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FEMA stands for Foreign Exchange Management Act, 1999, which preliminary governs the compliances required when the funds are received by entities in India from outside India in the form of investment, loan or payment against export or import of goods/services.
The Government of India started the liberalization process for the Indian economy in 1991 and this increased the pace of foreign exchanges in India, thereby resulting in many exchange reserves. This led to the cancellation of FERA (Foreign Exchange Regulatory Act) and to the introduction of FEMA.
Apart from the act, there are various master directions issued under FEMA in order to govern the compliances and reporting. The framework for the Foreign Direct Investment policy is issued by Department of Industrial Policy and Promotion and the RBI is responsible to ensure that the FEMA compliances are met by the entities..
As the economy was opening up there was requirement for having better policy framework to attract more investors and have a streamlined method for compliances.
As the regulations were streamlined there was need to have a better reporting/compliance system. Hence different forms and return were introduced such as form FC-GPR, Form FCTRS which were further simplified in the form of Single Master Form (SMF) for reporting FDI transactions.
RBI is also continuously working on simplifying the structure for obtaining loans from outside India in through External Commercial Borrowing.
As the regulations are more liberalised compliances become more important. Whenever an entity receives any Foreign Direct Investment (FDI) from outside India there are very strict timelines for reporting the transaction to Reserve Bank of India (RBI). Greenvissage will assist in submitting the Single Master form to the RBI along with necessary certifications within the due date.
External commercial borrowing is a loan obtained by an Indian entity (eligible borrower) from a non-resident entity (eligible lender). Such loan should confirm the parameters such as minimum average maturity, permitted end-use, all-in-cost ceiling etc. The loan should meet all the parameters in totality and not on standalone basis. The ECB has been divided into different frameworks based on the type of borrower, average maturity and currency.
Apart from promoting and regulating FDI, FEMA also covers the current account transactions such as Export/Import of Goods and Services. There are also various timelines for either realising the payments for exports or making the payment for imports. It is pertinent to note that one has to keep a track of such transactions so that there is no non-compliances under FEMA
Whenever an entity receives FDI they have to submit the annual return with RBI in the form – Foreign Assets and Liabilities. The due date for the same is 15 July and has to be submitted for a financial year.
There are instances when there is delay or non-compliance while undertaking the compliances under FEMA. FEMA provides an option for compounding either su-moto or on the notice receipt of notice from RBI. In the process of compounding RBI provides the opportunity of presenting the case and explain the reason for delay or non-compliance. After considering the facts of the case RBI then levy the penalty accordingly. It is important to note that RBI have power of levying the penalty of 300% of the defaulting amount.
Liberalised Remittance Scheme or LRS is a guideline issued by RBI defining the limit of the amount which can be remitted by a Resident Individual outside India. The cycle of the limitation period is a Financial Year (Apr-Mar), resetting the limit at the start of each financial year. This scheme covers both current account transaction and capital account transactions undertaken by an individual, and have a single limit for both. Since this scheme is specific to remittances done by an individual hence this scheme does not cover corporates, partnership firms, HUF, Trusts etc.
What is single master form?
Single Master Form or SMF, is a form issued by RBI for reporting FDI transactions done under either automatic or approval route. The FDI transactions such as Issue of shares, Issue of debentures, Transfer of shares etc
What is time limit within which any FDI has to be reported to the RBI?
Within 30 days from the date of allotment
Whether separate form is required for intimating share transfer from resident to non-resident?
No, all the FDI reportings have to be done through SMF now.
Whether reporting to RBI is required of funds are received from NRE/NRO account?
Yes, if the funds are being received towards share capital then necessary filing with RBI through SMF should be done.
How much penalty is levied by RBI on non-compliances?
RBI levies penalty on case to case basis after going through the process of compounding. RBI have power to levy a penalty of 300% of defaulting amount.
What is the limit under LRS?
At present the limit under LRS is USD 250,000. There are certain instances in which the remittance can go beyond USD 250,000 such as medical, education after obtaining necessary approvals.