FEMA & FDI Compliance
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- RBI & FEMA
FEMA & FDI Compliance - Overview
Foreign Direct Investment (FDI) has proven to be highly effective in the corporate finance world. However, as control shifts to foreign entities through equity stakes in Indian entities, the government oversees these transactions with various rules and regulations. Most FDI compliances are governed by the Foreign Exchange Management Act, 1999 (FEMA). Certain sectors require approval from the Reserve Bank of India (RBI) before allowing FDIs.
What is FEMA?
The Foreign Exchange Management Act, 1999 replaced the Foreign Exchange Regulation Act, 1973 to streamline India’s foreign exchange reserves in the post-liberalization era. It liberalized regulations, facilitating international market integration.
Meaning of Foreign Direct Investment
FDI involves a foreign investor acquiring equity in an Indian entity.
How can an Indian Company Receive FDI?
FDI routes are categorized into Automatic and Approval routes.
Automatic Route
Under this route, no prior RBI or government approval is needed for foreign investments. However, the RBI’s Regional Office must be notified within 30 days of investment with required documents.
Sectors under Automatic Route:
- Agriculture and Animal Husbandry
- Asset Reconstruction Companies
- Air Transport Services
- etc.
Up to 100% Automatic Route:
- Infrastructure Companies in Securities Markets: 49%
- Petroleum Refining (PSUs): 49%
- etc.
Approval Route
Prior government approval is mandatory before undertaking FDIs in certain sectors. Applications are forwarded to respective ministries for approval.
Sectors under Approval Route:
- Banking & Public Sector: 20%
- Print Media: 26%
- etc.
Prohibited Sectors
Certain sectors, including Atomic Energy and Railway Operations, are strictly prohibited from receiving FDIs.
FEMA Compliance Checklist – Major FDI Compliances
Key compliances include Form FC-GPR for foreign investment allotment, Form FC-TRS for share transfers, ECB reporting, and FLA annual returns.
FEMA Guidelines and Features
FEMA aims to boost foreign trade, develop India’s foreign exchange market, and align regulations with liberalization. It categorizes transactions into current and capital accounts, permitting current account transactions unless prohibited.
Liberalised Remittance Scheme
Allows remittance up to $2,50,000 per financial year for specified transactions without RBI approval.
Conclusion
While FEMA lays down foundational laws, detailed transactions are governed by specific regulations under FEMA.
