FEMA

The Foreign Exchange Management Act, 1999 (FEMA) is India's exchange control statute, administered by the Reserve Bank of India (RBI). It replaced the punitive FERA 1973 with a regulatory (rather than prohibitive) approach.

Two pillars:

• Current Account Transactions (Section 5) — broadly free, except for items in Schedule I (prohibited — e.g., remittance for lottery winnings) and Schedule II/III (require RBI approval beyond limits — e.g., private travel above $2,50,000 per FY under LRS).
• Capital Account Transactions (Section 6) — regulated. Includes FDI, ODI, ECB, NRI investments, real estate transactions, and acquisition/transfer of foreign securities. Governed by detailed regulations:
• - NDI Rules 2019 — non-debt instruments (FDI, ODI portfolio, etc.)
• - FEM (Debt Instruments) Regulations 2019 — debt securities, NCDs
• - ECB Master Direction — external commercial borrowings
• - Master Direction on LRS — Liberalised Remittance Scheme for resident individuals (currently US$250,000 per FY)
• - Master Direction on Export and Import of Goods and Services — trade transactions

Key compliance touchpoints for Indian startups:

• Inward FDI: file FC-GPR with RBI within 30 days of allotment to non-resident.
• Share transfer between resident and non-resident: file FC-TRS within 60 days.
• External Commercial Borrowing (ECB): pre-approval (where required) and Form ECB filings; monthly Form ECB-2 for outstandings.
• Overseas Direct Investment (ODI): file Form ODI Part I before remittance; APR (Annual Performance Report) by December 31 each year for foreign subsidiaries.
• FLA Return: every Indian entity that has received FDI or made ODI must file the Foreign Liabilities and Assets Return with RBI by July 15 annually.
• Export realisation: export proceeds must be realised within 9 months of export.

Penalties — Section 13:

Up to 3 times the sum involved in the contravention; if the amount is not quantifiable, up to ₹2 lakh; continuing default attracts ₹5,000 per day. The Adjudicating Authority is the Directorate of Enforcement (ED).

Compounding: Most FEMA contraventions are compoundable with RBI — the practical exit for inadvertent breaches.

Press Note 3 (2020) under FDI Policy added a layer over FEMA — investments from land-bordering countries require Government approval. Foreign Contribution Regulation Act (FCRA) is separate and governs non-profits.