Startups are technology-focused, that aims for rapid growth by innovating and developing new products, services, or processes to solve a problem or meet a market need. The idea a Startup develops often require a good financial support and these ideas are capable of generating good amount of profit. If an investor is interested in a Startup, then both the parties will get benefited. Startup gets funding and investor gets profit. Startups in India possess good business acumen, skilled personnel, quick and innovative problem-solving ability. These traits are attracting global investors to India and opening new markets to Indian Startups.
When a Startup accesses global capital / markets, it shall comply with the provisions of the Foreign Exchange Management Act, 1999 (FEMA). Consulting a FEMA consultant for startups at this stage becomes important, as even small errors can lead to big regulatory consequences. In this blog we will discuss about top FEMA Violations Startups must avoid in order to enhance their growth.
Basic aspects:
As per Indian laws, an entity which has registered itself as ‘Startup’ with Department for Promotion of Industry and Internal Trade (DPIIT) will only be considered as a ‘Startup’. Therefore, the thumb rule is if you want to call yourself a Startup you shall get registered with DPIIT as a ‘Startup’.
Apart from other conditions prescribed by DPIIT, only an Indian company (both public and private), partnership firm (registered), or limited liability partnership are eligible to be recognised as a ‘Startup’.
As per FEMA Non – Debt Instrument rules and investment guidelines, only an Indian company (both public and private), or limited liability partnership are eligible to receive foreign investment either in the form of equity or debt.
Therefore, as a first step to raise global capital you should register yourself as an Indian company or limited liability partnership.
Top FEMA Violations Startups Must Avoid
- Medium of receiving / remitting the investment
As per FEMA, all the foreign exchange transactions should be only through banking channels. But Startups being in their initial stages, immediate need of funds / time constraints and due to lack of proper knowledge and guidance, agrees to accept / remit capital through third party wallets (such as wise.com/ monito.com etc. which are not banks) to facilitate ease of transferring funds. This creates regulatory complexities that can be avoided by consulting a top FEMA advisory firm. - Allotment of securities
The main mistake Startups do is delaying the allotment of securities. As per Indian laws, securities have to be allotted to the investor within 60 days from receiving the money. If the Startup fails to allot within this time, then it shall repay the amount received within 15 days of such failure. - Transaction-based reporting
All foreign exchange transactions shall be duly reported to RBI within the prescribed time limits. For example, in the case of Foreign Direct Investment (FDI) the share allotment shall be reported within 30 days. Startups shall also adhere to other compliance requirements such as issuing / receiving share certificates within the prescribed time. - Presentation in financial statements
Depending upon the timing of receiving / remitting the investment amount and nature of such investment, Startups have to ensure that presentation and disclosures in the financial statements are accurate and appropriate. - Periodical reporting
In addition to the transaction-based reporting, FEMA also requires periodical reporting of overall position of the foreign exchange transactions entered into by the Startup, E.g., annual filing of Foreign Liabilities and Assets (FLA) and Annual Performance Report with RBI. - Downstream Investment
When a Startup performs well or even as a part of strategic requirements, it might explore the idea of incorporating or acquiring an entity, e.g., Zomato (now renamed as Eternal Ltd.) acquired Blinkit to enter the fast-growing quick commerce (q-commerce) market, this is called as downstream investment. If persons resident outside India beneficially holds more than 50% of such Startup, then downstream investments shall confirm to the requirements of FEMA. Startups generally overlook this aspect due to lack of knowledge and guidance, which is where FEMA due diligence becomes critical.
Our advice to Startups
It is highly suggested to conduct a FEMA due diligence to ensure proper compliance with statutes. This eliminates unnecessary regulatory hurdles and will aid in smooth growth for the Startups. Whether it’s fundraising, import-export compliance, or RBI filings, working with the best FEMA advisory in India or a FEMA consultant Hyderabad can ensure that your growth is smooth, compliant, and future-ready.
Why Choose Us?
- Recognised as one of the best FEMA advisory firms with proven expertise.
- End-to-end guidance from FEMA consultants for startups—from registration to investment structuring.
- Specialized support for FEMA import rules, FDI, ODI, and due diligence.
- Based in Hyderabad, we combine local accessibility with global knowledge.
- Our team helps startups avoid costly FEMA mistakes and ensures long-term growth.
