FEMA compliances for Foreign Direct Investment (FDI)

What id FDI

Foreign Direct Investment (FDI) is an organization's transfer of funds from one country to another in order to create 'lasting interest.' According to the OECD (Entity for Economic Co-operation and Development), if the entity acquires at least 10 percent of voting power in another organization, a permanent interest is calculated.

FDI's definition isn't limited to international capital movement alone. Its concept also includes the international movement of complementary elements of capital-such as skills, systems, management, technology, etc.

Foreign Direct Investment (FDI) is one of the Indian company's main sources of funds. Under FDI, money from individuals or from foreign companies is invested in Indian startups and existing companies. The FDI Policy is governed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) 2000.

In India, the Foreign Direct Investment Policy is regulated by the Reserve Bank of India's Foreign Exchange Management Act, 1999. An investment of 10 percent or above from overseas is known as FDI, according to the Organization for Economic Co-operation and Development (OECD).

FDI can be brought through

Foreign investment can be made in India through:

➲ Automated route

Under this route, there is no need for prior government approval for making an investment in the Indian company

➲ Approval route

Under this route, prior approval is need before making the investment in the Indian company

Sectors in which 100% FDI is allowed under automatic route:

➲ Agriculture sector

➲ Animal husbandry

➲ E-commerce activity

➲ Healthcare sector

➲ Textile garment

➲ Capital goods

Sectors where FDI is allowed under approval route

➲ Public sectors and Banks (public bank) – 20%

➲ Core investment company -100%

➲ Retail food product trading- 100%

FDI is not allowed for the following sector (prohibited sector) neither in the automatic route nor in the approval route:

➲ Lottery business including public/ private, online lottery, etc

➲ Betting/ gambling including casinos

➲ Chit fund

➲ Nidhi company

➲ Trading on transferable development rights (TDR)

➲ Real estate business

➲ Manufacturing of cigar, cigarettes, tobacco or tobacco substitutes

➲ Sectors not open to private sector investment- atomic energy, railway operations (other than permitted activities mentioned under the Consolidated FDI policy)

Main compliances under FEMA

FEMA has acted as an important source in India for the growth and development of different sectors. FEMA's main aim is to promote international trade, balance payments, promote orderly growth, and maintain India's international-exchange market. Below is the list of main compliance to be followed under FEMA's provisions:

➲ Annual Return on Foreign Liabilities and Assets

FLA (foreign liabilities and assets) return is required to be submitted mandatory by all Indian resident companies which have received or have outstanding FDI or ODI in any previous year including the current year by 15^th July each year.

➲ Annual Performance Report (APR)

An Indian Party, a resident person who has made an Overseas Direct Investment (ODI) must apply to the AD Bank, on or before 31 December of each year, an Annual Performance Report (APR) in the Form ODI Part II in respect of each joint venture, wholly-owned subsidiaries (WOS) outside India.

➲ External Commercial Borrowings

Borrowers need to report to RBI on a monthly basis through AD category-1 bank in form ECB 2 about all the ECB transactions.

➲ Advance Reporting Form (ARF)

An Indian company receiving investment from outside India for the issue of shares or other eligible securities under the FDI Scheme shall report the details of the amount of consideration to the Reserve Bank's Regional Office concerned within 30 days of the date of the issue of the shares through its AD Category I bank.

➲ Form FC-GPR

When the company receives the foreign investment and the company allocates shares to such foreign investor against such investment, then it is the company's duty to file details of such allocation of shares with The RBI within 30 days and for that company to use the FC-GPR (Foreign Currency-Gross Provisional Return) form for submitting information to RBI.

➲ Form FC-TRS

It is a method used by Indian resident shareholders outside India, or vice versa when they transfer their shares. The FC-TRS form will be submitted to its designated dealer bank along with the FC-GPR form, which will send the same to the RBI

➲ Form ODI

An Indian Party and a resident person who makes an investment overseas are required to send an ODI form. When they collect share certificates or some other documentary evidence of investment in the international JV / WOS as proof of the investment and send the same within 30 days to the appointed AD.