obligation of Indian party is fulfilled such as reporting of remittances, Annual Performance Report.

Note: The above checklist does not cover the entire list of all the mandatory, important compliances laid down by the FMEA. To know more about it, please get in touch with Vakilsearch experts.

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.