Foreign Direct Investment (FDI): FEMA Compliance Checklist for Startup’s 

Foreign Direct Investment (FDI) is one of the important sources of funds for countries where capital is not readily available. FDI is regulated under the Foreign Exchange Management (FEMA) act,1999 which requires to follow certain compliances and rules & regulations to regulate and maintain the steady foreign exchange market.

Foreign Direct Investment (FDI) means the investment made by a person resident outside India through capital instruments such as equity shares, debentures, preference shares and share warrants issued by the Indian company) in an unlisted Indian company; or in 10 percent or more of the fully diluted equity paid-up share capital of a listed Indian company.

Fully diluted means the total no of shares that would be outstanding if all possible sources of conversion are exercised.

Means to receive Foreign Investment

Following are the routes under which Foreign Investment can be made-

• Automatic Route: Under the automatic route, FDI is allowed without prior approval of the Government or the Reserve Bank of India (RBI), in all activities or sectors as specified in Regulation 16 of FEMA 20 (R).
• Government Route: Under the Government route, prior approval of the Government authorities or Ministries is needed for investing in the activities or sectors which is not covered under the automatic route. Procedure for applying such Government approval is prescribed at the Foreign Investment Facilitation Portal (FIFB) (http://fifp.gov.in/Forms/SOP.pdf) which is regulated under the Dept of Industrial Policy & Promotion (DIPP).

Sectors Under Automatic Route

• Agriculture Sector
• Animal Husbandry Sector
• Mining- Coal & Lignite and Exploration of metal and Non-metal ores.
• Trading Sector
• E-commerce activities
• Healthcare 
• Financial Services
• Manufacturing Sector
• Capital Goods

Complete list of sectors can be viewed from below link-

https://dipp.gov.in/sites/default/files/Sectors_under_Automatic_Route_with_Conditions_25062019.pdf

Sectors Under Government Route

Sector or Activities	Government Approval
Mining and mineral separation of titanium bearing minerals and ores	100%
Food Product Retail Trading	100%
Defense	49%
Telecom Services	49%
Banking- Public Sector	20%

Complete list of sectors can be viewed from below link-

https://dipp.gov.in/sites/default/files/Sectors_where_Government_Approval_is_required_25062019.pdf.

Prohibited Sectors

FDI is prohibited or not allowed under the following sectors

• Lottery Business including Government or private lottery, online lotteries.
• Gambling and betting including casinos.
• Chit funds.
• Nidhi company.
• Trading in Transferable Development Rights (TDRs).
• Real Estate Business or Construction of Farmhouses.
• Atomic energy
• Cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutes manufacturing.

Following are the few main compliances to be followed as per provisions of FEMA/RBI

• Annual Return on Foreign Liabilities and Assets (FLA Return)- FLA Return is required to be submitted mandatorily on every year by 15th of July by the person who holds foreign assets or liabilities in their financial statements as on 31 March by all the India resident companies which have received FDI and or made ODI in any of the previous year(s), including current year.
• Annual Performance Report (APR)- Annual Performance Report (APR) has to be submitted every year in Form ODI Part II within 31st December by an Indian Party (IP) or Resident Individual (RI) which has made an Overseas Direct Investment (ODI) to the AD bank  in respect of each Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside India.
• External Commercial Borrowings- Form-ECB 2 Return is required to be submitted on a monthly basis by the borrowers to report all ECB transactions to the RBI through an AD Category – I Bank.
• Advance Reporting Form (ARF)- Form-ARF is required to submitted by the  Indian company receiving investment from outside India for the issue of shares or other eligible securities under the FDI Scheme to report the details of the amount of consideration to the Regional Office concerned of the Reserve Bank through its AD Category I bank.
• Form FC-GPR- Form FC-GPR is required to be submitted to RBI within 30 days from the date of issue of shares by the Indian company issuing shares to persons resident outside India (Foreign Investor) directly or on amalgamation or merger with an existing Indian company, along with Certificate from Company Secretary and from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant.
• Form FC-TRS- Form FC-TRS is required to be submitted to the AD Category-I bank within 60 days from the date of receipt of the consideration amount to report the details of the transfer of shares and other eligible securities between residents and non-residents and vice- versa.
• Form ODI- Form ODI is required to be submitted to RBI on every year by 30th of June by the Indian Party and a Resident Individual making an overseas investment (or financial commitment) in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS)