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Foreign investment plays a crucial role in India’s economic growth. To regulate and streamline cross-border capital flows, the Government of India introduced the Foreign Exchange Management Act (FEMA). FEMA governs foreign exchange transactions and ensures that foreign investments in India are lawful, transparent, and aligned with national economic objectives.
What is Foreign Direct Investment (FDI)?
Foreign Direct Investment (FDI) is an organization’s transfer of funds from one country to another in order to create ‘lasting interest.’ According to the OECD (Entity for Economic Co-operation and Development), if the entity acquires at least 10 percent of voting power in another organization, a permanent interest is calculated.
FDI’s definition isn’t limited to international capital movement alone. Its concept also includes the international movement of complementary elements of capital-such as skills, systems, management, technology, etc.
Foreign Direct Investment (FDI) is one of the Indian company’s main sources of funds. Under FDI, money from individuals or from foreign companies is invested in Indian startups and existing companies. The FDI Policy is governed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) 2000.
In India, the Foreign Direct Investment Policy is regulated by the Reserve Bank of India’s Foreign Exchange Management Act, 1999. An investment of 10 percent or above from overseas is known as FDI, according to the Organization for Economic Co-operation and Development (OECD).
Role of FEMA in India’s Economic Growth
FEMA has acted as an important source in India for the growth and development of different sectors. FEMA’s main aim is to promote international trade, balance payments, promote orderly growth, and maintain India’s international-exchange market. Below is the list of main compliance to be followed under FEMA’s provisions:
Annual Return on Foreign Liabilities and Assets
FLA (foreign liabilities and assets) return is required to be submitted mandatory by all Indian resident companies which have received or have outstanding FDI or ODI in any previous year including the current year by 15th July each year.
Annual Performance Report (APR)
An Indian Party, a resident person who has made an Overseas Direct Investment (ODI) must apply to the AD Bank, on or before 31 December of each year, an Annual Performance Report (APR) in the Form ODI Part II in respect of each joint venture, wholly-owned subsidiaries (WOS) outside India.
External Commercial Borrowings
Borrowers need to report to RBI on a monthly basis through AD category-1 bank in form ECB 2 about all the ECB transactions.
Advance Reporting Form (ARF)
An Indian company receiving investment from outside India for the issue of shares or other eligible securities under the FDI Scheme shall report the details of the amount of consideration to the Reserve Bank’s Regional Office concerned within 30 days of the date of the issue of the shares
Form FC-GPR
When the company receives the foreign investment and the company allocates shares to such foreign investor against such investment, then it is the company’s duty to file details of such allocation of shares with RBI within 30 days and for that company to use the FC-GPR (Foreign Currency-Gross Provisional Return) form for submitting information to RBI.
Form FC-TRS
It is a method used by Indian resident shareholders outside India, or vice versa when they transfer their shares.
Need expert guidance on FEMA compliance and foreign investments? Contact us for accurate FDI filings and RBI compliance support.
Indicative List of Important Compliance for FDI as per FEMA
| Sl No | Compliance Particulars | Details of compliance | Due Date | Key Points |
| 1 | Annual Returns on Foreign Liabilities and Assets (FLA return) | All India-based businesses who received FDI and/or made ODI in the prior year(s), including the current year, are mandated to submit a FLA Return. | Till 15th july every year | The Indian firm is not required to submit the FLA Return if it has no outstanding FDI or ODI investments as at the end of the reporting year. Similar to the above, if an Indian firm has outstanding FDI and/or ODI but has not received any new FDI or ODI in the most recent year, the company is still obligated to submit the FLA Return by 15 July each year. |
| 2 | ECB (External Commercial Borrowings | All ECB transactions must be reported by borrowers to the RBI on a monthly basis via an AD Category-I Bank in the form of a “ECB 2 Return.” | Every Month | All columns must be filled (use ‘Nil’ where applicable); include certifications and changes in parameters like interest rates |
| 3 | APR (Annual Performance Report) | For each joint venture (JV) or wholly owned subsidiary (WOS) outside of India, an Indian Party (IP) / Resident Individual (RI) that has made an Overseas Direct Investment (ODI) is required to file an Annual Performance Report (APR) in Form ODI Part II to the AD bank. | Before 31st December every year | It requires filing with the Annual Performance Report (APR), accompanied by the audited balance sheet of the overseas company, determined by the Indian party’s controlling stake |
| 4 | Single Master Form | Combines the reporting requirements for FDI in India, regardless of the method used to make the investment. | 1. Form FC-GPR reporting for FDI under SMF must be completed within 30 days of allotment. 2. FC-TRS reporting for SMF must be completed within 60 days of the earliest of the following: the transfer of capital instruments or the receipt or remittance of cash. 3. For reporting FDI and transferring capital contributions or profit shares in LLPs, respectively, Form LLP-I & LLP-II must be filled. 4. Within 60 days of the transfer, Form CN must be filled out to report the issuing or transfer of convertible notes. | FCGPR (Foreign Currency-Gross Provisional Return) and FCTRS (Foreign Currency-Transfer of Shares) are critical Indian regulatory forms under FEMA for reporting foreign investment, with FCGPR for issuing new shares to foreigners (inflow) within 30 days, and FCTRS for transferring existing shares between residents/non-residents within 60 days, both filed online via the RBI’s FIRMS portal to track FDI and ensure compliance. |
Dematerialisation Requirement for FDI
Private limited companies receiving FDI must ensure foreign investors open a dedicated Demat account in India, linked to a PAN card, via a Depository Participant (DP). This requires notarized/apostilled documents per MCA rules, mandating dematerialization under Rule 9B for electronic shareholding to streamline management and exits.
Key Steps
- Obtain PAN for foreign investor and partner with SEBI-registered DP.
- Submit KYC, notarized/apostilled passports, and incorporation proofs.
- Convert physical shares to Demat within timelines
| Requirement | Details |
| Demat Account | Mandatory for FDI shares; PAN-linked |
| Documents | Notarized/apostilled for MCA compliance |
| Rule 9B (MCA) | Compulsory demat for Pvt Ltd receiving FDI |
| Purpose | Easier transfers, exits, and regulatory ease |
Frequently Asked Questions
FEMA (Foreign Exchange Management Act) regulates all foreign exchange transactions in India. It ensures that foreign investments are legally compliant, transparent, and aligned with India’s economic policies. For foreign investors, FEMA provides a clear framework for investing, repatriating funds, and conducting cross-border transactions safely.
FDI refers to an investment made by a non-resident entity in an Indian company with the intention of establishing a lasting interest. As per OECD norms, acquiring 10% or more of voting rights qualifies as FDI under FEMA regulations.
Major FEMA compliances include:
- Filing of FLA (Foreign Liabilities and Assets) Return
- Submission of FC-GPR for new share allotments
- Filing FC-TRS for transfer of shares between residents and non-residents
- Reporting ECB transactions through ECB-2 returns
- Filing APR (Annual Performance Report) for overseas investments
The FLA return must be filed annually by 15th July, even if there were no new FDI or ODI transactions during the financial year but outstanding balances exist.
- FC-GPR is filed when new shares are issued to a foreign investor.
- FC-TRS is filed when existing shares are transferred between a resident and a non-resident or vice versa.
Yes. As per MCA Rule 9B, private limited companies receiving FDI must issue shares only in dematerialized form. Foreign investors must have a Demat account linked with a PAN to hold such shares.
Conclusion
FEMA plays a pivotal role in shaping India’s foreign investment ecosystem by creating a transparent, structured, and investor-friendly regulatory environment. From governing capital inflows and overseas investments to ensuring timely reporting and compliance, FEMA acts as the backbone of India’s cross-border financial framework.
As global trade and foreign investments continue to expand, understanding and complying with FEMA regulations is no longer optional—it is a strategic necessity. Proper adherence not only safeguards businesses from penalties but also enhances credibility, operational efficiency, and investor confidence.
With evolving RBI guidelines and increasing regulatory scrutiny, businesses must stay proactive and informed. Partnering with experienced FEMA advisors ensures seamless compliance, accurate reporting, and risk-free global expansion. By aligning with FEMA requirements, businesses can unlock long-term growth opportunities while remaining fully compliant with India’s regulatory ecosystem.
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