FEMA | Exchange Control Regulations

FEMA / Exchange Control Regulations

As the primary regulatory authority, the Reserve Bank of India (RBI) oversees and enforces foreign exchange control regulations in India. The Foreign Exchange Management Act, 1999, along with the Regulations and Rules prescribed by the Government, govern all foreign currency-related transactions in India. To facilitate compliance, the RBI has issued Master Directions on various topics, consolidating applicable provisions of FEMA, Regulations, and Rules, and FAQs to clarify multiple aspects of FEMA compliance.

Foreign Direct Investments
(Inbound Investment)

Investments from foreign jurisdictions into India are known as foreign direct investments (FDIs).

The Reserve Bank of India (the Central Bank of India) regulates FDIs. There are two routes for FDIs in India: the Approval Route and the Automatic Route. The Government of India prescribes a Consolidated Foreign Direct Investments Policy from time to time.
Sectors are classified under Approval or Automatic routes (except for prohibited sectors) with investment caps and are subject to certain conditions.

Some strategic sectors are kept under the Approval route, where prior government approval is required before starting a business in India. The Foreign Investment Facilitation Portal and National Single Window System are available under the Approval Route for government approval.

Most other sectors are opened up, allowing 100% FDI in India. The Automatic Route, in particular, offers a flexible approach to investment, with sectoral caps applicable for some sectors with or without conditions. There are investment restrictions for some of India’s neighbouring countries, but the overall process is designed to facilitate foreign investment.

External Commercial Borrowings (ECBs) are commercial loans raised by eligible Indian resident entities from recognised non-resident (foreign) entities. ECBs can be denominated in foreign currency or the Indian rupee.

ECBs in foreign currency denomination can take the form of loans, including bank loans, floating/ fixed rate notes, bonds, and debentures (other than fully and compulsorily convertible instruments), trade credits beyond three years, foreign currency convertible bonds (FCCBs), foreign currency exchangeable bonds (FCEBs), and Financial Leases.
ECBs in Indian Rupee denomination can take the form of loans, including bank loans, floating/ fixed rate notes, bonds, debentures, preference shares (other than fully and compulsorily convertible instruments), trade credits beyond three years, and Financial Leases. Also, plain vanilla rupee-denominated bonds issued overseas can be either placed privately or listed on exchanges as per host country regulations.

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ECBs should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling and hedging.

The borrower shall obtain a Loan Registration Number (LRN) from RBI through authorised banks. Draw-down will be allowed only after receiving the LRN.

ECBs can be converted into equity, subject to the prescribed conditions.

Security can also be provided for raising ECBs by creating charges on immovable and movable assets, financial securities, and personal guarantees.

Special dispensation has been given to startups for the ECB facility, demonstrating the supportive environment for entrepreneurship in India. This provision is a testament to the country’s commitment to fostering innovation and growth.

External Commercial Borrowings

Overseas Direct Investments
(Outbound Investment)

Overseas Direct Investment (ODI) means;

(i) acquisition of any unlisted equity capital or subscription as a part of the Memorandum of Association of a foreign entity or

(ii) investment in 10% or more of the paid-up equity capital of a listed foreign entity; or

(iii) investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity.

Once an investment in a foreign entity is classified as ODI, it shall continue to be treated as ODI even if it falls below 10% of the paid-up equity capital or the investor loses control of the foreign entity.

An Indian entity can make Financial Commitments of up to 400% of its Net Worth or USD 1 billion, whichever is lower, in a financial year. This limit is based on the most recent audited balance sheet, which should be no more than 18 months before the transaction date.

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“Financial Commitment” by a person resident in India means the aggregate amount of investment by way of ODI, debt other than Overseas Portfolio Investment (OPI) and non-fund based facility or facilities extended by it to all foreign entities. An Indian entity may lend or invest in any debt instruments issued by a foreign entity or extend non-fund based commitment to or on behalf of a foreign entity, including overseas step-down subsidiaries of such Indian entity, subject to the following conditions:

the Indian entity is eligible to make ODI;
the Indian entity has made ODI in the foreign entity;
the Indian entity has acquired control of the foreign entity on or before the date of making such financial commitment.

It’s important to note that any ODI in startups should not be made out of funds borrowed from others, ensuring that the investment is made from the entity’s own resources.

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A person resident in India cannot make ODI in a foreign entity engaged in:

(a) real estate activity;

(b) gambling in any form and

A person resident in India acquiring equity capital in a foreign entity reckoned as ODI shall submit the evidence of investment within six months, failing which the funds remitted overseas need to be repatriated within the said period of six months.

Outward ODI remittance will be facilitated only after obtaining the UIN for such an entity. The allotment of UIN does not constitute approval from the Reserve Bank for the investment made/to be made in the foreign entity.

Indian entities must file foreign entities’ Annual Performance Report (APR) by 31 December every year. If a foreign entity is not required to be audited under the host country’s laws, then the APR must be certified by a chartered accountant. Where the APR is required to be filed jointly, other investors may authorise either one investor to file it, or such persons may jointly file it.

“Overseas Portfolio Investment (OPI)” means investment, other than ODI, in foreign securities.

OPI is not allowed in:

any unlisted debt instruments; or
any security issued by a person resident in India who is not in an IFSC; or
any derivatives unless otherwise permitted by the Reserve Bank or
any commodities, including Bullion Depository Receipts (BDRs).

An Indian entity may make OPI not exceeding fifty per cent of its net worth as of its last audited balance sheet.

OPI by a person resident in India in the equity capital of a listed entity, even after its delisting, shall continue to be treated as OPI until any further investment is made in the foreign entity. Any further investment made in the equity capital of the foreign entity after its delisting can be made as ODI only.

A listed Indian company may make OPI, including by way of reinvestment. ‘Reinvestment’ means that the OPI proceeds are exempted from repatriation provisions as long as such proceeds are reinvested within the time specified for realisation and repatriation.

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An unlisted Indian entity may make OPI only by way of:

(a) acquisition of equity capital by way of rights issue or allotment of bonus shares;

(b) capitalisation, within the period specified for the realisation of any amount due towards the Indian entity from the foreign entity, the remittance of which is permitted or does not require prior permission of the Central Government or the Reserve Bank;

(d) merger, demerger, amalgamation or any scheme of arrangement as per the applicable laws in India or laws of the host country or the host jurisdiction, as the case may be.

Investment (including sponsor contribution) in units of any overseas investment fund duly regulated by the regulator for the financial sector in the foreign jurisdiction will be considered as OPI. Listed Indian companies and resident individuals are allowed to make such investments. However, unlisted Indian entities cannot invest in overseas investment funds.

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Unlisted Indian entities can make OPI in units of an investment fund or vehicle in IFSC.

Resident individuals may make OPI within the overall limit for the Liberalised Remittance Scheme (LRS). Shares or interest acquired by the resident individuals by way of sweat equity shares or minimum qualification shares or under Employee Stock Ownership Plan (ESOP)/ Employee Benefits Scheme up to 10% of the paid-up capital/stock, whether listed or unlisted, of the foreign entity and without control will also qualify as OPI.

Resident individuals are not permitted to transfer any overseas investment by way of gift to a person resident outside India.

Foreign entities are permitted to repurchase the shares issued to individual residents in India under any ESOP Scheme provided:

(i) the shares were issued in accordance with the rules/regulations framed under FEMA, 1999

(ii) the shares are being repurchased in terms of the initial offer document and

(iii) necessary reporting is done through the AD bank.

Overseas Portfolio Investment

Branch / Liaison / Project Office in India by a Foreign Entity

Foreign entities can open branch/liaison/project offices (BO/LO/PO) in India for specific purposes as per their business requirements.

AD Banks are authorised to consider applications from foreign entities to establish BO/LO/PO offices as per the extant RBI regulations and guidelines.

The following categories require prior approval of RBI for opening BO/LO/PO offices in India:

The applicant is a citizen of or is registered/incorporated in Pakistan;
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 BO/LO/PO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;

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3. The applicant’s principal business falls into the four sectors: defence, telecom, private security, information, and broadcasting. However, prior approval of the Reserve Bank of India shall not be required in cases where government approval or license/permission from the concerned ministry/regulator has already been granted. In the case of a proposal for opening a PO relating to the defence sector, no separate reference or approval of the Government of India shall be required if the said non-resident applicant has been awarded a contract by/ entered into an agreement with the Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings.

4. The applicant is a Non-Governmental Organisation (NGO), Non-Profit Organisation, or Body/ Agency/ Department of a foreign government. However, if such an entity is engaged, partly or wholly, in any of the activities covered under the Foreign Contribution (Regulation) Act, 2010 (FCRA), it shall obtain a certificate of registration under the said Act and is not required to seek prior RBI permission.

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The non-resident entity applying for a BO/LO in India should have a financially sound track record as below:

For Branch Office

A profit-making track record during the immediately preceding five financial years in the home country and net worth of not less than USD 100,000 or its equivalent.

For Liaison Office

A profit-making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50,000 or its equivalent.

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An applicant that is not financially sound and is a subsidiary of another company may submit a Letter of Comfort (LOC) from its parent/ group company provided the parent/ group company satisfies the prescribed criteria for net worth and profit.

The validity period of an LO is generally three years, except for Non-Banking Finance Companies (NBFCs) and entities engaged in the construction and development sectors, for whom the validity period is two years only. The project office’s validity period is for the project’s tenure.BO/LO/PO can apply for an extension of validity for further periods subject to specific terms and conditions.

Foreign companies have general permission to establish POs in India, provided they have secured a contract from an Indian company to execute a project in India. Also, the project must have secured the necessary regulatory clearances and be funded directly by inward remittance from abroad, or the project is funded by a bilateral or multilateral International Financing Agency, or a company or entity in India awarding the contract has been granted a Term Loan by a Public Financial Institution or a bank in India for the Project.

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BO/LO/PO approval will lapse unless the office is opened within six months. For valid reasons, AD Bank may extend the approval for a further six months. Any additional extension of time shall require the prior approval of the Reserve Bank of India.

There is general permission for non-resident companies to establish BO in the Special Economic Zones (SEZs) to undertake manufacturing and service activities subject to the following conditions:

such BOs are functioning in those sectors where 100% FDI is permitted;
such BOs comply with Chapter XXII of the Companies Act, 2013; and
such BOs function on a stand-alone basis.

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The applicant may submit to the Reserve Bank requests for undertaking activities in addition to what has been permitted initially, justifying the need.

BOs can remit the profits/surplus outside India subject to compliance with prescribed conditions.

In the event of a business winding up and for the remittance of winding-up proceeds, the branch shall approach an AD bank with the documents. BO/PO can remit funds after closure and upon satisfaction with prescribed conditions.

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Requests for establishing additional BOs / LOs may be submitted to the in a fresh Form FNC. However, the documents mentioned need not be resubmitted if there are no changes to the documents already submitted earlier.

If the number of offices exceeds 4 (i.e., one BO / LO in each zone, viz., East, West, North, and South), the applicant must justify the need for additional office/s and require prior approval of RBI.
The applicant may identify one of its offices in India as the Nodal Office, which will coordinate the activities of all its offices in India.
Whenever the existing BO/LO is shifting to another city in India, prior approval from the AD bank is required. However, no permission is required if the LO/BO is shifted to another place in the same city, provided the new address is intimated to the designated AD bank.

An Indian entity opening a Branch / Representative / Liaison office outside India is allowed to remit, subject to the following specific terms and conditions:

For Initial Expenses

Up to 15% of its average annual sales/income or turnover during the last two financial years or up to 25% of net worth, whichever is higher.

For Recurring Expenses

Up to 10% of its average annual sales/income or turnover during the last two financial years.

Branch / Liaison / Project Office outside India by an Indian Entity

Our Service Offerings

We offer the following major services under FEMA/Exchange Control Regulations, which are tabulated for ease of understanding: