What is FEMA Compliance?
FEMA compliance is the set of filings Indian entities must make when foreign investment comes in, when Indian entities invest abroad, or when they borrow from overseas. Most inbound filings are made on the Reserve Bank's FIRMS portal, and each has its own period running from the date of allotment, transfer or receipt of funds.
Who needs it
- Indian companies that have issued shares or other eligible instruments to a non-resident investor.
- Shareholders transferring shares between a resident and a non-resident, in either direction.
- Every Indian company and LLP that has foreign investment on its books or investment abroad, which must file the annual FLA return.
- Indian entities that have invested in a joint venture or wholly owned subsidiary outside India.
- Borrowers who have raised external commercial borrowings and must file the monthly return.
- Entities that have missed a FEMA filing and need to regularise it through a late submission fee or compounding.
- Startups issuing convertible notes to non-resident investors, or granting share-based benefits to non-resident employees.
Benefits
- Filings made within their periods, which is what keeps a late submission fee from arising at all.
- Entity Master and Business User registration on the FIRMS portal set up correctly before the first filing.
- Valuation and the supporting certificates arranged so a filing is not rejected for want of them.
- The annual FLA return filed on the Reserve Bank's survey portal for every year it is due.
- Delayed filings regularised through the late submission fee route, or a compounding application where that is the appropriate course.
Key facts
| Filing | When | Where |
|---|---|---|
| Form FC-GPR — issue of shares to a non-resident | Within 30 days of allotment | FIRMS portal |
| Form FC-TRS — transfer between resident and non-resident | Within 60 days, as the rules prescribe | FIRMS portal |
| Annual FLA return | By 15 July each year | Reserve Bank survey portal |
| Annual performance report for overseas investment | By 31 December each year | Through the authorised dealer bank |
| External commercial borrowing monthly return | Monthly, within the prescribed period | Through the authorised dealer bank |
| Delayed reporting | Regularised by late submission fee | With the filing |
| Contravention beyond late reporting | Compounding application | Reserve Bank of India |
Which filings does foreign investment trigger?
The answer depends on the event rather than on the size of the investment, and each event starts its own clock. The sequence for a typical inbound investment runs as follows.
- Before the transaction: register the Entity Master and a Business User on the FIRMS portal, because approval is not instant
- Before pricing the issue: obtain the valuation certificate the instrument requires, since the price cannot be below the floor the rules set
- On receipt of funds: obtain the foreign inward remittance certificate and the know-your-customer report from the receiving bank
- On allotment: file Form FC-GPR within 30 days of the date of allotment
- On a later transfer involving a non-resident: file Form FC-TRS within the period prescribed
- Each year while the investment remains: file the annual FLA return by 15 July
- For share-based benefits to non-resident employees, convertible notes, or downstream investment by an Indian company with foreign investment: file the separate form prescribed for each
Why is the FLA return so often missed?
Because it is annual, it is filed on a different portal from the investment filings, and nothing prompts it. A company that filed FC-GPR correctly when its investor came in often does not realise that a return is then due every July for as long as the foreign investment stays on its books, whether or not anything happened during the year.
The second reason is the audit timing. The return is due by 15 July, before many companies have audited accounts for the year ended 31 March. The framework contemplates this: the return is filed on unaudited figures and revised once the accounts are audited. Companies that decide to wait for the audit instead of filing on unaudited figures end up filing late.
What does a delay actually cost?
There are two routes, and which one applies depends on whether the problem is the timing of the filing or the substance of the transaction.
| Situation | Route | Practical effect |
|---|---|---|
| The filing is correct but late | Late submission fee | Computed on the amount involved and the length of the delay; the filing is then accepted |
| The transaction itself breached a condition, for example pricing or eligibility | Compounding application to the Reserve Bank | An amount determined by the Reserve Bank, and the underlying position may need correcting first |
| A delay found during due diligence before a funding round | Either, depending on the breach | Usually the costliest moment to find it, because the round waits on the regularisation |
The figures and the method of computing the late submission fee are set by the Reserve Bank and have been revised more than once, so the current position should be checked when a delay is identified rather than estimated from an earlier case.
Example: a startup's first foreign round
The figures below are illustrative. A private company receives ₹3 crore from an overseas investor on 5 April and allots shares on 20 May. Three things have to be right. The price must be at or above the floor the valuation certificate supports, and the certificate must be dated before the allotment, because a valuation obtained afterwards cannot fix a price already set. The Entity Master and Business User registration must already exist on the portal, since the 30-day period runs from 20 May regardless of whether the company can log in. And Form FC-GPR is due by about 19 June, counted from allotment and not from the 5 April receipt. The following July, and every July after it while the investment remains, the company also files the annual FLA return.
Related reading
- Form 15CA and 15CB — the tax side of an outward remittance
- Private limited company registration — the entity that receives the foreign investment
- Transfer pricing — pricing transactions with the overseas group
Official sources
- Reserve Bank of India – FEMA — Act, rules, regulations and directions
- FIRMS portal — Entity Master, FC-GPR and FC-TRS filings
- Reserve Bank of India – notifications — late submission fee and compounding framework
- Reserve Bank of India – master directions — external commercial borrowings and overseas investment
Documents required
- 01Certificate of incorporation, memorandum and articles, and permanent account number
- 02Board and shareholder resolutions for the issue, transfer or investment
- 03Foreign inward remittance certificate and the know-your-customer report from the receiving bank
- 04Valuation certificate from a chartered accountant, merchant banker or practising cost accountant, as the instrument requires
- 05Share certificates or the allotment record, with the date of allotment
- 06Share transfer agreement and consent letters, for a transfer filing
- 07Audited financial statements, for the annual FLA return
- 08Loan agreement and the loan registration number, for external commercial borrowings
- 09Details of the overseas entity and its audited accounts, for overseas investment filings
Due dates and penalties
| Item | Due date | If missed |
|---|---|---|
| Form FC-GPR, on issue of shares to a non-resident | Within 30 days of the date of allotment | Late submission fee, computed on the amount and the period of delay |
| Form FC-TRS, on transfer of shares between a resident and a non-resident | Within 60 days of the date of transfer or of receipt or remittance of the consideration, whichever applies | Late submission fee for the period of delay |
| Annual return on foreign liabilities and assets (FLA) | By 15 July each year, for the previous financial year | Treated as a contravention of FEMA; late submission fee or compounding |
| Annual performance report for overseas investment | By 31 December each year, for the overseas entity's accounting year | Contravention, and further remittances to the overseas entity can be restricted |
| External commercial borrowing monthly return | Within the period prescribed after the close of each month | Contravention of the borrowing conditions |
FEMA periods run from the date of the underlying event, such as allotment, transfer or receipt of funds, rather than from the end of a month or a quarter, so each transaction carries its own deadline. Where a return is based on unaudited figures, a revised return is generally required once the accounts are audited. Confirm the current form, period and fee position before filing, as the framework is amended by notification.
Mistakes to avoid
- Counting the 30 days for FC-GPR from the date the money was received rather than from the date of allotment.
- Allotting shares before the Entity Master and Business User registration on the portal is in place, which leaves no time to file.
- Issuing shares to a non-resident at a price below the valuation the rules require, which cannot be corrected by a later filing.
- Treating the FLA return as a one-off, when it is due every year for as long as the foreign investment or overseas investment remains on the books.
- Filing the FLA return on unaudited figures and never revising it once the accounts are audited.
- Overlooking that a transfer between two non-residents, or between two residents, may need no FC-TRS at all, while one leg involving a non-resident does.
- Discovering a missed filing during a due diligence exercise, when the delay is already long and the fee correspondingly higher.
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