Step by Step Guide for FEMA Compliance

Foreign Exchange Management Act (FEMA), 1999, governs the foreign currency in India. The main aim of FEMA is to smooth the progress of external trade, balance the payments, maintain foreign exchange, and encourage orderly growth. FEMA compliance plays a significant role in the development and success of various business sectors in India.

Overview of FEMA Compliance

India maintains inflexible compliance for cross border transactions. Time and again, companies have to go through a burdensome and lengthy irritating process while conducting cross border transactions. An increase in foreign trade in the last two decades has made businesses follow FEMA compliance more sincerely.

FEMA compliance will help the business run smoothly in India; the foreign organization can set up its offices in India by following FEMA compliance. Any person who is residing outside of India can buy property here under the FEMA compliance as the acquisition of immovable property is permitted under the Foreign Exchange Management Act, 1999.

Essential FEMA Compliances to Follow Under the FEMA

• Foreign Liabilities and Assets Annual Return

All India inhabitant organizations must submit Foreign Liabilities and Assets Annual Return that have already got Foreign Direct Investment (FDI) or have made Overseas Direct Investment (ODI) in any previous years. If the Indian organization has not made any investment in ODI or FDI, the organization will not have to file an annual return for foreign liabilities and assets. According to FEMA compliance, if any Indian organization has any outstanding ODI or FDI, then it is mandatory for the organization to file an annual return for foreign liabilities and assets.

• APR

An annual Performance Report (APR) is submitted by those Indian entities or individual residents who have made an ODI. As per the FEMA compliance, APR has to be submitted using form ODI part 2 to the authorized dealer bank of the joint venture.

• External Commercial Borrowings

An organization has to report about the borrowings to the Reserve Bank of India regarding all External Commercial Borrowings through an authorized dealer Category-I bank in the form of External Commercial Borrowings (ECB) 2 return every month.

• Single Master Form

Under the Single Master Form, various forms such as FC-TRS, FC-GPR, LLP-I, LLP-II, ESPON, CN, DRR, DI, InVi that needs to be recorded and submitted. The Reserve Bank of India introduced a single master form to incorporate foreign investment standards in India.

• ARF

Under the FEMA compliance, an organization can take advantage of receiving investment from foreign countries for the issue of qualified securities or shares under the Foreign Direct Investment (FDI) scheme has to report the subtleties of the amount of consideration to the regional office of the Reserve Bank of India through its authorized dealers' Category-I bank within thirty days from the date of issuance of offers.

• Form FC –GPR

The Reserve Bank of India issues Foreign Currency – Gross Provisional Transfer form under the Foreign Investment Management Act (FEMA), 1999. Under the FEMA compliance at the time when any company gets foreign investment, and for such investment it offers its shares to outside investors, it becomes obligatory for the company to file subtleties of allotments of shares with the Reserve Bank of India within thirty days and the company has to use the form FC-GPR for submitting subtleties with the Reserve Bank of India.

• Form FC-TRS

Form for Foreign Currency Transfer (FC-TRS) is filed at the time of transfer of convertible debentures or shares of an Indian organization from a resident to a non-resident Indian or from a non-resident to a resident of India with the intention of sale.

• Form ODI

Any Indian entity or Individual or Indian resident is investing in the foreign market has to submit Form ODI. When the Indian Company receives a share certificate or any other document as a poof of investment in the outside WOS/JV as an investment proof and submits it to the assigned authorized dealer within thirty days of the investment made.

Guidelines and Features for FEMA compliance

As per FEMA compliance, all foreign exchange offenses are treated as civil offenses, whereas FERA deals with foreign exchange offenses as criminal offenses.

• FEMA is not applicable to Indian Citizens who live in other countries. For checking the residency of an India citizen, a method is adopted by the authorities in which the authorities check how many days an individual has stayed in India in the previous financial year if a person has stayed in India for 182 or more days during the last fiscal year that that person is considered as an Indian resident. An office or a branch or an agency can be taken into consideration as a person to calculate the Indian residency.

• Foreign Exchange Management Act grants authority to the central government of India to compel restrictions on certain things and supervise them. These are the payments given to anyone outside of India, the payment received from any person outside India, foreign security deals, and forex.

• FEMA compliance indicates the territories around holding/acquisition of forex that requires the explicit consent of the Reserve Bank of India or the central government of India.

• Foreign Exchange Management Act classifies foreign exchange transactions in two categories:

1. Capital Account

2. Current Account

The point of capital account transaction is to regulate the liabilities and assets inside or outside of India but only for a person that resides outside India. Therefore, any transaction, which is the reason that has caused a change in the overseas liabilities and assets of an Indian resident in a remote nation or vice versa, comes under the category of capital account transaction.

If any individual or entity fails to follow the FEMA compliance such as orders, norms, and provisions is liable to a penalty as per the FEAM, 1999. The penalty will be charged three times the amount is involved in such breach or up to INR 2 lakh, an additional penalty up to INR 5000 per day from the day of breach.

Therefore it is highly advisable to follow the FEAM compliance.

Conclusion

India maintains inflexible compliance for cross border transactions. Time and again, companies have to go through a burdensome and long, irritating process while conducting cross border transactions. Foreign Exchange Management Act (FEMA), 1999, governs the foreign currency in India, the main aim of FEMA is to smooth the progress of external trade and balance the payments, maintain foreign exchange and encourage orderly progress. FEMA compliance plays a major role in the development and success of various business sectors in India.