The Foreign Exchange Management Act, 1999 (FEMA) regulates Foreign Direct Investment (FDI in India), External Commercial Borrowings, and other aspects of foreign investment in India. Aspects related to foreign investments are covered under ‘Foreign Exchange Management (Non-Debt Instruments) Rules, 2019’ and related master directions. Aspects related to External Commercial Borrowing are covered under ‘Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations. FEMA compliance is crucial to avoid severe penalties and legal proceedings. Foreign Investors investing in India through any of the above modes shall acquaint themselves with the following aspects to remain FEMA compliant:
Entities Eligible to Receive Foreign Investment
Foreign investors may invest on a repatriable basis in:
- Indian companies (public & private limited)
- Limited Liability Partnerships (LLPs)
Together referred to as “Indian Entities” under FEMA rules.
Mode of Investment
Funds for foreign direct investment in India or External Commercial Borrowings must come strictly through banking channels. Usage of wallets or third-party platforms is not permitted.
FEMA Rules for FDI in India
FDI can be made through two routes:
- Automatic Route – No prior government approval required (e.g., software, greenfield airports, credit information companies).
- Government Route – Prior approval required (e.g., print media, Private Security Agencies, multi-brand retail).
Certain sectors permit investment up to a specified minimum threshold under the automatic route, while investments beyond this limit require approval under the government route. Some of the examples of sectors covered are :
| Sectors | Automatic Route | Government Route |
|---|---|---|
| Satellites – Manufacturing & Operation | Up to 74% | 74% to 100% |
| Defence | Up to 74% | 74% to 100% |
| Scheduled Air Transportation Services | Up to 49% | 49% to 100% |
Therefore, while investing in sectors which are not open for 100% Automatic route the Foreign Investors shall be more cautious.
Pricing guidelines and timelines:
Foreign Investors while acquiring the shares or convertible instruments of Indian entities, must adhere to the pricing norms set by the RBI. While investing in unlisted companies, the valuation must be conducted by a Securities and Exchange Board of India (SEBI)-registered Category I Merchant Banker or a Chartered Accountant (CA).
In the case of fresh issue of instruments by the Indian entity, the instruments against the funds received must be allotted within 60 days. If not allotted, the funds need to be returned to the foreign investor within 15 days after the end of the 60-day period.
Once instruments are allotted to a foreign investor, the Indian entity must file Form FC-GPR / LLP (I), as applicable, within 30 days. In cases involving the transfer of instruments between residents and non-residents, Form FC-TRS / LLP (II), as applicable, must be submitted within 60 days of the transaction.
Foreign investors may also invest into convertible notes issued by Indian private limited companies recognized as Startups by the Department for Promotion of Industry and Internal Trade (DPIIT). The Indian company has to file Form CN for convertible notes, and comply with the timelines set by the RBI.
In addition to this, Indian entities that have received foreign investment must submit the Foreign Liabilities and Assets (FLA) return annually.
External Commercial Borrowings (ECB) Regulations
If a person resident in India borrows from a person resident outside India, the transaction is classified as External Commercial Borrowing (ECB).
Key Features of ECB:
- Maximum ECB limit: USD 750 million per financial year per Indian entity.
- Depending upon the nature of the borrowing the minimum average maturity period must comply with RBI norms. Minimum average maturity period refers to the period during which the borrower shall not repay the debt, this requirement promises the foreign lender a minimum interest earnings.
- ECB funds cannot be used for real estate, equity purchase, or capital market investment.
- Mandatory reporting: Form ECB before obtaining the loan and Form ECB-2 monthly filings.
Penalties for Non-Compliance
- Fines up to 3x the amount involved.
- Daily penalties of ₹5,000 for ongoing violations.
- In serious cases, RBI or the Enforcement Directorate may initiate appropriate action.
Why Choose Femabide Advisorz?
- Expert FEMA Guidance – With FEMA consultants in Hyderabad, compliance advisors in Bangalore, and experts in Andhra Pradesh, we simplify compliance for investors.
- End-to-End Support – From structuring foreign direct investment in India to reporting and RBI approvals.
- Trusted by Businesses – Helping companies expand seamlessly while staying compliant.
At Femabide Advisorz, our team of FEMA consultants in Hyderabad, FEMA compliance advisors in Bangalore, and FEMA experts in Andhra Pradesh provide clarity and guidance to foreign investors, ensuring their businesses remain fully compliant.
