FEMA & FCRA

The foreign exchange regulations have been Liberalised over the years to facilitate the remittance of funds both in and out of India. The changes have been introduced on a continuous basis in line with the government policy of economic liberalization. Still, in few cases, specific approvals are required from the regulatory authorities for foreign exchange transactions/remittances.

FEMA is not only applicable to all parts of India but is also applicable to all branches, offices and set-ups outside India which are owned or controlled by a person resident in India. It also applies to all branches, offices and set-ups in India which are controlled or owned by person resident outside India. FEMA regulates all aspects of foreign exchange and has direct implications on external trade and payments. FEMA also impacts foreign nationals who are working in India or outside.

NR Professionals with decade old affluent experience & number of complex resolutions of problems regarding approval of regulatory authorities, advices, procedural compliances & successful appearance before authorities make NR Professionals a final destination of all cross border transactions.

FEMA was enacted by the Parliament of India in the winter session of 1999 to replace the Foreign Exchange Regulation Act (FERA) of 1973. The Foreign Exchange Management Act, 1999 officially came into force on 1st June 2000. Thus, the forex market in India is regulated by RBI (Reserve Bank of India) and its arrival paved the way for the introduction of the Prevention of Money Laundering Act (PMLA) of 2002.

As the product is exchange traded, the conduct of forex rates or foreign currency futures trading facility is being regulated jointly by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Indian forex reserves are very important strength of any country for international economic relations and negotiations. Foreign market is mainly influenced by international transactions across the world.

Objectives of FEMA Act, 1999:

Following are the most important objectives of FEMA Act, 1999:-
• Facilitating external trade and payments
• Promoting the orderly development and maintenance of foreign exchange market in India
• Defining formalities and procedures for all forex transactions in India

Difference between FEMA and FERA:

FERA was an act promulgated, to regulate payments and foreign exchange in India, on the contrary FEMA is an act or FEMA Bare Act to promote orderly management of the foreign exchange in India. FERA has been annulled whereas FEMA act 1999 is in existence as one of the regulatory authorities of India.

Difference between FEMA and FCRA?

Money received for commercial purposes is governed by the ministry of finance under FEMA while funds received for charity or social work are governed by the ministry of home affairs under FCRA. … “FCRA is a product of the Emergency era, much like the predecessor of FEMA—the Foreign Exchange (Regulation) Act, 1973 (FERA). Full form of FCRA is Foreign Contribution Regulation Act.

Forex meaning?

Foreign Exchange (forex or FX) is the trading of one currency for another. For example, one can swap the U.S. dollar for the euro. Foreign exchange transactions can take place on the foreign exchange market, also known as the forex exchange market.

Foreign Exchange Reserve:

Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies. These reserves are used to back liabilities and influence monetary policy. It includes any foreign money held by a central bank, such as the U.S. Federal Reserve Bank.

SCOPE OF SERVICES:

Foreign Direct Investment in India

Since 1991, the regulatory environment and the process to get FDI has consistently been eased to make it investor-friendly, catapulting India into the position of one of the fastest-growing economies of the world. It has been ranked (9th in terms of FDI inflows for 2016 by UNCTAD) among the top attractive destinations for inbound investments in the world. The Government with intent to attract and promote foreign investments has put in place FDI regulations in India with a framework that is transparent, predictable and easily comprehensible.

Foreign investment into a domestic entity on a strategic basis is subject to FDI policy in India. The GOI through Department of Industrial Policy & Promotion (DIPP) formulates a consolidated the process of FDI on a yearly basis which is a defined framework for FDI. Most recently, reforms were made for FDI policy in India 2019.

Foreign investors can invest directly in India, either on their own or through joint ventures in virtually all the sectors except in a very small list of activities where foreign investment is prohibited.
FDI in the majority of the sectors is under the automatic route, i.e., allowed without any requirement of seeking regulatory approval prior to such investment. Thus, the process to get FDI in most sectors don’t require prior approval from the GOI. Eligible investors can invest in most of the sectors of Indian Economy on an automatic basis.

FDI Investment Routes:

Foreign Direct Investment (FDI) can be made through two routes that are:
Automatic Route:
Indian companies engaged in various industries can issue shares to foreign investors up to 100% of their paid up capital in Indian companies

Government Approval Route:
Certain activities that are not covered under the automatic route require prior Government approval for FDIs.

*Investors are advised to check for government approval and other related sector condition in latest FDI Circular Section 5.

Category 1– Sectors in which FDI is permitted up to 100% under automatic route
Category 2– Sectors in which FDI is permitted up to 100% under Government Route
Category 3– Sectors in which FDI is permitted beyond certain limit with Government
Category 4– Sectors wherein FDI is permitted up to certain limit under both Government and Automatic routes subject to applicable laws/ regulations security and other conditionality’s

Our Key Services Offerings are:

(a) Prior RBI approval at the time of receipt of Foreign Loan in Indian entity
(b) Prior RBI approval at the time of transferring of fund from NRO Depository Accounts to Resident Person’s Account.
(c) Obtaining Central Government (FIPB) & RBI (Reserve bank of India) approvals
(d) Reporting at the time of receipt of Foreign Direct Investment (FDI) in Indian entity
(e) Annual Return by Indian entities
(f) Advisory as well as procedural services of Transfer of Shares of Indian Company from Residents to Non-Residents or Vis-à-vis.
(g) Interpretations and analysis of Foreign Exchange Management (Non-Debt Instruments) rules, 2019
(h) Advisory on which mode of FDI is most suitable for the intended purpose along with FDI Policy’s detailed analysis and interpretations.

Service Offering with respect to Inbound Investment

Since 1991, the regulatory environment in terms of foreign investments has been consistently eased to make it investor-friendly. The liberalization programme of the government aims at rapid and substantial growth of the country’s economy and a harmonious integration with the global economy.

Our key service offerings are:

1. Advise on an India entry approach and suggestions for obtaining optimal ownership/jurisdiction for an investment in India
2. Advise on the entity structuring for selecting an optimal entry vehicle such as a branch, subsidiary, LLP, joint venture, to name a few
3. Advise on capital structuring in the backdrop of foreign exchange policies keeping repatriation needs in mind
4. Assistance in filing/obtaining necessary regulatory approvals including those from the Reserve Bank of India, Foreign Investment Promotion Board, Government of India and other regulatory authorities
5. Assistance in finalizing /review of shareholders, joint venture and other relevant business agreements from a tax perspective
6. Repatriation strategies
7. Target due diligence.

Service offering with respect to Outbound Investment

The Indian regulations permit outbound investments from India into overseas companies, branch offices, joint ventures, etc. The Indian home-grown business houses interested in or aiming to set-up shop abroad or getting listed on the overseas bourses, also need to understand and stride through an interplay of cross-border taxes and regulatory challenges.

Our key service offerings are:

1. Advise on cross-border investment strategies and suggestions for obtaining optimal ownership/jurisdiction structures for investment into a particular jurisdiction which includes setting up an international holding company, global sales company etc.
2. Advise and assistance on entity structuring, capital structuring and regulatory approval processes in the selected jurisdiction
3. Assistance in finalizing/review of shareholders, joint venture and other relevant business agreements from a tax perspective
4. Identifying and enhancing tax and fiscal incentives, including obtaining tax rulings in the selected jurisdiction
5. Advise on the tax credit claim in India and tax treaty implications
6. Assistance in obtaining approvals from the Reserve Bank of India/regulatory authorities that may be required in the matter.

Overseas Direct Investment by Person Resident in India

Overseas Direct Investment means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment.

ODI IS REGULATED BY RBI THROUGH VARIOUS REPORTING REQUIREMENTS UNDER FEMA. Hefty Penalty is imposed if Compliances not done for FEMA – ODI !!!

Although FEMA is a very simple Law generally based on reporting / prior approval / compliance as directed by Reserve Bank of India (RBI), its non-compliance attracts massive penalties (in some cases even up to 3 times the amount involved!!!). Many a time due to lack of knowledge of Foreign Exchange Management Act, 1999 (FEMA) and sometimes due to inadvertence, one can unintentionally contravene the law and land in huge trouble.

Permissible Sources of Direct Investment in Joint Venture/Subsidiary:

a) Market Purchase
b) Swap of Shares
c) Capitalization of export and other dues & entitlement
d) Proceeds of ECB/FCCB
e) In exchange of ADRs/GDRs issued
f) Balance held in EEFC Account
g) Proceeds of ADR/GDR Issue

Entities allowed for ODI & Its Governance:

(A) Governed through ODI Regulations

i. Company incorporated in India
ii. A body created by parliament
iii. A Partnership Firm
iv. Limited Liability Partnerships
v. Registered Trust/Society

(B) Governed Through Liberalized Remittances Scheme

i. Resident Individual

Our Key Service Offerings are:

1. Calculation of Financial Commitment of Overseas Direct Investment
2. Reporting in Form ODI Part I at the time of investment remittance.
3. Filing of Annual Performance Return
4. FLA Returns by Indian Entities
5. Reporting of Disinvestment
6. Compliances & follow up of Investment proof, Repatriation of dues & disinvestment-sale proceeds compliances
7. Liaising with RBI regarding compliances and other communication
8. Any other advisory services regarding FEMA (Transfer & Issue of Any Foreign Security) Regulation 2004, Master Direction on Direct Investment by Residents in JV/WOS Abroad & Capital Account and Current Account Rules & LRS Scheme
9. Cancellation of UIN Number allotted

Repatriation of funds from NRO to NRE/abroad

You are allowed to transfer money from NRO to NRE account up to USD 1 million in a calendar year.

NRIs manage their expenses in India through two accounts- the Non-Resident External (NRE) account and the Non-Resident Ordinary (NRO) account. The NRE account is meant for transferring foreign earnings to India. On the other hand, NRO account is used to manage income earned in India.

How to transfer money to NRE account? How to transfer money to NRE account from USA? These are common questions many NRIs have. There are several ways in which you can transfer money to a NRE account from abroad. The money is deposited in Indian rupees.

Another question you may have is- can I deposit money in NRE account from India? You cannot transfer money to a NRE account from a savings account in India. However, you can transfer money from NRO to NRE account. You can also transfer money from one NRE account to another. Interest on NRO accounts attracts tax. On the other hand, interest on NRE accounts is tax free. So it is important to pay required taxes before you move funds from NRO to NRE account.

RBI announcement: On May 7, 2012 the Reserve Bank of India (RBI) permitted funds transfer from NRO to NRE account, subject to certain conditions. Before 2012, this was not permitted. The limit of money that can be transferred is USD 1 million in a financial year.

What is NRO and NRE Accounts?

1. The NRO account is mainly for depositing Indian incomes like dividends, rent or incomes through any investment or sale of property. In case of NRO account both non-resident and resident can become joint account holders.
2. The NRE account is mainly for depositing income from abroad. In case of NRE account, only NRIs can become joint account holders.

Our Key Services Offerings are:

1. Procedural compliances of converting funds from NRO to NRE to Foreign Account
2. Advisory for converting this fund from NRO to NRE & types of transactions allowed in respective NRO and NRE accounts
3. Documents Management required for such conversions
4. Filing Online of form No. 15CA with AD Category 1 Banks
5. Filing Online of Form No. 15CB-chartered accountant certificate

Inward & Outward Foreign Remittances by Residents

Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Further, resident individuals can avail of foreign exchange facility for the purposes mentioned in Para 1 of Schedule III of FEM (CAT) Amendment Rules 2015, dated May 26, 2015, within the limit of USD 2,50,000 only.

What are Inward Remittances?

Inward Remittance is used for remittance from an Overseas Bank to a Domestic Bank. Inward Remittance can be made against Export of Goods/ Services, for Investment purposes, Donations, Gifts, etc.

What is Outward Remittance?

An Outward Remittance is a process of transferring money in the form of foreign exchange, by a resident in a particular country, for instance, say India, to a beneficiary who is located outside the other country (except for Nepal and Bhutan) for any purpose and that is been approved under the Foreign Exchange Management Act (FEMA).

Our Key Services Offerings are:

1. Advice on inward remittances for receipt of remittance from abroad
2. Documents required for executing inward remittances
3. Procedural Compliances Outward remittances
4. Advices both inward and outward compliances
5. Advice on provisioning requirements of Income tax act, 1961 including assisting in filing of form 15CA on behalf of client and 15CB-Chartered Accountants certificate for such remittances

Setting up Branch/Project/Liaison Office in India

Recently, India has been growing at an unprecedented pace which has aroused a keen interest among foreign entities to establish their operations in India and tap into one of the largest and fastest growing market, and have access to some of the best human resources in the world. A physical presence in India is essential to break into the country’s emerging market.

Foreign companies should consider state regulations, physical connectivity, and local costs when choosing a location for their Indian office. Of equal importance is the type of company setup foreign companies choose. Having the right establishment presence can mean the difference between success and wasted efforts.

Branch Office in India

As a Branch Office (“BO”) in India, foreign companies can conduct full-fledged business in India. BO can carry the same or substantially the same trading activities as carried out by their parent or group companies. However, BO is not allowed to directly carry out manufacturing activities though it is permitted to sub-contract these services to an Indian manufacturer.

Liaison Office in India

Setting up a liaison or representative office (“LO”) is a common practice for foreign companies seeking to enter the Indian market. The role of such offices is limited to collecting information about the possible market and to providing information about the company and its products to prospective Indian customers. It cannot undertake any commercial activities and must only use remittances received from its parent foreign company to maintain itself.

Our Key Services Offerings are:

1. Advices related with permissible activities in branch or/and project office
2. Verification of eligibility criteria along with calculation of net worth as per said regulation
3. RBI prior approval compliances required for:
4. the applicant is a citizen of or is registered/incorporated in Pakistan;
5. the applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a liaison or branch office in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
6. the principal business of the applicant falls in the four sectors namely Defense, Telecom, Private Security and Information and Broadcasting:
7. The applicant is a Non-Government Organization, Non-Profit Organization, Body/ Agency/ Department of a foreign government.
8. Application for registration with RBI
9. Documents collection for procedural compliances
10. Post RBI approval advices like shifting of office, name change
11. Cancellation of UIN number allotted by RBI on registration
12. RBI liaison for above procedural compliances along with query resolutions

Advices on External Commercial borrowing & other borrowing and lending

In this context person resident in India and person resident outside India is to be referred from FEMA Act,1999 vide Section 2 for definition and not Income tax Act, 1961 vide section 6. To know various requirements of provisions as per regulation, following meanings are important to be known:

What is ECB (External Commercial Borrowing):
External Commercial Borrowings (ECB) are the borrowings taken by an eligible entity in India for commercial purpose from any recognized entity outside India. As funding by the companies through debt has been traditionally been a preferred mode of funding due to inherent advantages such as security creation, minimum guaranteed returns, and tax optimization for both the lender as well as the borrower. Therefore, funding through ECB route is gaining more prominence to bring investment or loan for new projects under permitted areas by the Reserve Bank of India (RBI).

What is ECL (External Commercial Lending):
Regulation 2(v) of FEMA 3(R) – “External Commercial Lending (ECL)” means lending by a person resident. in India to a borrower outside India in accordance with framework decided by the Reserve Bank in. consultation with the Government of India;

What is Indian Entity:
“Indian Entity” means a company incorporated in India under the companies Act, 2013, as amended from time to time, or a Limited Liability Partnership formed and registered in India under the Limited Liability Partnership Act, 2008, as amended from time to time.

Restricted End Uses of such borrowing and lending:
“Restricted End Uses” shall mean end uses where borrowed funds cannot be deployed and shall include the following:
a) In the business of Chit fund or Nidhi Company;
b) Investment in capital market including margin trading and derivatives;
c) Agriculture or plantation activities;
d) Real estate activities or construction of farm house; and
e) Trading in Transferrable Development Rights (TDR), where TDR shall have meant as assigned to it in the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2015.

Our Key Services Offerings are:

1. Advisory related to eligibility criteria for ECB and ECL
2. Advisory related with procedural compliances including Form No. ECB application for both Foreign Currency denominated ECB or INR denominated ECB
3. Advice for borrowing by persons other than Authorized dealer
4. Advice for Borrowing in Indian Rupees by a person Resident in India
5. Advice in lending in Foreign Exchange by a person Resident in India
6. Advice for lending in Indian Rupees by a person Resident in India by person Resident outside India
7. Advice on available routes–automatic and RBI approval route
8. Advice on borrowing rupees on repatriation or non-repatriation basis
9. Advices on repayment of loans to non-residents by relatives
10. Eligibility verification for borrowings in foreign exchange under the Automatic as well as RBI approval Route

Acquisition and Transfer of Immovable Properties in India

Reserve Bank of India notified the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018. Investment into immovable property or real estate investment may consist of substantial investment and black money could be channeled using these kinds of transactions involving funds from sale proceeds of such assets can be remitted outside India subsequently. Hence to have check over various transactions by various entity or persons, relevant regulations are to be adhered to.

Our Key Services Offerings are:

1. Consultancy for Acquisition and Transfer of Property by Non-Resident India or an Overseas Citizen of India
2. Consultancy for Acquisition of Immovable Properties for carrying out permitted activity by branch office, liaison office or project office.
3. Consultancy regarding Purchase and sale of immovable property by Foreign Embassies/Diplomatic/Consulate Generals other than agricultural land/ plantation property/farm houses
4. Consultancy for joint acquisition by the spouse of an NRI or an OCI
5. Consultancy for immovable property by a long-term Visa holder being a citizen of Afghanistan, Bangladesh or Pakistan
6. Consultancy for repatriation of sale proceeds outside India
7. Consultancy regarding creating charge on immovable properties in favor of an overseas lender/ security trustee or creating mortgage on an Immovable property owned by an NRI or OCI
8. Consultancy regarding appropriate provisions of Income tax before repatriation of sale proceeds outside India

Carry out compliance health check/regulatory risk analysis of past compliances/filings

Regulatory compliances are very easy & convenient especially so many compliances are to be done online only. If procedural compliances are not done through oversight or willingly, a person could find itself/himself into great problem as harsh provisions have been laid down for hefty penalty & rigorous imprisonment could be exercised. Penalty may increase to the extent of three times of amount involved.

As it is said Prevention is better than cure. Over here cure could be very uncomfortable and uneconomical hence let us select prevention by doing audit of compliance check for all the provisions and procedural compliances of relevant transactions impacting foreign exchange.

Our Key Services Offerings are:

1) Due Diligent checks of all transactions involving NRI/OCI/Non-Resident
2) Compliances audit for all provisions of FEMA and Income Tax including respective approvals of RBI & Government
3) Documentary & other evidential checks
4) Consultancy as well as compliance of non-compliances including appearance before relevant authorities, compounding of contraventions

Compounding of FEMA provisions contravention

Contravention is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued there under. Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. The Reserve Bank is empowered to compound any contravention as defined under section 13 of FEMA, 1999 except the contravention under section 3(a)1 ibid, for a specified sum after offering an opportunity of personal hearing to the contravener. It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention. It provides comfort to any person who contravenes any provisions of FEMA, 1999 by minimizing transaction costs. Willful, malafide and fraudulent transactions are, however, viewed seriously, which will not be compounded by the Reserve Bank.

Who can apply for compounding?
Any person who contravenes any provision of the FEMA, 1999 [except section 3(a)] or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act or contravenes any condition subject to which an authorization is issued by the Reserve Bank, can apply for compounding to the Reserve Bank.

Our Key Services Offerings are:

1) Verifications & Scope of Compounding credentials vis-à-vis contraventions analysis
2) Assisting in carrying out procedures for compounding with RBI
3) Appearance before authorities for personal hearing
4) Pre-requisite analysis for Compounding process
5) Assistance in compliances required to be done before applying to Compounding of Offences
6) Consultancy with respect to Guidance Note on Computation Matrix
7) Assistance in payment of convention when order of compounding is received within due times