FDI compliance is of utmost importance for all corporate entities, especially startups. In this article, we will be exploring the compliance checklist for startups wishing to reap the benefits of FEMA.
Foreign Direct Investment (FDI) in India: A Comprehensive Overview
Foreign Direct Investment (FDI) serves as a crucial financial lifeline for Indian businesses, attracting investments from foreign individuals and companies into startups and established enterprises. Governed by the Reserve Bank of India’s Foreign Exchange Management Act (FEMA) of 2000, the FDI policy plays a pivotal role in regulating and facilitating overseas investments. Lets have a look at FEMA Compliance Checklist for Startups.
FEMA: Foreign Exchange Management Act
The Foreign Exchange Management Act (FEMA) is a regulatory framework in India that was enacted to facilitate external trade and payments and promote orderly development and maintenance of the foreign exchange market. It came into effect on June 1, 2000, replacing the Foreign Exchange Regulation Act (FERA).
Key features and aspects of FEMA Compliance include:
- Liberalization of Transactions
FEMA liberalized various transactions involving foreign exchange and external trade, simplifying procedures and promoting ease of doing business.
- Current and Capital Account Transactions
FEMA Compliance categorizes foreign exchange transactions into current account transactions and capital account transactions. Current account transactions are generally free from restrictions, while certain capital account transactions may require regulatory approvals.
- Authorized Persons
The act empowers the Reserve Bank of India (RBI) to authorize persons (individuals, banks, or financial institutions) to deal in foreign exchange.
- Realization and Repatriation
FEMA mandates the realization and repatriation of foreign exchange to or from India within the stipulated time frames.
- FEMA Violations and Penalties
Violations of FEMA provisions can result in penalties, adjudication, and compounding. The act aims to ensure compliance and prevent unauthorized dealings in foreign exchange.
- Enforcement Directorate (ED)
The Enforcement Directorate is the enforcement agency responsible for investigating and prosecuting violations under FEMA.
- Forms of FDI Investment
FDI is characterized by an overseas investment exceeding 10%, and the investment avenues are delineated through two main routes:
- Automatic Route
Non-resident investors don’t require prior approval from the Government of India or RBI.
- Government Route
Involves seeking approval from Government authorities or Ministries through the Foreign Investment Facilitation Portal (FIFB), regulated by the Department of Industrial Policy & Promotion (DIPP).
Evolution and Liberalization:
The concept of FDI underwent significant evolution during the 1991 economic crisis. To counterbalance trade deficits caused by increased imports and decreased exports, the Indian Government implemented a liberalization policy. This policy shift aimed at attracting more FDIs to stimulate economic growth and development.
Sectors with 100% Automatic Route:
- Agriculture
- Animal Husbandry
- E-commerce Activities
- Healthcare
- Manufacturing
- Textiles & Garments
- Capital Goods
Sectors with Up to 100% FDI Under Government Route:
- Core Investment Company
- Food Products Retail Trading
- Printing & Publishing of Scientific Magazines/Journals/Periodicals
Sectors Wherein FDI Through Automatic and Government Routes is Restricted:
- Lottery Business (including private and online lottery)
- Nidhi Company
- Chit Funds
- Real Estate Business
- Construction Companies
- Casinos (Gambling and Betting)
- Atomic Energy
Checklist on Foreign Direct Investment under Automatic Route
- Individual Eligibility
Verify the eligibility of individuals intending to invest in FDI.
- Sectoral Compliance
Ensure that the total FDI aligns with sectoral caps and avoids prohibited sectors.
- Rights/Bonus Issue Impact
Confirm that rights/bonus issues haven’t caused FDI to exceed sectoral caps.
- Share Issuance Compliance
Check compliance with share issuance against pre-operative/pre-incorporation expenses.
- FEMA Guidelines Adherence
Follow FEMA guidelines accurately when calculating total foreign investment.
- Annual Returns Filing
File annual returns on foreign liabilities & assets before July 15th, even in the absence of fund inflow/outflow.
FEMA Restrictions
- Be aware that FEMA empowers the Government to impose restrictions on FDI aspects like payments received from India, payments made to non-residents, and foreign security arrangements.
- Adhering to this checklist will ensure that companies are well-prepared and compliant with regulations when venturing into Foreign Direct Investment under the Automatic Route.
Checklist for Foreign Direct Investment under Govt Approval route
- Share Transfer Approval
Verify if there’s any share transfer from a resident to a non-resident requiring government approval.
- Excess of Sectoral Cap:
Ensure prior approval from the Foreign Investment Promotion Board is obtained for FDI exceeding sectoral caps.
Checklist for the Establishment of Branch/Liaison/Project Office in India
- Business Activity Evaluation
Assess whether the company is engaging in activities considered to have a place of business in India as per the Companies Act, 2013.
- Compliance Verification
Confirm compliance with both the Companies Act, 2013, and FEMA Compliance for activities conducted in India.
For Direct Investment Outside India – Automatic Route
- Government Approval for Share Swap
Verify if government approval was obtained in cases of investment through the swap of shares.
- Venture Capital Fund Investment Limit
For investments by Domestic Venture Capital Funds/Alternative Investment Funds registered with SEBI in offshore Venture Capital Undertakings, ensure compliance with the overall limit of USD 500 million.
- Obligations of the Indian Party
Confirm that the obligations of the Indian party are fulfilled, including reporting remittances and filing annual performance reports.
Conclusion on Fema Compliance
Following these checklists will help companies navigate the complexities of FDI under the Automatic and Government Approval Route in India in accordance with regulatory requirements. To know more about FEMA Compliance and FDI, get in touch with Vakilsearch experts, today!
