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FEMA Compliance

A need emerges with the Corporate to watch out for outside trade exchanges, in the setting of sectoral tops, investment tops, to go around from the enormous penalties. FEMA compliance plays an essential role in the growth and success of various sectors in India. The purpose of introducing the Foreign Exchange Management Act, 1999 (FEMA) is to smooth external trade, maintaining a healthy foreign exchange market in India, promote the importance of balance payments.

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Overview of FEMA Compliance

The Foreign Exchange Management Act (FEMA) acts as the guiding law to regulate the flow of funds flowing from foreign countries to India and vice versa. The act came into existence in 1999, and apart from regulation of funds, it also mentions FEMA compliances that a corporate body should follow.

This act helped smooth the functioning of cross-border trade, increased foreign investment, transparency of international financial transactions, and balance of trade payments.

The importance of FEMA filing becomes more relevant due to globalization and the fast pace growth of international trade investments. Moreover, to keep a check on sectoral caps, investment caps and avoid penalties in FEMA's non-compliances.

Therefore, it is essential for corporates to stay compliant with the rules and regulations mentioned in FEMA. Furthermore, this practice can smooth international business activities and favorably manage their regulatory liabilities.

Foreign Exchange Management Act

List of substantial compliance that is essential to follow under the provisions of FEMA

compliance under FEMA
  • Annual Return On Foreign Liabilities And Assets

    All India-based enterprises that have received FDI or made ODI in any previous year, including the current year, are required to file an Annual Return for Foreign Liabilities and Assets.

    If an Indian firm does not make any FDI or ODI investments by the end of the reporting year, it is not required to file the FLA Return. However, if an Indian firm has any outstanding FDI or ODI, the FLA return must be filed every year.

  • Annual Performance Report

    Those Indian parties or residents who have made an Overseas Direct Investment must submit an annual performance report (ODI). In addition, joint Venture, Wholly Owned Subsidiaries (WOS) outside India must submit an Annual Performance Report in Form ODI Part II to the AD bank on or before the 31st of December each year.

  • Appropriate To Software Companies

    1. Directors or employees of the company enjoy the privilege of investing in the shares of Promoters Company abroad (JV or WOS).

    2. Only a limited number of shares can be purchased. The limit prescribed is $10,000 for five calendar years.

    3. These shares cannot be more than 5% of the paid-up capital of the issuing company.

    4. Post allotment holding should not exceed the pre allotment holding.

  • External Commercial Borrowing

    Borrowers need to report to the RBI regarding all ECB transactions via an AD Category-I Bank in the form of 'ECB 2 Return' monthly.

  • Single Master Form (W.E.F 30.06.2018)

    The Reserve Bank of India (the "RBI"), on September 1, 2018, discharged a client manual (the "SMF Manual") to understandably set out the system for filing a single master form(the "SMF"), which is presented on June 7, 2018, to incorporate the current detailing standards for foreign investment in India.

    The following forms can be now filled under a single umbrella form of SMF;

    FC-GPR- The form used for the issue of capital instruments by an Indian Company to a person resident outside India. Reporting of FDI under this form must be done within 30 days of fund allotment.

    FC-TRS - The form is used to transfer capital instruments from a foreign resident to a person in India.

    Submission of FC-TRS under the SMF must be made within 60 days of transferring capital instruments or the remittance of funds, whichever is earlier.

    LLP-I- The form is used for Foreign Direct Investment, which is required by an LLP.

    LLP-II-The form which is used for Divestment or transfer of capital contribution in an LLP.

    CN - The form which is used for the issue or to transfer convertible notes. Reporting of Convertible notes must be done within 60 days of such transfer.

    DRR- The form which is used for the issue of transfer of depository receipts.

    ESOP- The form which is used for issuing employee stock options or sweat equity shares.

    DI- The form used for reporting downstream investment or some form of foreign indirect investment in a business.

  • Advance Reporting Form

    Within 30 days of the date of issue of offers, an Indian organization that benefits from foreign investment for the issue of shares or other qualified securities under the FDI Scheme must report the details of the amount of consideration to the Reserve Bank's concerned Regional Office via its AD Category I bank.

  • Form FC-GPR

    This form is issued by the RBI under the Foreign Exchange Management Act of 1999. When the organisation receives foreign investment, it distributes its shares to outside investors in exchange for such investment.

    It is the organization's responsibility to register details of such a share allotment with the RBI within 30 days and to do so. The organisation must use the form FC-GPR (Foreign Currency-Gross Provisional Return).

  • Form FC-TRS

    Form FC-TRS stands for Foreign Currency Transfer. This form must be submitted when an Indian company's shares or convertible debentures are transferred from a resident to a non-resident/non-resident Indian or vice versa for sale.

  • Form ODI

    Form ODI must be filled out by any Indian resident or Indian entity interested in investing in the international market. In addition, they should deliver the share certificate or proof of investment against investment in a joint venture or wholly owned subsidy to the designated AD within 30 days.

FEMA Compliance Guidelines and Features

FEMA considers all forex-associated offenses as civil offenses, whereas FERA considers them as criminal offenses. Therefore, it can be counted as one of the features of FEMA.

Other Essential Features And Guidelines Of FEMA Compliance Are As Follows:

  • FEMA will not apply to Indian people living in foreign countries. To determine an Indian citizen's residence, a technique is used. First, the number of days an individual spent in India during the previous fiscal year is determined (182 days or more to be a resident). To calculate Indian residence, an office, a branch, or an agency might be considered a person.
  • FEMA gives the federal government the power to place limitations on three items while also overseeing them. These include payments made to people outside of India, payments received from India, currencies, and foreign security arrangements.
  • It indicates the territories around acquisition/holding of forex that requires the Reserve Bank of India (RBI) or the government.
  • FEMA classifies foreign exchange transactions into two categories:

1. Capital Account

2. Current Account

The purpose of capital account transaction is to adjust the assets and liabilities outside or inside India and an individual who resides outside India. Thus, any transaction that has led to a change in overseas assets and liabilities for an Indian resident in a remote nation or vice versa falls under the category of capital account transaction. Any other sort of transaction falls into the category of a current account.

Penalty for Non-Compliance under FEMA

Individuals and corporates who do not follow FEMA's rules, instructions, and restrictions are subject to penalties. The penalty might be up to triple the amount involved in the violation of up to Rs 2 lakhs. In addition, additional penalties may be imposed, with the maximum penalty being Rs. 5,000 each day following the first day of the violation. As a result, it is prudent of you to follow all FEMA regulations.

Frequently Asked Questions

FEMA's LSR plan allows a resident Indian, NRI, or overseas citizen to transmit funds from India to other countries up to USD 250,000 in a single monetary year without the need for RBI or central government approval.

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India "to consolidate and amend the law relating to foreign exchange to facilitate external trade and payments and promote the orderly development and maintenance of foreign exchange market in India."

RBI issues this form under Foreign Exchange Management Act, 1999. When the organization gets foreign investment and against such investment, it distributes its shares to such outside investors. It becomes the organization's obligation to file subtleties of such allotment of shares with the RBI within 30 days and for that organization needs to utilize the form FC-GPR (Foreign Currency-Gross Provisional Return) for submitting subtleties with RBI.

An Authorized Dealer (AD) is any individual explicitly approved by the Reserve Bank under Section 10(1) of FEMA, 1999, to deal in foreign exchange or remote securities and regularly incorporates banks.

The principle objective behind the Foreign Exchange Management Act (1999) is to unite and revise the law identifying with outside trade with the target of encouraging outer exchange and payment. It was also figured to advance the efficient turn of events and support outside trade showcases in India.

The Liberalized Remittance Scheme (LRS) of the Reserve Bank of India (RBI) permits occupant people to transmit a specific cash flow during a budgetary year to another nation for venture and consumption. As per the predominant guidelines, inhabitant people may dispatch up to $250,000 per money-related year.

Form FC-TRS stands for Foreign Currency Transfer. This form is filed at the time of transfer of shares or convertible debentures of an Indian company from a resident to a non-resident/non-resident Indian or vice versa with the purpose of sale.

  • FEMA will not apply to Indian citizens who live outside India. To check the residency of an Indian citizen, a method is adopted based on which number of days an individual lived in India is calculated during the preceding financial year (182 days or more to be a resident). An office, a branch, or an agency can be considered a person to calculate Indian residency.
  • FEMA grants the authority to the central government to impose restrictions on three things and supervise those things as well. These are payment given to any individual outside India, payment received from any individual outside India, forex, and foreign security deals.
  • It indicates the territories around acquisition/holding of forex that requires the Reserve Bank of India (RBI) or the government.
  • FEMA classifies foreign exchange transactions into two categories:

    Capital Account

    Current Account

The model arrangement requires the remitter to announce what the remitter proposes and not what he won't do. Therefore, the A2 structure ought to be abstained from for settlements up to the US $ 25,000 for each annum, and any answering to the RBI for parity of installments ought to be filled by the AD and not the remitter.

Any contradiction, under FEMA, may welcome after sorts of punishments: If the sum against which offense is amounts, at that point punishment will be "THRICE," the total associated with negation. Where the sum can't be measured, the punishment might be forced up to two lakh rupees.

The Municipal Administration and Urban Development (MA&&UD) office reported Layout Regularization Scheme (LRS) for the 68 recently shaped districts and civil organization, with fundamental guideline charges beginning from ₹200 per sq ft for under 100 sq meters plot to ₹750 for plots over 500 sq meters.

The Foreign Exchange Regulation Act (FERA) was passed in 1973; the fundamental reason was to guarantee the utilization of outside trade. Unfortunately, the FERA made snags in the nation's advancement, so the government supplanted it by FEMA in 1999.

The genuine distinction between the two is that while FDI intends to assume responsibility for the organization in which venture is made, FPI means to procure benefits by putting resources into offers and obligations of the contributed element without controlling the organization.

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