Money across the Border: FEMA and Foreign Investment

A Remittance and Its Shadow

Singapore dollars arrived in the payments firm's current account on 19 March 2021, converted at a rate the bank's advice printed to four decimal places. The credit came to ₹11.62 crore. Two days after the conversation at my door, the chief financial officer sent me a folder of scans. It held the remittance advice, the subscription agreement with the Singapore fund, a board resolution of 12 May 2021 allotting compulsorily convertible preference shares, and the PAS-3 return of allotment filed with the Registrar of Companies a fortnight later. The Ministry of Corporate Affairs had been told everything. The Reserve Bank of India, so far as the folder showed, had been told nothing.

His first reaction was relief. The money was clean, the fund was well known, the shares were issued within sixty days of receipt as the rules require, and nobody in five years had complained. 'It is all there only, madam. RBI can see the bank entry.' The bank had certainly reported a foreign inflow. What the Reserve Bank could not see was what the inflow had bought: which Indian company, which instrument, at what price, and whether the price respected the valuation floor that applies when a resident company issues shares to a person resident outside India.

From Prohibition to Notice

To understand why that gap matters, it helps to know what came before. The Foreign Exchange Regulation Act, 1973 began from prohibition. Any dealing in foreign exchange was forbidden unless permitted, contraventions were criminal, and the burden of proving innocence frequently lay on the accused. It was a statute for a country that counted its reserves in weeks of imports, and in mid-1991 India very nearly ran out.

The Foreign Exchange Management Act, 1999 (FEMA) reversed the default. Its preamble speaks of 'facilitating external trade and payments', and Section 13 makes contraventions civil. The penalty is up to three times the sum involved where that can be quantified, up to ₹2 lakh where it cannot, and up to ₹5,000 for every day a contravention continues. Section 6 separates capital account transactions, which change assets or liabilities across the border (a share subscription, a loan, an overseas subsidiary), from current account transactions such as paying for imports. The capital account is where companies spend most of their FEMA life, and since October 2019 its equity side has been governed by the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, with reporting set out in the companion Mode of Payment and Reporting Regulations of the same year.

The consequence of liberalisation is easy to miss. In most sectors, foreign investment no longer needs anyone's approval in advance. That is the automatic route: the company and the investor agree terms, the money comes in, the shares go out. Permission is granted by default, generally and in advance, to everyone who stays within the published conditions.

So the state learns about the transaction afterwards, and only if someone tells it. Reporting is the price of not having to ask. The Reserve Bank compiles India's balance of payments and its international investment position partly from these filings, and it checks pricing, sectoral limits and the investor's eligibility against them. A FERA-era officer would have stopped the money at the door. A FEMA-era officer waits for a form, and treats its absence as the contravention.

I have explained this distinction to founders many times, and the response is nearly always the same: if nobody had to approve it, how can it be wrong? The answer is that the approval was conditional, and the filing is one of the conditions. Under the 2019 Regulations, an unreported allotment is an incomplete transaction, however lawful its other parts.

The CFO read the regulation on his phone in my office, scrolling with one thumb. 'So the money is legal,' he said, 'but the shares are not finished.'

'Reported late, they can be finished,' I said. 'Five years late is a different conversation.'

Behind him the window looked onto Prabhat Road, where a courier was arguing with the pharmacist downstairs about a parcel addressed to the wrong floor.

Routes and Caps

The automatic route is general permission, but it is not universal. Schedule I of the Non-debt Instruments Rules lists sectors one by one, and against each it prints two things: a percentage, and a route. The percentage is the sectoral cap, the maximum share of the company that persons resident outside India may hold in aggregate. The route says whether the investment up to that cap may simply happen or must first be approved.

Most of the economy sits at 100 per cent, automatic. Manufacturing does, and so do software, most services and, since 2021, telecom services. Below that the table becomes a map of national anxieties. Defence manufacturing is automatic up to 74 per cent and needs approval beyond it. Private sector banking is automatic to 49 per cent and needs approval up to 74. Multi-brand retail trading is permitted to 51 per cent, and only with approval. News in print media stops at 26 per cent, and digital news media sits at the same figure, also by approval. A short list is closed altogether, whatever the percentage: lottery, gambling and betting, chit funds, Nidhi companies, the business of real estate (which is different from construction development, which is open), and the manufacture of cigars and cigarettes of tobacco.

The government route is a procedure as well as a permission. Applications go through the Foreign Investment Facilitation Portal maintained by the Department for Promotion of Industry and Internal Trade, which forwards them to the ministry responsible for the sector. The published standard operating procedure contemplates a decision in roughly ten to twelve weeks. In my experience the clock is accurate only for applications that need no clarification, and I have yet to see one of those.

The payments firm's own position was benign. Financial services regulated by a financial sector regulator are permitted at 100 per cent under the automatic route, subject to whatever conditions the regulator itself imposes. A Singapore fund subscribing in 2021 needed no approval on that ground.

There was, however, a second ground, and it is the one founders tend not to know about. On 17 April 2020, in the first weeks of the pandemic and with listed Indian valuations at their lowest, the Department issued Press Note 3 (2020 Series). It is two paragraphs long. An entity of a country that shares a land border with India, or an investor whose beneficial owner is situated in or is a citizen of such a country, may invest only under the government route, in every sector. The countries are China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan. Pakistan was already restricted. The note was written about the other six, and principally about one of them. A change in the beneficial ownership of an existing investment that brings it within the restriction needs approval too. The rule now sits in Rule 6(a) of the Non-debt Instruments Rules.

The note does not define 'beneficial owner'. Practitioners have borrowed thresholds from the money-laundering rules or the Companies Act, regulators have declined to endorse any of them, and the result is that a cautious adviser asks about every layer. A Singapore fund is not a Singapore investor for this purpose until someone has looked through it. Its limited partners matter, and so does the residence of whoever controls its manager. Practice treats Hong Kong as covered, although the note does not name it.

I asked the CFO whether anyone had examined the fund's investor base in 2021, eleven months after the note was issued.

'They gave a side letter,' he said. 'Standard one. Our earlier CA said fine.'

'Does the side letter say where the limited partners are?'

He scrolled for some time. 'It says they comply with all applicable laws.'

That clause appears in nearly every side letter I have read, and it tells an Indian regulator nothing it can verify. He wrote to the fund's counsel in Singapore that afternoon, from my office, and copied me. The question was a single sentence: did any limited partner, or any person controlling the general partner, have a nexus to a country sharing a land border with India as at March 2021?

The reply arrived at 11.40 that night, Singapore time. It ran to four lines, and the second line began with the words 'One LP, approximately 3.2 per cent'.

The FIRMS Filings: FC-GPR, FC-TRS and the annual FLA return

That reply belonged to a later conversation. The question in front of us that week was simpler and more mechanical: what had the company actually told the Reserve Bank, and when?

Since September 2018, reporting of foreign investment has run through the Foreign Investment Reporting and Management System, known as FIRMS, a portal hosted by the Reserve Bank. A company first registers itself in the Entity Master, then appoints a business user who files the individual forms. The forms do not go to the Reserve Bank directly. They go to the company's authorised dealer bank, the branch that received the foreign money, which checks them and either approves them or sends them back. It is a two-stage process, and most of the delay I see happens at the second stage, because the bank wants documents the founder assumed it already had.

The principal form is FC-GPR, the report of fresh shares issued to a person resident outside India. Regulation 4(1)(b) of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 requires it within 30 days of the date of allotment. A second clock sits behind that one. The Non-debt Instruments Rules require the shares to be allotted within 60 days of receiving the money, failing which the money must be refunded within the following 15 days. The FC-GPR itself carries the board resolution, a valuation certificate showing that the price was not below fair value, the foreign inward remittance certificate, the bank's KYC report on the investor, and a declaration signed by a company secretary. I have signed a great many of those declarations. The form asks me to confirm, among other things, that the investment complies with the sectoral conditions and the land-border rule. It does not ask whether anyone looked at the fund's limited partners.

FC-TRS covers a different event: the transfer of existing shares between a resident and a non-resident, for example when an angel investor sells to a foreign fund. It is due within 60 days of the transfer or of receipt of the money, whichever is earlier, and the obligation falls on the resident party to the transfer, not on the company. Founders forget this when they are the sellers. The company's own records then show a non-resident shareholder whom the Reserve Bank has never been told about.

The third filing is annual. Every Indian company that has received foreign direct investment, or made an investment abroad, must file the Annual Return on Foreign Liabilities and Assets by 15 July each year, covering the financial year just ended. The FLA return is filed on its own portal, not through the bank, and may be based on unaudited figures if the audit is not finished. It is the filing most often missed, partly because it is short and partly because it is due in the same fortnight as the first quarter's TDS return, when the accountant is busy with that.

Calendar. FC-GPR falls due 30 days from each allotment to a non-resident, and the allotment itself must take place within 60 days of the money arriving. FC-TRS falls due 60 days from a transfer of shares between a resident and a non-resident, or from receipt of the consideration if that comes earlier. The FLA return is due on 15 July every year for as long as the foreign investment remains on the books.

We logged in to FIRMS together on the CFO's laptop. The Entity Master had been created in February 2021, apparently by the earlier chartered accountant, and then left. The Singapore fund's money had been credited on 4 March 2021 and the shares allotted on 19 March. The FC-GPR had therefore been due on 18 April 2021. There was a draft on the portal, saved but never submitted, with the valuation certificate field blank.

The FLA position was no better. No return had been filed for 2020–21, 2021–22, 2022–23, 2023–24 or 2024–25. Five Julys.

Regulation 5 of the 2019 Reporting Regulations allows a delayed filing to be regularised by paying a late submission fee, a modest formula of ₹7,500 plus a small percentage of the amount involved for each year of delay, provided the delay does not exceed three years from the due date. The FC-GPR was four years and eight months late.

'So we cannot just pay the fee,' the CFO said.

'Not for this one.'

He closed the draft and looked for a while at the date in the corner of the screen. It read 18/12/2025.

When Filing Is Late: compounding, late submission fees and the cost to a funding round

A delay longer than three years cannot be cured by a fee. The Foreign Exchange Management Act, 1999 treats it as a contravention, and Section 13 makes a contravention punishable with a penalty of up to three times the sum involved where that sum can be quantified. The sum involved here was the whole of the Singapore fund's investment. Nobody seriously expected the Reserve Bank to impose a penalty of that size for an unsubmitted form. The section still permits it, and the next investor's lawyers would read the section, not my expectations.

The route out is compounding under Section 15, now governed by the Foreign Exchange (Compounding Proceedings) Rules, 2024, which replaced the rules of 2000 in September 2024. Compounding means that the contravener admits the contravention and pays an amount the Reserve Bank fixes, and the matter is closed without adjudication. The application goes to the Foreign Exchange Department, carries a fee of ₹50,000, and must be supported by the filing it seeks to regularise. That order of events surprises people. The FC-GPR has to be completed on FIRMS and processed by the authorised dealer bank first, with the bank marking it as filed beyond the late-fee window, and only then can the company ask to be forgiven for its lateness.

The compounding amount follows a published matrix in the Reserve Bank's Master Direction on compounding. It rises with the sum involved and with the length of the delay. For a reporting default it is usually a small fraction of the investment. It is never nil, and the Reserve Bank publishes compounding orders on its website, naming the company.

The FLA returns were a separate problem. The portal accepted all five late returns once the CFO's accountant prepared them over the following fortnight, and no fee was demanded. Whether the Reserve Bank will treat five missed Julys as a further contravention is a question I could not answer with confidence, and I told him so. I advised that the compounding application disclose them anyway. A regulator who finds an omission for himself is less generous than one who is told.

The cost that worried the CFO was the round. A Bengaluru fund had issued a term sheet in November 2025 for a pre-IPO round, closing targeted for the end of March 2026. Its diligence questionnaire, which he forwarded to me that evening, had a section headed 'FEMA and RBI Compliance'. Question 7.4 asked for copies of every FC-GPR with the bank's acknowledgement. Question 7.6 asked whether any compounding application was pending or contemplated. Neither question could be answered in a way the fund would like.

'They will put it as condition precedent,' he said. 'Compounding order before closing.'

'Very likely.'

'And how long does RBI take?'

The 2024 Rules contemplate disposal within 180 days of a complete application. A complete application presupposed an acknowledged FC-GPR, and the bank had not yet seen one. March was not realistic. I said so.

The land-border question sat underneath all of this. Press Note 3 of 2020, issued in April 2020, requires government approval where the beneficial owner of an investment is situated in, or is a citizen of, a country sharing a land border with India. It does not define beneficial owner by any percentage, and the government has never clarified whether a 3.2 per cent limited partner in a Singapore fund is one. The point is unsettled. If the answer is yes, the 2021 investment needed approval it never received, and the problem stops being a late form and becomes the money itself. We drafted the compounding application to disclose the limited partner and leave the characterisation to the Reserve Bank. I do not yet know what it will make of that.

The CFO packed his laptop slowly. At the door he turned back with the diligence questionnaire still open on his phone.

'Section 9 also they have asked,' he said. 'Data protection. Our merchants' KYC, Aadhaar copies, all we are keeping on one shared drive since 2019. Is that also a filing?'