India adheres to stringent compliance for cross border transactions. Often companies have to go through a cumbersome and irritant process while going through cross border transactions. An increase in inbound outbound flow of funds has also led to increase in the level of check on compliances in the milieu of foreign exchange. A need emerges with the Corporate to watch out for outside trade exchanges, in the setting of sectoral tops, investment tops, to go around from the enormous penalties. FEMA compliance plays an essential role in the growth and success of various sectors in India. The purpose of introducing the Foreign Exchange Management Act, 1999 (FEMA) is to smooth external trade, maintaining a healthy foreign exchange market in India, promote the importance of balance payments.
List of substantial compliance that is essential to follow under the provisions of FEMA
Annual Return On Foreign Liabilities And Assets
Annual Return for Foreign Liabilities and Assets is compulsory to submit by all India inhabitant companies which have already got FDI or have made ODI in any of the preceding years, including current year. If the Indian Company fails to make any investment either in FDI or ODI at the end of the reporting year, then the company doesn't need to submit the FLA Return. If the Indian Company has any outstanding FDI or ODI then it becomes essential for the company to submit the FLA return every year.
Annual Performance Report
Annual Performance Report is submitted by those Indian Party or Resident Individual who has made an Overseas Direct Investment (ODI). Annual Performance Report is provided in Form ODI Part II to the AD bank in respect of Joint Venture, Wholly Owned Subsidiaries (WOS) outside India on or before 31st December every year.
Appropriate To Software Companies
1. Directors or employees of the company enjoys the privilege of investing in the shares of Promoters Company abroad (JV or WOS).
2. Only a limited number of shares can be purchased. The limit prescribed is $10,000 for five calendar years.
3. These shares cannot be more than 5% of the paid-up capital of the issuing company.
4. Post allotment holding should not exceed the pre allotment holding.
External Commercial Borrowing
Borrowers need to report to the RBI regarding all ECB transactions via an AD Category-I Bank in the form of ‘ECB 2 Return’ on a monthly basis.
Single Master Form (W.E.F 30.06.2018)
Under the head Single Master form FC-GPR, FC-TRS, LLP-I, LLP-II, CN, ESOP, DI, DRR, InVi are to be recorded and submitted. The Reserve Bank of India (the "RBI"), on September 1, 2018, discharged a client manual (the "SMF Manual") to understandably set out the system for filing a single master form(the "SMF"), which it presented on June 7, 2018, to incorporate the current detailing standards for foreign investment in India.
Advance Reporting Form
An Indian organization enjoying the benefit of receiving investment from abroad for issue of shares or other qualified securities under the FDI Scheme needs to report the subtleties of the amount of consideration to the concerned Regional Office of the Reserve Bank via its AD category I bank within 30 days from the date of issue of offers.
RBI issues this form under Foreign Exchange Management Act, 1999. At the point when the organization gets the foreign investment and against such investment it distributes its shares to such outside investors. It becomes the obligation of the organization to file subtleties of such allotment of shares with the RBI within 30 days and for that organization needs to utilize the form FC-GPR (Foreign Currency-Gross Provisional Return) for submitting subtleties with RBI.
Form FC-TRS stands for Foreign Currency Transfer. This form is filed at the time of transfer of shares or convertible debentures of an Indian company from a resident to a non-resident/non-resident Indian or vice versa with the purpose of sale.
Any Indian resident individual or Indian party is willing to invest in the overseas market needs to submit Form ODI. At the point when they get a share certificate or some other documentary proof of investment in the outside JV/WOS as a proof of investment and present the equivalent to the assigned AD within 30 days.
FEMA Compliance Guidelines and Features
FEMA considers all forex-associated offenses as civil offenses whereas FERA considers them as a criminal offense. It can be counted as one of the features of FEMA.
Other Essential Features And Guidelines Of FEMA Compliance Are As Follows:
- FEMA will not apply to Indian citizens who live outside India. To check the residency of an Indian citizen, a method is adopted based on which number of days an individual lived in India is calculated during the preceding financial year (182 days or more to be a resident). An office, a branch, or an agency can be considered as a person to calculate Indian residency.
- FEMA grants the authority to the central government to impose restrictions on three things and supervise those things as well. These are payment given to any individual outside India, payment received from any individual outside India, forex, and foreign security deals.
- It indicates the territories around acquisition/holding of forex that requires the explicit consent of the Reserve Bank of India (RBI) or the government.
- FEMA classifies foreign exchange transactions into two categories:
1. Capital Account
2. Current Account
The purpose of capital account transaction is to adjust the assets and liabilities either outside or inside India but of an individual who resides outside India. Thus, any transaction that has led to change in overseas assets and liabilities for an Indian resident in a remote nation or vice versa falls under the category of capital account transaction. Any other sort of transaction falls into the category of current account.
If any individual fails to comply with the norms, orders, and provisions of FEMA is liable for penalty. The penalty to be charged is up to thrice the sum involved in such contravention or up to Rs 2lakhs. Further penalty, which may reach out to rupees 5,000 for each day post the first day during which the contravention proceeds. Hence, it is wise of you to stick to all the compliances of FEMA.