FDI is governed by the Foreign Exchange Management Act of 199. FDI compliance is of utmost importance for all corporate entities, especially startups. In this article, we will be focusing on the compliance checklist for startups wishing to reap the benefits of FEMA.

Foreign Direct Investment (FDI) is an important source of funding for an Indian firm. Foreign individuals or foreign companies invest money in Indian startups and established businesses through FDI.

FDI is defined as an overseas investment of more than 10%. The FDI Policy is governed by the Reserve Bank of India’s Foreign Exchange Management Act (FEMA) of 2000. (RBI).

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

Automatic route: Under the automatic route, the non-resident investor does not require 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).

During the 1991 economic crisis, the concept of FDI underwent significant evolution. As a result, imports increased while exports decreased, causing investors to withdraw their investments/funds, resulting in a trade deficit. To address the economic crisis, the Government implemented a liberalization policy, which paved the way for increased FDIs in India.

Some sectors where FDI is allowed under the 100% Automatic route:

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

Some sectors where up to 100% FDI is allowed under Govt route

Core investment company
Food products retail trading
Printing & publishing of scientific magazines/journals/periodicals.

Sectors where FDI is not allowed through 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

Foreign Direct Investment and Indian Nationals Residing Abroad

FEMA does not apply to Indian nationals living in other countries. There is a standardized method for determining the residence of an Indian citizen. The number of days spent in India by an individual is calculated against the underlying norm of 182 days or more using this technique. When using this technique, an office, branch, or agency can be considered a person.

Checklist on Foreign Direct Investment under Automatic route

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

Check the eligibility of the individuals investing in FDI.
Check whether the total FDI is within the sectoral cap and not under prohibited sectors.
Ensure that any rights/bonus issue has not resulted in the FDI exceeding a sectoral cap.
Check whether the company has complied with the issue of shares, if any, against pre-operative/pre-incorporation expenses.
Check whether FEMA guidelines are followed while calculating total foreign investment.
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.

FEMA authorizes the Government to impose restrictions on three FDI items while also administering them. Payments received from India, payments made to people living outside of India, and foreign security arrangements are examples of these.

Checklist for Foreign Direct Investment under Govt Approval route

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

Checklist for the Establishment of Branch/Liaison/Project Office in India

Check if the company is carrying out 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 followed.

For Direct Investment Outside India – Automatic Route:

In cases of investment by way of swap of shares, ensure that the government’s approval was taken. This is a prerequisite for investment by a swap of shares.
In cases where Domestic Venture Capital Funds/Alternative Investment Funds registered with SEBI have invested in equity and equity-linked instruments of off-shore Venture Capital Undertakings, check whether the investment is within the overall limit of USD 500 million.
Check whether the obligation of the Indian party is fulfilled, such as reporting remittances and filing the annual performance reports.

Note: The above checklist only covers part of the list of all the mandatory, important compliances laid down by the FMEA. To know more about it, please get in touch with Vakilsearch experts.