FEMA compliance for foreign companies

FEMA Compliance for
Foreign Companies in India

The Umbrella Framework Behind Every Cross-Border Indian Transaction

The Foreign Exchange Management Act 1999 (FEMA) is the legal foundation for every cross-border money flow involving India — FDI inflows, dividend remittance, royalty payment, ECB drawdown, ODI outflow, and even employee LRS spending. For a foreign-owned Indian company, FEMA shapes the timing and form of almost every meaningful financial transaction. This page walks through the FEMA framework, the NDI Rules 2019 that govern non-debt investment, the ECB Master Direction, common compliance touch points, and how compounding works when something does go wrong.

Current Account vs Capital Account — The Key FEMA Distinction
Current Account Transactions
  • Trade in goods and services.
  • Remittance of dividends, royalty, technical fees, salary.
  • Generally freely permitted subject to documentation (Form 15CA / 15CB for outward).
  • Restrictions only on specific items (e.g., LRS limits for individuals).
Capital Account Transactions
  • Investment in equity / convertibles (FDI in, ODI out).
  • External Commercial Borrowings (ECB).
  • Foreign currency loans, trade credit beyond 180 days.
  • Regulated through specific rules; reporting mandatory.
Core FEMA Sub-Frameworks a Foreign-Owned Company Encounters
  • NDI Rules 2019: non-debt instruments — equity, CCDs, CCPS. Governs FDI inflow, transfer between resident and non-resident, valuation, sector caps. See FDI Compliance in India.
  • ECB Master Direction: debt raised from non-resident lenders. Form ECB at drawdown, monthly Form ECB-2 until full repayment. Eligible end-uses, all-in cost ceiling, minimum maturity.
  • ODI Rules 2022: Overseas Direct Investment by Indian entities into foreign JV / WOS. Form ODI for each remittance, Annual Performance Report (APR).
  • Form 15CA / 15CB: for outward remittance of any taxable income or capital. Required for almost every remittance out of India by a foreign-owned subsidiary.
  • FLA Annual Return: aggregate foreign liability / asset position reported to RBI by 15 July each year.
  • Liberalised Remittance Scheme (LRS): for individual cross-border remittances; USD 250,000 per resident individual per FY.
Compounding — When Something Goes Wrong

FEMA breaches are not criminal; they are civil and can be regularised through compounding — a formal admission of contravention and payment of a fee, after which the matter is closed.

  1. Identify the contravention: what specific provision was breached, transaction value, period of contravention.
  2. File compounding application with the RBI office (jurisdiction based on registered office address) along with prescribed fee.
  3. RBI examination & personal hearing as required.
  4. Compounding order issued with fee computation; typically a few times the late submission fee depending on gravity.
  5. Pay and comply: matter closed within 180 days of filing.

Voluntary compounding is always preferable to compounding triggered by audit or whistleblower. We routinely prepare and represent compounding applications for foreign-owned subsidiaries that have inherited compliance gaps from prior advisors.

Our FEMA Compliance Engagement Models
  • Annual retainer: all routine filings (FC-GPR, FLA, ECB-2 monthly, 15CA/CB for each remittance) handled in one package.
  • Transaction-based: for specific events — capital infusion, share transfer, ODI, ECB drawdown, dividend remittance.
  • Compliance review: retrospective audit of last 3–5 years of FEMA filings to identify gaps; recommended for newly acquired Indian subsidiaries.
  • Compounding representation: end-to-end preparation, filing and hearing for FEMA compounding cases.

Get in touch for a FEMA health check or to set up a compliance retainer. The cost of staying compliant is a small fraction of the cost of compounding.