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This page explains fdi, FEMA and foreign exchange compliance in plain terms: the law, the forum, the documents and the usual steps. Legals365 is the legal platform of Advocate B.K. Singh and associates, based in Delhi NCR.

In short. FEMA 1999 governs every cross-border money flow in India: foreign investment into Indian companies and LLPs, Indian investment abroad, export and import payments, borrowing and remittances. Most FDI comes under the automatic route but must be reported to the RBI through the AD bank on time. Contraventions are civil, with penalties up to three times the sum involved, and most can be compounded.

Foreign exchange law in India rarely announces itself. A start-up takes money from an overseas angel, an exporter's buyer pays late, a family sells a flat and wants to send money to a son in Canada, a Dubai company is set up by an Indian director, or a foreign partner leaves an Indian firm. Each of these is a transaction under the Foreign Exchange Management Act 1999 (FEMA), and each has a form, a deadline and an approval route. Most problems arise not from bad faith but from a missed filing that surfaces years later during due diligence, a bank's review or an Enforcement Directorate notice.

This page explains how FEMA works in practice: foreign direct investment (FDI) and its reporting, transfers of shares between residents and non-residents, overseas investment by Indian companies and individuals, export and import payments and the role of the Directorate General of Foreign Trade (DGFT), foreign partners in firms and LLPs, cross-border IP payments, and what to do when a contravention is found. It also covers compounding with the RBI, adjudication by the Enforcement Directorate and appeals.

Law

Foreign Exchange Management Act 1999; Foreign Exchange Management (Non-debt Instruments) Rules 2019; Overseas Investment Rules and Regulations 2022; Foreign Trade (Development and Regulation) Act 1992; Foreign Trade Policy 2023; Customs Act 1962

Regulators

Reserve Bank of India through authorised dealer (AD) banks; Ministry of Finance and DPIIT for FDI policy and approvals; Enforcement Directorate for investigation and adjudication; DGFT for import-export licensing

Key deadlines

Capital instruments issued within 60 days of receiving funds; FC-GPR within 30 days of allotment; FC-TRS within 60 days of transfer or receipt of funds, whichever is earlier; FLA return by 15 July each year

Penalty

Up to three times the sum involved where quantifiable, or up to ₹2 lakh where not, plus up to ₹5,000 a day for a continuing contravention (s.13)

Settlement route

Compounding under s.15, mostly by the RBI, under the Foreign Exchange (Compounding Proceedings) Rules 2024

Appeals

Special Director (Appeals) or Appellate Tribunal within 45 days; then the High Court on a question of law within 60 days (s.35)

Documents

Board resolutions, valuation report, FIRC and KYC from the AD bank, share allotment records, investment agreements, shipping bills, IEC, bank realisation certificates

What FEMA covers, and why it is a civil law

FEMA regulates dealings in foreign exchange and transactions between residents and non-residents. Section 3 bars dealing in foreign exchange except through an authorised person, s.4 bars a resident from holding foreign exchange or assets abroad except as permitted, s.5 governs current account transactions such as trade payments, travel and education, and s.6 governs capital account transactions such as investment, borrowing and property. The detailed rules sit in notifications: the Non-debt Instruments Rules 2019 for foreign investment, the Overseas Investment Rules 2022 for investment abroad, and RBI regulations and master directions for reporting, borrowing, exports and imports.

FEMA replaced the Foreign Exchange Regulation Act 1973 in June 2000 and turned foreign exchange violations from crimes into civil contraventions. A contravention leads to adjudication and a monetary penalty, not prosecution, and most can be compounded by paying a sum fixed by the RBI. The exceptions to the soft approach are foreign assets held abroad in breach of s.4, where s.37A lets the authorities seize assets of equivalent value in India, and non-payment of a penalty, which can lead to recovery and civil imprisonment under s.14. Money laundering is a separate matter under the PMLA, and undisclosed foreign income and assets attract the Black Money Act.

For most businesses the real FEMA risk is procedural: a late FC-GPR, shares issued below fair value, an export bill not realised in time, an overseas subsidiary set up without the right filing, or a foreign partner admitted to a firm without approval. These are fixable, and the earlier they are fixed the cheaper the fix.

Common foreign exchange transactions and what each needs

The laws and rules that apply

FDI routes, sector caps and prohibited sectors

Foreign direct investment comes in through the automatic route, where no prior approval is needed and the company only reports after receiving the money, or the government route, where the investor applies on the National Single Window and Foreign Investment Facilitation Portal and the administrative ministry decides. Most manufacturing and services sectors are on the automatic route up to 100%. Some sectors carry caps or conditions, such as insurance, defence, broadcasting, print media, multi-brand retail and banking, and these change through press notes, so check the current consolidated policy before signing a term sheet.

A few activities are closed to FDI altogether: lottery, gambling and betting, chit funds, nidhi companies, trading in transferable development rights, real estate business or construction of farmhouses, and manufacture of tobacco products, among others. Real estate business here means dealing in land and immovable property for trading; construction development, completed rental assets and REITs are treated differently.

Press Note 3 of 2020 changed the picture for one group of investors. Any investment from an entity in a country sharing a land border with India, or where the beneficial owner is situated in or is a citizen of such a country, needs government approval regardless of sector. Founders often discover this late, when a fund with a small limited partner from such a country wants to invest. Ask about beneficial ownership at the term sheet stage, not at closing.

Pricing, instruments and valuation

Foreign investors can be issued equity shares, compulsorily convertible preference shares and compulsorily convertible debentures, and warrants and partly paid shares on conditions. Instruments that are optionally convertible or redeemable are treated as debt and fall under the external commercial borrowing rules. Eligible start-ups can also issue convertible notes to non-residents, subject to a minimum amount per tranche and a conversion period set by the NDI Rules.

The pricing rule is the one that trips people. For an unlisted Indian company, shares issued to a non-resident cannot be priced below fair value worked out by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant using an internationally accepted pricing method. When a non-resident sells to a resident, the price cannot be above fair value. For conversion instruments, the conversion price or formula must be fixed upfront and must not be below fair value at the time of issue.

Put options in favour of a foreign investor are allowed only if there is a minimum lock-in of one year and the exit price is at fair value without an assured return. A clause that guarantees the investor a fixed return on exit can make the instrument look like debt and cause a contravention. Where Companies Act rules also require a registered valuer's report, as for a preferential allotment, obtain both and make sure they do not contradict each other.

How to receive FDI and report it correctly

The sequence below is for an unlisted Indian company receiving fresh equity from a foreign investor under the automatic route.

1. Check the sector and the investor

   Confirm the sector is on the automatic route, the cap is not crossed and the investor is not from a land-border country or beneficially owned from one. If any of these fails, apply for government approval first.

2. Fix price and documents

   Obtain the fair value certificate, pass the board and shareholder resolutions under the Companies Act, sign the subscription agreement and shareholders' agreement, and amend the articles if investor rights need to be entrenched.

3. Register on FIRMS and receive funds

   Create or update the entity master on the RBI's FIRMS portal. The money must come through normal banking channels into the company's account with an AD bank, which issues a Foreign Inward Remittance Certificate and completes the investor's KYC.

4. Allot within 60 days

   Issue the capital instruments within 60 days of receiving the funds. If allotment cannot happen in time, the money must be refunded within 15 days after the 60-day period ends. File the return of allotment with the ROC.

5. File FC-GPR within 30 days

   File the FC-GPR on FIRMS through the AD bank within 30 days of allotment, with the FIRC, KYC, valuation certificate, company secretary certificate and declaration. Respond to the AD bank's queries quickly; an unanswered query can leave the form pending past the deadline.

6. Keep up the annual filings

   File the FLA return by 15 July every year while foreign investment remains. Record the investor in the register of members and issue share certificates or credit demat shares, which most private companies must now do under rule 9B.

Where the company is an LLP, the sequence is similar, but the form is LLP-I and FDI is allowed only in sectors open to 100% automatic route without FDI-linked conditions.

Transfers of shares between residents and non-residents

When an Indian resident sells shares to a foreign buyer, or a foreign shareholder sells to an Indian buyer, the transfer must follow the pricing guidelines and be reported in Form FC-TRS within 60 days of the transfer or receipt of funds, whichever is earlier. The resident party is responsible for the filing. Stamp duty on the transfer must be paid, and the company records the transfer only after receiving the duly stamped transfer instrument or depository instruction.

Deals with deferred consideration are allowed within limits: up to 25% of the price can be deferred for up to 18 months, held in escrow or paid later, or the seller can indemnify the buyer for the same period and amount. Earn-outs beyond these limits need careful structuring. When a foreign investor exits a company in a sector with conditions, check that the buyer is eligible and that the post-transfer shareholding still respects the cap.

For the wider deal, including due diligence, share purchase agreements and joint ventures, see mergers, acquisitions, joint ventures and investment deals. For the ROC side of allotments and transfers, see company and LLP compliance.

Overseas investment and setting up a company abroad

An Indian company or LLP that wants to set up or buy a business abroad does so under the Overseas Investment Rules and Regulations 2022. Overseas direct investment into an operating foreign entity is allowed under the automatic route up to a financial commitment limit linked to the Indian entity's net worth, reported to the AD bank in Form ODI, with an Annual Performance Report filed by 31 December each year for as long as the investment lasts. Investment in a foreign entity engaged in real estate business, gambling or certain financial products is restricted, and structures that route money back into India through more than two layers of subsidiaries are not allowed.

Resident individuals can make overseas direct investment in an operating foreign entity within the Liberalised Remittance Scheme limit of USD 250,000 per financial year, but not in an entity engaged in financial services, and with limits on step-down subsidiaries. This is the route for an Indian founder setting up a company in Dubai, Singapore, Sri Lanka or elsewhere. The foreign company is formed under local law, through a mainland or free zone authority in the UAE or the local registrar elsewhere, usually with local counsel or an agent, but the Indian side needs its own FEMA paperwork first. Indian tax collection at source applies to LRS remittances above a threshold, and the overseas holding has to be disclosed in Indian tax returns.

For Indian incorporation and foreign subsidiaries of Indian groups, see company, LLP and business registration. When Advocate B.K. Singh reviews an overseas structure, the first question he asks is whether money will ever come back to India from the foreign entity, because round-tripping is where most ODI problems begin.

Export and import payments under FEMA

Exporters must declare their exports, realise the full export value and bring it into India within the period the RBI allows. Each shipping bill or export declaration is tracked on the Export Data Processing and Monitoring System (EDPMS) of the AD bank, and each import payment on the Import Data Processing and Monitoring System (IDPMS). RBI notified the Foreign Exchange Management (Export and Import of Goods and Services) Regulations 2026, in force from 1 October 2026, and the realisation period has been changed more than once in recent years, between nine and fifteen months from export. Check the period that applies to your shipment date with your AD bank rather than relying on an old circular.

When a foreign buyer does not pay, the exporter should not simply leave the entry open on EDPMS. AD banks can extend the realisation period, allow set-off of export receivables against import payables with the same overseas party, and permit write-off within limits, provided the exporter shows genuine efforts to recover such as reminders, legal notices or a claim with the export credit insurer. Outstanding entries can lead to caution listing of the exporter and refusal of further export facilities.

Importers face the mirror problem: advance payments for imports that never arrive, and import bills paid without matching bills of entry. These stay open on IDPMS until closed with proof of import or refund. Keep shipping documents, bills of entry and bank advices together; a reconciliation done every quarter avoids a long correspondence later.

DGFT, the Importer Exporter Code and export obligations

Anyone importing or exporting goods needs an Importer Exporter Code (IEC) from the DGFT, issued online against the business PAN. The IEC must be updated every year between April and June, even if nothing has changed; otherwise it is deactivated, and shipments get held at customs. Services exporters need it only if they claim benefits under the Foreign Trade Policy.

The Foreign Trade Policy 2023 runs schemes such as Advance Authorisation and the Export Promotion Capital Goods scheme, which allow duty-free import of inputs or capital goods against an export obligation. When the obligation is not met within the period, the DGFT regional authority issues a demand and show cause notice, and customs claims the duty saved with interest. Extensions, regularisation, clubbing of authorisations and relief from the Policy Relaxation Committee are possible in many cases, but the application must be made with documents before the matter turns into a penalty order.

Penalties under s.11 of the Foreign Trade (Development and Regulation) Act include fines and suspension or cancellation of the IEC. Appeals lie under s.15 to the appellate authority named in the Act. Where a DGFT or customs order is without jurisdiction or passed without hearing, a writ before the High Court may be appropriate; see cases in the Delhi High Court. GST refunds on exports run separately; see GST registration, returns, notices and disputes.

Foreign partners in firms and LLPs, and dissolution

A foreign partner cannot simply be admitted to an Indian partnership firm or proprietorship. NRIs and OCIs may invest in a firm on a non-repatriation basis, but other non-residents need prior approval. An LLP is the better vehicle for foreign participation, since FDI is allowed in LLPs on the automatic route in sectors open to 100% FDI without conditions, and capital contributions and transfers are reported in Forms LLP-I and LLP-II.

When a firm or LLP with a non-resident partner is dissolved, or when that partner retires, the payout is a capital account transaction. The amount paid must match the partner's entitlement under the deed and the accounts, it must be paid through the AD bank, and for an LLP the transfer of the contribution must follow pricing rules and be reported. A dissolution notice to the partners and to the Registrar of Firms or ROC deals with the partnership law side; the foreign exchange side has to be completed separately, or the repatriation gets stuck at the bank.

The same applies in reverse when an Indian resident is a partner in a foreign firm. Holding a share in a foreign partnership is an overseas investment, and its creation, any additional contribution and its closure need the corresponding ODI filings.

Cross-border IP, royalties and international trademark protection

Payments for technology, brand licences and software from India to foreign owners are current account transactions and are generally permitted through the AD bank without RBI approval, subject to tax withholding and documentation. Income from licensing Indian IP abroad must be realised like any export of services. For group companies, the licence terms also have to stand up under transfer pricing.

Protecting an Indian brand abroad usually starts with an Indian trademark application or registration, which can then be extended to other countries through the Madrid Protocol by a single international application filed through the Indian Trade Marks Registry, designating the countries required. Some markets are better covered by a national filing through local agents. See trademark registration, objections and infringement and intellectual property protection and licensing.

Individuals, NRIs and property

Individual foreign exchange questions are common and usually straightforward. Residents send money abroad for education, travel, gifts, maintenance of relatives and investment under the LRS limit of USD 250,000 per financial year. NRIs keep NRE, NRO and FCNR accounts; NRE and FCNR balances are freely repatriable, while an NRI can remit up to USD 1 million per financial year from NRO balances, including sale proceeds of property, after tax compliance.

NRIs and OCIs may buy residential and commercial property in India, but not agricultural land, plantation property or farmhouses, except by inheritance. A person resident outside India who is not an NRI or OCI generally cannot buy immovable property in India except through permitted business routes. Sale proceeds of inherited property can be repatriated within limits with documentary proof of inheritance.

When something has gone wrong: late filings and compounding

Most FEMA contraventions found in due diligence are reporting delays. For a delay in filing forms such as FC-GPR, FC-TRS, ODI forms or the APR, the RBI allows regularisation by paying a late submission fee calculated on the amount and period of delay, within the time limit the RBI sets. Where the late submission fee route is not available, or the contravention is substantive (shares issued below fair value, investment in a prohibited sector, allotment beyond 60 days, an unreported ODI), the route is compounding under s.15.

Compounding is a voluntary admission. The applicant files an application with the RBI (or, for certain contraventions, the Enforcement Directorate) describing the contravention, the amount and the period, and pays a fee. The RBI calculates a compounding amount under the Foreign Exchange (Compounding Proceedings) Rules 2024 and its master direction, and once paid, no further proceedings are taken for that contravention. Compounding can be refused where the ED is investigating the matter or the contravention is serious, and repeat contraventions within a short period are treated more strictly.

In compounding applications that reach Advocate B.K. Singh's office, the weak point is usually the narrative: a vague description that leaves the RBI asking for clarifications for months. A clean chronology with each remittance, allotment and filing date, and the reason for each delay, is what gets an application decided.

Enforcement Directorate notices and adjudication

The Enforcement Directorate investigates FEMA contraventions and adjudicates them. It can summon people, call for documents and record statements, and it can search premises and seize documents. After investigation, a complaint goes to an adjudicating authority within the ED, which issues a show cause notice. The noticee files a reply, inspects the relied-upon documents and is heard. The order may impose a penalty under s.13 and confiscate the currency or property involved.

A FEMA notice is not an arrest notice. FEMA proceedings are civil. But the same facts sometimes lead to a PMLA case if a scheduled offence is involved, and statements given under FEMA can be used later, so answer summons through counsel with a prepared set of documents. Appeals from the adjudicating authority go to the Special Director (Appeals) or the Appellate Tribunal within 45 days, and from the Tribunal to the High Court on a question of law within 60 days. A pre-deposit of the penalty may be required, and the Tribunal can waive or reduce it.

Where the ED alleges a criminal angle such as cheating or forgery, see economic offences and EOW cases. Income-tax questions about foreign income and assets are covered under income tax notices, returns and ITAT appeals.

Documents to keep for FEMA and DGFT compliance

Common FEMA and DGFT mistakes

• Taking foreign money before checking the route. Funds from a land-border country investor, or into a capped sector, need approval first.
• Issuing shares late. Allotment beyond 60 days needs a refund or compounding. Keep documents ready before the money arrives.
• Back-dated valuations. A valuation prepared after the event is easy to spot and creates a pricing contravention on top of a delay.
• Assured returns to foreign investors. A guaranteed exit price turns equity into debt in the eyes of the regulator.
• Founders setting up foreign companies informally. Paying incorporation costs abroad on a personal card without ODI filings leaves a contravention on the founder.
• Leaving export bills open. Unrealised entries on EDPMS lead to caution listing; ask the AD bank for extension or write-off in time.
• Missing the IEC annual update. A deactivated IEC holds up shipments at the port.

What to do this week

• List every foreign investment, overseas investment and foreign loan the business has, with dates and amounts.
• Download the FIRMS and AD bank records and check each FC-GPR, FC-TRS, ODI form and APR.
• Check that the FLA return for the last year was filed by 15 July.
• Pull the EDPMS and IDPMS outstanding list from your AD bank.
• Confirm the IEC was updated this year between April and June.
• If you received an ED summons or show cause notice, collect all transaction documents before the date and do not appear without preparation.
• If a contravention is found, decide between late submission fee and compounding, and file the chronology.

How the answer changes for start-ups, exporters, NRIs and foreign parents

A start-up raising its first foreign money worries mostly about pricing, instruments and the 60-day and 30-day deadlines; see also legal advisory for startups and businesses. A foreign parent setting up an Indian subsidiary deals with sector caps, downstream investment rules and the annual FLA return. An exporter's concern is realisation, EDPMS and DGFT export obligations. An individual NRI or resident family's questions are about LRS, NRO repatriation and property. The law is the same; the forms and the pressure points differ.

For businesses in Delhi, Noida, Ghaziabad and Gurugram, the practical work happens with the AD bank's trade or FEMA desk, the RBI's regional office for compounding, the DGFT regional authority in New Delhi and the ED's zonal office for notices. Cross-border contracts with foreign investors or suppliers should carry a workable dispute clause; see arbitration and commercial contracts.

If you want the papers checked before you act, the team of Advocate B.K. Singh at Legals365 can review them and tell you the next step. Talk to a lawyer.

Frequently asked questions

What is FC-GPR and when must it be filed?

FC-GPR is the form an Indian company files on the RBI's FIRMS portal, through its AD bank, to report shares or other capital instruments issued to a foreign investor. It must be filed within 30 days of allotment. Late filing can be regularised by a late submission fee within the RBI's time limits.

Is FEMA violation a criminal offence?

No. FEMA contraventions are civil and lead to adjudication and monetary penalties, not prosecution. The penalty can go up to three times the amount involved. Separate criminal laws such as the PMLA or BNS can apply if the facts involve money laundering, cheating or forgery.

How does FEMA compounding work?

You admit the contravention and apply to the RBI (or the ED for some contraventions) with the facts, amounts and dates. The RBI fixes a compounding amount under the Foreign Exchange (Compounding Proceedings) Rules 2024, and once it is paid, no further proceedings are taken for that contravention. It can be refused where the contravention is serious or under ED investigation.

Can a company receive FDI before getting approval?

Under the automatic route, yes: no prior approval is needed, and the company reports after receiving the money. Under the government route, including any investment from a country sharing a land border with India, approval must come first. Taking money before approval is a contravention.

What happens if shares are not allotted within 60 days of receiving foreign funds?

The company must refund the money within 15 days after the 60-day period ends. If it allots late or does not refund, that is a contravention that is usually regularised through compounding with the RBI. Keep the valuation and resolutions ready before the money arrives.

How much money can I send abroad under LRS?

A resident individual can remit up to USD 250,000 per financial year under the Liberalised Remittance Scheme for permitted purposes, including education, travel, gifts and investment. Tax collection at source applies above a threshold. Remittances for prohibited purposes such as lottery or margin trading are not allowed.

Do I need an IEC for exporting services?

Services exporters need an IEC only if they want benefits under the Foreign Trade Policy. Exporters and importers of goods need one for customs clearance. The IEC must be updated every year between April and June.

What if my foreign buyer does not pay for an export?

Inform your AD bank, keep evidence of recovery efforts such as reminders, legal notices and insurance claims, and apply for extension of the realisation period or write-off within the limits the bank can allow. Leaving the bill open on EDPMS can lead to caution listing. A claim against the buyer can be pursued separately under the contract.

Can an Indian resident set up a company in Dubai?

Yes. A resident individual can invest in an operating foreign entity under the Overseas Investment Rules within the LRS limit, but not in a financial services entity. An Indian company can do so under the ODI route with Form ODI and annual reporting. The company is formed under local law with local registration.

Can an NRI buy agricultural land in India?

No. NRIs and OCIs can buy residential and commercial property but not agricultural land, plantation property or farmhouses, except by inheritance. Inherited property can be held and sold, and sale proceeds repatriated within limits.

What should I do if I receive an ED summons under FEMA?

Read the summons carefully for the date, the documents called for and the capacity in which you are summoned. Collect the transaction documents and appear with a prepared chronology, preferably after taking legal advice. FEMA proceedings are civil, but statements recorded can be used later.

How long does the RBI take to decide a compounding application?

The RBI aims to decide within about 180 days of receiving a complete application. Incomplete applications and vague facts cause most delays. Once the compounding order is passed, the amount must be paid within the time stated.