Background
The Foreign Exchange Management Act (FEMA), 1999 was enacted to consolidate and amend laws relating to foreign exchange management in India. It replaced the Foreign Exchange Regulation Act (FERA), 1973, shifting from a regulatory to a management approach. FEMA facilitates external trade and payments while promoting the orderly development of the foreign exchange market in India. The Act provides the regulatory framework for foreign exchange transactions, foreign investments, establishment of branch offices by foreign entities, and various reporting requirements to the Reserve Bank of India (RBI).
Applicability
FEMA provisions apply to all persons resident in India, including individuals, companies, partnerships, and other entities dealing with foreign exchange transactions. The regulations specifically cover foreign direct investment (FDI), overseas direct investment (ODI), external commercial borrowings (ECB), establishment of branch/liaison/project offices by foreign entities, export-import transactions, and various foreign exchange dealings. Compliance requirements vary based on transaction type, amount, sector, and nature of business activities involving foreign exchange.
Compliance requirements under the Act in accordance with the Regulations
FLA Return has to be filed by the entities which have received FDI or made ODI in any of the previous years including current year.
Transactions of External Commercial Borrowings should be reported to Reserve Bank of India within 7 working days from close of the month
Annual Performance Report should be filed in Form ODI Part II before AD Bank on or before 31 Dec every year.
Survey on Computer Software & Information Technology Enabled Services (ITES) Exports
To report changes in ECB parameters in consonance with the ECB norms
To report issue of new equity instruments by an Indian company to non-resident investors.
In case of full conversion of ECB into equity, company to report the conversion in Form FCGPR as well as ECB2 within seven working days from the close of the month to which it relates.
To report transfer of equity instruments between resident and non-resident and from non resident holding equity instruments on a repatriable basis to a non resident holding equity instruments on a non-repatriable basis.
To report issue of ESOPs by an Indian company to its non-resident employees
To report downstream investment made by an Indian company in another Indian company resulting in indirect foreign investment in the investee Indian company.
Form FC is a Return on Overseas Direct Investment (ODI)/ financial commitment/ restructuring/ disinvestment in a foreign entity
Form FC is a Return on Overseas Direct Investment (ODI)/ financial commitment/ restructuring/ disinvestment in a foreign entity
Non-STPI Unit is required to get Registration with STPI for Export of Software
Non-STPI Unit registered with STPI is required to furnish Progress Report with STPI on Quarterly Basis
Non-STPI Unit registered with STPI is required to furnish Progress Report with STPI on Annual Basis
Softex Form to be filed on monthly basis for the Export of Software
The Legal Entity Identifier (LEI) is a 20-digit number used to uniquely identify parties to financial transactions worldwide to improve the quality and accuracy of financial data systems. LEI has been introduced by the Reserve Bank in a phased manner for participants in the over the counter (OTC) derivative, non-derivative markets, large corporate borrowers and large value transactions in centralised payment systems.
No person resident outside India shall without prior approval of RBI open a branch/liaison/project office/any other place of business except as laid down in Foreign Exchange Management (Est. in India of a branch office or a liaison office or a project office or any other place of business)Reg.2016
A person resident outside India can establish a branch/liaison office in India if: -B.O.-profit track record for imm. preceding 5 F.Y in home country & NW of at least USD 1 lac or equivalent -L.O.-a profit track record for imm. preceding 3 F.Y. in home country & NW of at least USD 50k or equivalent
A person resident outside India permitted by RBI under Regulations to establish a branch/liaison office in India may undertake or carry on any activity specified in Schedule I or II as case may be, but shall not undertake or carry on any other activity unless otherwise specifically permitted by RBI
A person resident outside India desiring to establish a branch / liaison/project office or any other place of business in India shall submit an application in Form FNC to an AD Category-I bank
A person resident outside India may establish in India a liaison office for 3 years subject to Reg.4 d (III). Application can be made to AD bank for extension of validity period which latter may extend for 3 years from date of expiry of original approval/ext granted, subject to RBI directions
A person resident outside India desiring to establish additional branch office or liaison office may submit to the Authorised Dealer Category-I bank a fresh FNC Form along with the justification for the need for additional office/s.
A foreign company can open a project office in India if it has secured a contract from an Indian company to execute a project & project meets one of the conditions prescribed
A person from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau opening a branch office or a liaison office or a project office or any other place of business in India shall have to register with the concerned State Police Authorities.
Branch office may remit outside India profit of the branch net of applicable Indian taxes, on production of the prescribed documents to the satisfaction of the Authorised Dealer Category-I bank through whom the remittance is effected
Intermittent remittances by project offices pending winding up / completion of the project can be permitted by Authorised Dealer Category -I bank subject to submission of required documents
Acquisition of property by branch office/project office shall be governed by the guidelines issued under Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations.
A person resident outside India permitted under the Regulations to establish a branch office or liaison office or project office may apply to the concerned Authorised Dealer Category-I bank for transfer of its assets to a Joint Venture/Wholly Owned Subsidiary or any other entity in India
Requests for closure of the branch office/liaison office may be submitted to the Authorised Dealer Category – I bank along with the prescribed documents
Any application from a person resident outside for opening of a branch/liaison office/project office/ any other place of business in India shall require prior approval of RBI where applicant is a citizen of or is registered/incorporated in Pakistan
Every branch office/liaison office/project office is required to file an Annual Activity Certificate as at March 31 each year along with the audited financial statements including receipt and payment account with the designated AD Category -I bank as well as Director-General of Income Tax (International Taxation), New Delhi on or before Sep 30 of that year
Where the annual accounts of the branch office/liaison office/project office are finalized with reference to a date other than March 31, the AAC along with the audited financial statements may be submitted within six months from the due date of the Balance Sheets to the Authorised Dealer Category-bank and the Director General of Income Tax (International Taxation), Drum Shape Building, I.P. Estate, New Delhi 110002.
Penalty & Punishments
a) Late Submission Fees (LSF) of Rs. 7500 for each return, Where an advice has been issued for payment of LSF and such LSF is not paid within 30 days, such advice shall be considered as null and void and any LSF received beyond this period shall not be accepted.
b) The facility for opting for LSF shall be available up to three years from the due date of reporting/ submission.
c) In case a person responsible for any submission or filing under the provisions of FEMA, neither makes such submission/filing within the specified time nor makes such submission/filing along with LSF, such person shall be liable for penal action under the provisions of FEMA, 1999, as follows:
i. 3 times the sum involved or Rs. 2,00,000 if the amount is not quantifiable.
ii. If the contravention continues, a penalty of Rs. 5000 per day
Late Submission Fee (LSF) for delay in reporting Form ECB 2, LSF amount=[7500 + (0.025% × A × n)] where;
a) n” is the number of years of delay in submission rounded-upwards to the nearest month and expressed up to 2 decimal points.
b) “A” is the amount involved in the delayed reporting.
c) LSF amount is to be computed for each return.
However, for any number of Form ECB-2 returns, delayed submission for each LRN will be treated as one instance for the fixed component. Further, ‘A’ for any ECB-2 return will be the gross inflow or outflow (including interest and other charges), whichever is more.
d) Maximum LSF amount will be limited to 100 per cent of ‘A’ and will be rounded upwards to the nearest hundred.
e) Where an advice has been issued for payment of LSF and such LSF is not paid within 30 days, such advice shall be considered as null and void and any LSF received beyond this period shall not be accepted. If the applicant subsequently approaches for payment of LSF for the same delayed reporting, the date of receipt of such application shall be treated as the reference date for the purpose of calculation of “n”.
Non-compliance with the provision of STPI registration for export of software will attract penal proceedings under Section 13(1) FEMA and accordingly, penalty up to thrice the sum involved in the contravention can be imposed. Further, Unit may also be subjected to continuous penalty which may extend to INR 5,000 for every day after the first day during which the contravention continues.
Failure to comply with these requirements can lead to the denial of credit, renewal, or enhancement of existing exposures
U/s 13 of FEMA 1999: For contravention of any provision of the Act/Rules/Regulations, etc thereunder, penalty up to 3 times of the sum involved in contravention, where such sum is quantifiable and where its not, up to two lakh rupees and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.
Conclusion
The Foreign Exchange Management Act, 1999 establishes a comprehensive framework for regulating foreign exchange transactions and cross-border business activities in India. Compliance with FEMA regulations is mandatory for all entities engaged in foreign exchange dealings, foreign investments, or international business operations. The Act emphasizes proper reporting, documentation, and approval procedures to ensure transparent and regulated foreign exchange management. Businesses must maintain accurate records, file timely returns, obtain necessary approvals, and adhere to prescribed limits and conditions. Non-compliance can result in penalties and legal consequences. Regular monitoring of regulatory updates, proper documentation of transactions, timely submission of reports to RBI and other authorities, and seeking appropriate approvals are essential for maintaining FEMA compliance and facilitating smooth international business operations.
Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article.