Foreign Exchange Management Act (FEMA) compliances
CA Shivprasad Sakhare
Chartered Accountants | Audit | Consulting | Advisory | Tax Services
Foreign Exchange Management Act (FEMA) compliances are crucial for businesses and individuals dealing with foreign exchange transactions in India. FEMA is regulated by the Reserve Bank of India (RBI) and aims to facilitate external trade, promote orderly foreign exchange management, and prevent violations.
Below is a detailed guide to FEMA compliances, including forms, documents, and processes.
1. FEMA Key Compliance Categories
FEMA compliances can be categorized into the following areas:
1. Inbound Foreign Investments (FDI)
2. Outbound Investments (ODI)
3. External Commercial Borrowings (ECB)
4. Export and Import of Goods/Services
5. Liberalized Remittance Scheme (LRS)
6. Other Financial Transactions
2. Inbound Foreign Investments (FDI)
Inbound investments involve foreign direct investment in Indian companies.
Key Compliances for FDI
1. Reporting of Inward Remittance:
- File Advance Remittance Form (ARF) within 30 days of receiving foreign funds.
2. Allotment of Shares:
- Issue shares or convertible instruments within 60 days of receiving funds.
- File Form FC-GPR (Foreign Currency-Gross Provisional Return) within 30 days of share allotment.
3. Annual Return on Foreign Liabilities and Assets (FLA):
- Report details of foreign investments annually by July 15th using the FLA Return.
Documents for FDI
- Copy of FIRC (Foreign Inward Remittance Certificate).
- KYC of the foreign investor from their bank.
- Board resolution approving the investment.
- Valuation certificate from a registered valuer or CA.
- Share subscription agreement.
3. Outbound Investments (ODI)
Indian entities investing in overseas entities must comply with FEMA regulations.
Key Compliances for ODI
1. Filing Form ODI:
- Submit the ODI form through the Authorized Dealer (AD) Bank before making an outbound investment.
- Include details like the name of the foreign entity, nature of business, and investment structure.
2. Post-Investment Reporting:
- Submit an annual performance report (APR) by December 31st.
- Notify the AD Bank of any changes in shareholding or disinvestment.
Documents for ODI
- Board resolution for the investment.
- Shareholding agreement with the foreign entity.
- Valuation certificate for investment exceeding USD 5 million.
4. External Commercial Borrowings (ECB)
Borrowing foreign funds by Indian entities for specific purposes comes under ECB.
Key Compliances for ECB
1. Loan Agreement:
- Comply with ECB guidelines issued by RBI.
- Ensure adherence to borrowing limits, all-in-cost ceiling, and end-use restrictions.
2. Filing Form ECB:
- Report loan details using Form ECB within 7 days of signing the loan agreement.
3. Monthly ECB-2 Return:
- Submit ECB-2 returns to the RBI through the AD Bank by the 7th of every month.
Documents for ECB
- Loan agreement.
- KYC report of the lender.
- FEMA-compliant certificate from a CA.
5. Export and Import Transactions
All cross-border trade in goods or services must comply with FEMA guidelines.
Key Compliances for Exports
1. Export Declaration:
- Submit shipping bills and invoices to the AD Bank.
- Realize export proceeds within 9 months.
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2. Export Performance Reporting:
- File Export Declaration Form (EDF) for exports.
Key Compliances for Imports
1. Import Payments:
- Ensure import payments are made within 6 months.
- Submit necessary documents to the AD Bank for verification.
Documents for Trade Transactions
- Shipping bills, bill of entry, and invoices.
- Bank realization certificate (BRC) for exports.
6. Liberalized Remittance Scheme (LRS)
LRS allows Indian residents to remit up to USD 250,000 per financial year for permissible purposes.
Key Compliances for LRS
1. Remittance Application:
- Submit Form A2 to the AD Bank before remittance.
- Provide purpose details (e.g., education, travel, investment).
2. Reporting by Banks:
- Banks must report remittances under LRS to the RBI.
Documents for LRS
- PAN card of the remitter.
- Declaration of the remittance purpose.
7. Other Financial Transactions
This includes foreign loans, deposits, gifts, or estate settlements.
Key Compliances
1. Foreign Gifts or Inheritances:
- Report gifts exceeding USD 5,000 to the AD Bank.
- Maintain documentation for tax and compliance purposes.
2. Foreign Bank Accounts:
- Disclose foreign bank accounts in the income tax return.
- Obtain necessary permissions if exceeding specified limits.
8. Common FEMA Forms
Below are key forms used for FEMA compliance:
Form Name Purpose Timeline
Form ARF Reporting receipt of foreign funds for FDI. Within 30 days of receipt.
Form FC-GPR Reporting share allotment against FDI. Within 30 days of allotment.
FLA Return Annual reporting of foreign liabilities and assets. By July 15th each year.
Form ODI Reporting outbound investments. Before remittance.
Form ECB Reporting foreign loans received by Indian entities. Within 7 days of agreement.
ECB-2 Return Monthly return for ECB transactions. By 7th of each month.
Form A2 Reporting foreign remittances under LRS. Before remittance.
9. Processes for FEMA Compliance
1. Pre-Transaction:
- Assess FEMA eligibility and restrictions for the transaction.
- Prepare necessary documents like agreements, invoices, and valuation reports.
2. Transaction Execution:
- Route all transactions through an Authorized Dealer Bank.
- Obtain necessary approvals, if applicable.
3. Post-Transaction Reporting:
- File required forms within stipulated timelines.
- Maintain proper records for future audits.
4. Regular Monitoring:
- Track compliance deadlines and submit returns promptly.
- Conduct periodic reviews to identify potential non-compliance.
10. Penalties for FEMA Non-Compliance
Non-compliance with FEMA regulations may result in severe penalties, including:
1. Penalty up to 3 times the sum involved in the contravention.
2. Additional penalties of ₹5,000/day for continuing default.
3. Confiscation of foreign exchange or property.