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Guide on Foreign Direct Investment Compliance under FEMA - BizAdvisors

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A Complete Guide on Foreign Direct Investment Compliance under FEMA

A Complete Guide on Foreign Direct Investment Compliance under FEMA

This article is about Foreign Direct Investment Compliance but let’s try to understand what FDI is. Foreign Direct Investment (FDI) is necessary for a country where capital is not easily available. It is an important source for various businessmen and their companies. It also contributes to the national income of the country. Such transactions between countries require proper measures and authority to look into such transactions.

Authority that regulates FDI Compliances

In India, FDI is regulated by Foreign Exchange Management Act, 2002 (FEMA). FEMA is governed by the Reserve Bank of India, which is the apex or central bank of India. FEMA aims to facilitate external trades, promote development, balanced payment, and maintain forex in India. 

How is foreign direct investment done?

Foreign Direct Investment is done by companies through two ways or routes and they are:

  1. Automated/ Automatic Route:-

This route does not require prior approval from the Reserve Bank of India. The following sectors are allowed 100% FDI under automatic route:-

  • Agriculture sector
  • Animal husbandry
  • E-commerce activity
  • Healthcare sector
  • Textile garment
  • Capital goods
  1. Approval/ Government Route:-

This route requires prior approval from the concerned Ministries/Departments through the Foreign Investment Facilitation Portal (FIFB) which is a single-window, administered by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry, Government of India. The following sectors are allowed FDI under the approval route:-

  • Public sectors and Banks (public bank) – 20%
  • Core investment company -100%
  • Retail food product trading- 100%

NOTE:

Applications, in which there is difficulty in finding the Ministry or the concerned authority, it will be looked after by the DIPP.

Prohibited activities under Foreign Direct Investment

The following are the prohibited activities that cannot be done by a person under FDI:-

  • Lottery business (Private/Public)
  • Betting and gambling
  • Chit fund
  • Trading on transferable development rights (TDR)
  • Real estate business
  • Manufacturing cigar, cigarettes, tobacco or tobacco substitutes
  • Atomic energy 

Eligibility criteria for Foreign Direct Investment Compliance

The following persons are eligible for FDI Compliances:-

  1. An individual
  2. Hindu undivided family
  3. A Firm
  4. Non-Resident Indians (NRIs)
  5. Companies
  6. Foreign Individuals
  7. High Net worth Individuals
  8. Partnerships/ proprietorship concerns
  9. Foreign Institutional Investors

Important Foreign Direct Investment Compliance under FEMA

For the purposes of FDI, the companies are required to follow FDI Compliances under FEMA and they are as follows:-

  1. Annual Return on Foreign Assets and Liabilities

All Indian resident companies that have received FDI in the previous fiscal year and this year are required to file their annual revenue. This annual return is made on foreign assets and liabilities are known as FLA returns. Irrespective of the Indian company having no new foreign direct investment, it must submit the FLA return by July 15th of each year.

  1. External Commercial Borrowings-

The borrower must report all external commercial borrowings to the RBI each month. The required form is ECB-2 return.

  1. Annual Performance Report

Individuals or Indian parties or organizations that have invested directly abroad must submit an Annual Performance Report (APR) to AD Bank in the form of ODI Part II. This report is submitted for a joint venture (JV) outside India, a wholly owned subsidiary (WOS). This must be done before December 31st each year.

  1. Advance Reporting Form

If an Indian company receives an investment from outside India for the issuance of shares or other eligible securities under the FDI scheme, this must be reported to the relevant regional office of the Reserve Bank. Amount details must be provided through the AD Category Bank within 30 days of the issue date of the shares.

  1. Single Master Form

The following lists of forms are submitted as Single Master Form:-

  • FC- GPR (Foreign Currency-Gross Provisional Return)
  • FC-TRS (Foreign Currency Transfer of Shares)
  • LLP-I (Limited Liability Partnership)
  • CN (Convertible Notes)
  • ESOP (Employee Stock Options Plan)
  • DI (Downstream Investment)
  • DRR (Depository Receipts)
  • InVi (Investment Vehicle)
  1. Form FC-GPR

If a company receives a foreign investment and allocates shares to the foreign investor, it is up to the company to submit the details of the share allocation to the RBI. This should be done within 30 days. The company used Form FC-GPR ((Foreign Currency-Gross Provisional Return) for sending information to RBI.

  1. Form FC-TRS

This is the method used by Indian resident shareholders (who are outside India) to transfer shares. The FC-TRS form is submitted to the specified bank along with the FC-GPR form. The specified bank submits the same to the RBI[1].

  1. Form ODI

ODI stands for Overseas Direct Investment. Residents of India making foreign investments are required to submit an ODI form. Share certificates or other documents acquired to invest in a foreign joint venture or wholly-owned subsidiary must be submitted to the designated AD within 30 days.

Guidelines for FDI Compliance under FEMA

  1. FEMA does not apply to Indian citizens residing outside India. In order to find whether a person is a resident of India, , a method  based on the number of days a person has lived in India is calculated. It should be more than 182 days in the previous fiscal year.
  2. FEMA empowers the central government to monitor and impose restrictions on three things. These are payments to people outside India, payments from people outside India, forex and foreign securities trading.
  3. FEMA classifies foreign exchange transactions into two categories: capital accounts and current accounts. Capital account transactions change assets and liabilities outside India. Other types of transactions fall into the current account category.
  4. FEMA also determines areas that require the approval of the Reserve Bank of India (RBI) or the Government.

Conclusion

India is the best place for foreign direct investment because it has the third-largest economy in the world. Moreover, India is known for ensuring that any activity is taken up by the country yields to the betterment of the country, for instance, the Make in India programme helps in investment. India is easily accessible because of its geographical location. FDI compliances should be adhered in order to have a better investment. 

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