Foreign Investment & FEMA

Cross-border capital is regulated by the Foreign Exchange Management Act, 1999, together with the rules, regulations and directions issued under it. Compliance is mainly a matter of route, pricing, timelines and reporting. Errors in these tend to surface years later, typically when the company raises funds or a shareholder exits.

Where this arises

• A foreign investor or non-resident Indian investing in an Indian company.
• Transfer of shares between residents and non-residents.
• An Indian company or resident setting up or investing in an overseas entity.
• Downstream investment through a company that already has foreign ownership.
• A company discovering, during diligence or an audit, that past reporting was not made.

What the work involves

Identifying the permitted entry route and any sectoral conditions; applying the pricing and valuation requirements; reporting to the Reserve Bank of India within the prescribed time, such as the reporting of an allotment of shares to a non-resident; the annual return on foreign liabilities and assets; and compliance under the overseas investment rules for outbound structures.

Correcting past lapses

Delays in reporting, and in some cases substantive contraventions, can usually be regularised. This is done through late submission and, where needed, a compounding application to the Reserve Bank of India. The longer a lapse remains uncorrected, the more complicated it is to correct, and a clean record is often a condition of the next transaction.

Points that are often missed

• The responsibility for reporting generally sits with the Indian company, even though the investment comes from abroad.
• Pricing is tested at the time of the transaction, and the supporting valuation must come from the right professional.
• Terms such as options, convertible instruments and deferred payment need to be checked against the rules before they are agreed, not after.