Foreign Exchange Management Act (FEMA) Compliance
● Residents of India: Individuals, companies, LLPs, partnership firms, trusts, etc., engaging in any transaction involving foreign exchange.
● Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs): For their investments and transactions within India.
● Foreign Entities: Companies, investors, or individuals investing in India or establishing a place of business in India (such as Liaison Offices, Branch Offices, or Project Offices).
● Indian Entities: Undertaking investments or financial commitments outside India.
● Anyone involved in importing or exporting goods, services, or technology.
● Individuals making or receiving remittances from abroad (e.g., under the Liberalised Remittance Scheme – LRS).
Essentially, if your transaction involves foreign currency or a non-resident entity, FEMA regulations apply.
● Transaction Identification: Clearly define the type of transaction (e.g., FDI, ODI, ECB, Trade Credit, LRS, Import/Export).
● Regulatory Check: Identify the specific FEMA regulations, Master Directions, and RBI circulars applicable to the transaction.
● Approval Route: Determine if the transaction falls under the automatic route or requires prior approval from the RBI or the relevant government authority.
● Authorized Dealer Bank: Ensure the transaction is routed through an AD Category-I Bank.
● Valuation Norms: Adhere to prescribed pricing and valuation guidelines, especially for capital account transactions (share issuance/transfer).
● Reporting Requirements: Identify the specific forms (e.g., FCGPR, FCTRS, FLA Return, Form ECB, APR) and reporting timelines.
● Documentation: Gather and maintain all necessary supporting documents for the transaction.
● KYC Compliance: Ensure Know Your Customer (KYC) norms are met for all parties involved.
● Post-Transaction Compliance: Fulfill any ongoing compliance obligations (e.g., Annual Performance Reports for ODI).
Reporting: Submitting accurate information in the prescribed formats (forms) to the AD Bank within the stipulated deadlines. This includes reporting inflows (like FDI) and outflows (like ODI), and annual reporting requirements like the Foreign Liabilities and Assets (FLA) return. Failure to report correctly or on time constitutes non-compliance.
Approvals: Obtaining necessary prior approvals from the RBI or government,t where transactions are not covered under the automatic route.
Documentation: Maintaining comprehensive records related to all foreign exchange transactions for potential scrutiny by regulatory authorities. Meeting all FEMA Compliance requirements ensures smooth cross-border operations.
Authorized Channels: Conducting transactions only through authorized dealers (typically banks authorized by the RBI).
For Entities:
● KYC documents of the Indian entity and the non-resident entity/individual.
● Certificate of Incorporation, Memorandum & Articles of Association.
● PAN Card copy of the Indian entity.
● Board Resolutions authorizing the transaction.
● Shareholding Pattern.
● Relevant agreements (e.g., Share Purchase Agreement, Joint Venture Agreement, Loan Agreement).
● Valuation Certificate from a Chartered Accountant or SEBI-registered Merchant Banker (as applicable).
● Foreign Inward Remittance Certificate (FIRC) or bank statements evidencing receipt/payment of funds.
● Statutory Auditor Certificates were required by regulations.
● Copies of specific RBI forms filed (e.g., FCGPR, FCTRS, Form ODI).
● Copy of RBI/Government approval (if applicable).
For Individuals (e.g., under LRS):
● Form A2.
● PAN Card copy.
● Other documents as required by the AD Bank for due diligence.
● RBI Master Directions: The RBI periodically issues Master Directions consolidating instructions on various subjects like FDI, ODI, ECB, etc. These are the primary reference points.
● Authorized Dealer Banks: AD Banks play a crucial role in ensuring compliance by verifying documentation and reporting transactions to the RBI.
● Reporting Platforms: RBI has specific online platforms (like FIRMS – Foreign Investment Reporting and Management System) for reporting various transactions.
● Compounding of Contraventions: FEMA provides a mechanism where entities can voluntarily admit a contravention, plead guilty, and seek resolution with the RBI by paying a penalty, thereby avoiding litigation.
● Due Diligence: AD Banks are required to exercise due diligence to ensure transactions are bona fide and compliant with regulations.
● Monetary Penalties: A penalty up to thrice the sum involved in the contravention, where the amount is quantifiable, or up to ₹2,00,000, where the amount is not quantifiable.
● Continuing Contravention: If the contravention continues, an additional penalty of up to ₹5,000 per day may be imposed.
● Confiscation: Confiscation of the currency, security, or property involved in the contravention.
● Adjudication: Contraventions are adjudicated by designated authorities within the Enforcement Directorate (ED).
● Compounding: As mentioned, this offers a chance to settle contraventions by paying a penalty determined by the RBI.
