Cross-border transactions are an integral part of India’s growing participation in the global economy. Whether it’s a startup receiving foreign investment, a company making payments to overseas vendors, or an individual investing in foreign assets, all such transactions involve the movement of foreign exchange. In India, these activities are regulated by the Foreign Exchange Management Act, 1999 (FEMA), which replaced the earlier Foreign Exchange Regulation Act (FERA) to shift the focus from control to management and facilitation of foreign exchange transactions.

In this article, CA Manish Mishra talks about Cross-Border Transactions & FEMA Compliance Simplified.

FEMA and Its Purpose

The Foreign Exchange Management Act, 1999 came into force on June 1, 2000, with the objective to facilitate external trade and payments and to promote orderly development and maintenance of the foreign exchange market in India. FEMA extends to the whole of India and applies to all branches, offices, and agencies outside India owned or controlled by a person resident in India. It governs both current account transactions and capital account transactions, setting the legal framework for foreign exchange dealings.

Current Account Transactions – Section 5 of FEMA

According to Section 5 of FEMA, any person may sell or draw foreign exchange to or from an authorized person if such exchange is for a current account transaction, subject to the reasonable restrictions imposed by the Central Government. Current account transactions are those that involve day-to-day business expenses and routine transactions.

The Foreign Exchange Management (Current Account Transactions) Rules, 2000 further define these:

• Rule 3 prohibits certain transactions such as:

  • Remittance of lottery winnings

  • Income from racing, riding, or similar hobbies

  • Payments related to call-back services

  • Remittance of interest income from non-resident accounts

• Rule 4 requires prior approval of the Central Government for:

  • Cultural tours

  • Remittances exceeding US$1 million per project for consultancy services provided by Indian companies abroad

• Rule 5 mandates RBI approval for:

  • Remittance exceeding prescribed limits under the Liberalised Remittance Scheme (LRS)

  • Gifts or donations beyond the permissible limits

  • Expenses for emigration, maintenance of close relatives abroad beyond thresholds

These rules help monitor the outflow of foreign exchange while allowing operational flexibility to residents.

Capital Account Transactions – Section 6 of FEMA

Section 6 of FEMA empowers the Reserve Bank of India (RBI), in consultation with the Central Government, to regulate, restrict, or prohibit certain capital account transactions. These are transactions that alter the assets or liabilities of a person resident in India or outside India. Examples include:

• Investment in foreign securities or companies

• Acquisition or transfer of immovable property abroad

• Borrowing or lending in foreign currency

• FDI (Foreign Direct Investment)

• ODI (Overseas Direct Investment)

To streamline such transactions, RBI has notified the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, which categorizes transactions allowed under the automatic route and those requiring approval.

Foreign Direct Investment (FDI) and FEMA 20(R)

Foreign Direct Investment in India is governed by FEMA 20(R) - Foreign Exchange Management (Non-debt Instruments) Rules, 2019, read with the FDI Policy notified by the Department for Promotion of Industry and Internal Trade (DPIIT). FDI is allowed in most sectors under the automatic route, but some sectors require prior government approval (e.g., defence, telecom, media).

Companies receiving FDI must:

• Issue shares within 60 days from receipt of inward remittance

• File Form FC-GPR on the FIRMS Portal within 30 days of share allotment

• Comply with pricing guidelines as per the RBI valuation norms

Non-compliance may result in penalties under Section 13 of FEMA.

Overseas Direct Investment (ODI) and FEMA 120

ODI by Indian entities is regulated by FEMA 120 - Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. It allows Indian companies to invest in joint ventures (JV) or wholly-owned subsidiaries (WOS) abroad up to 400% of their net worth, under the automatic route.

Entities must file:

• Form ODI Part I & II at the time of making the investment

• Annual Performance Reports (APR)

• Obtain valuation certificates and comply with host country regulations

In 2022, the RBI notified new Overseas Investment Rules, simplifying the process by merging multiple regulations into one unified framework for both individual and corporate investors.

Liberalised Remittance Scheme (LRS)

The LRS allows resident individuals to remit up to USD 250,000 per financial year for current and capital account transactions. This includes:

• Investment in foreign securities

• Education and medical treatment abroad

• Gifts, donations, and maintenance of relatives

• Travel and employment expenses

Banks must ensure PAN submission and verify the source of funds. Any remittance beyond the limit requires prior approval from RBI. Recent updates require PAN-Aadhaar linking and stricter KYC checks to curb misuse of LRS routes.

ECB (External Commercial Borrowings) and FEMA 3

Borrowings from non-residents in foreign currency fall under FEMA 3 - Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000. ECBs are permitted for capital-intensive sectors and must comply with RBI’s Master Direction on ECB, including:

• Eligible borrowers and lenders

• All-in-cost ceilings

• End-use restrictions

• Minimum average maturity period

Reporting is done through Form ECB, and monthly returns must be submitted via the ECB 2 Return.

Mandatory FEMA Reporting and Filing Requirements

Businesses and individuals engaging in cross-border transactions are required to make specific filings to the RBI:

• Form FC-GPR: For reporting FDI inflows

• Form FC-TRS: For transfer of shares between resident and non-resident

• Form ODI: For overseas investment

• Form ECB: For borrowings from abroad

• FLA Return: Annual return on Foreign Liabilities and Assets, due by July 15 each year

Failure to report or delayed submissions attract compounding penalties under Section 13 of FEMA, which can go up to ₹2 lakh, with a further penalty of ₹5,000 per day for continuing default.

Recent Updates in FEMA Compliance

Several reforms and digital initiatives have been undertaken to simplify compliance:

• Single Master Form (SMF): One consolidated form for all foreign investment-related filings via FIRMS Portal.

• New Overseas Investment Rules (2022): Consolidated rules under a unified framework, replacing earlier fragmented regulations.

• Crypto Transactions Under LRS: RBI has cautioned against overseas investments in cryptocurrency using LRS.

• Digital KYC Norms: Banks must ensure full KYC compliance before permitting remittances or investments under FEMA.

These updates reflect the government's intent to promote ease of doing business while maintaining control over foreign exchange transactions.

Penalties and Enforcement – Section 13 of FEMA

Under Section 13, if any person contravenes FEMA provisions, the penalties include:

• A fine up to three times the sum involved or ₹2 lakh (whichever is higher)

• A continuing penalty of ₹5,000 per day for prolonged default

• Seizure of accounts, adjudication, or compounding by the Enforcement Directorate (ED)

Therefore, timely filings and proper documentation are essential to avoid penal consequences.

Conclusion

Cross-border transactions open up immense growth opportunities for businesses and individuals, but they also come with legal responsibilities. The Foreign Exchange Management Act (FEMA) provides a comprehensive legal framework to manage foreign exchange in India. Whether you are receiving FDI, investing abroad, or making routine payments, FEMA compliance is mandatory. From understanding capital and current account transactions to filing FC-GPR or ODI forms, adherence to legal provisions under FEMA helps businesses maintain credibility, avoid penalties, and ensures smooth international operations. Given the evolving regulatory landscape, professional guidance and timely compliance are key to managing cross-border transactions effectively.

Frequently Asked Questions (FAQs)

Q1. What is FEMA and why is it important?

Ans. FEMA is the law that governs foreign exchange transactions in India, ensuring legal and transparent dealings with foreign entities.

Q2. What is the difference between current and capital account transactions?

Ans. Current account transactions are for daily operations like imports and remittances. Capital account transactions impact assets or liabilities abroad.

Q3. How much can I remit under LRS?

Ans. Residents can remit up to USD 250,000 per financial year without RBI approval under the Liberalised Remittance Scheme.

Q4. What is Form FC-GPR?

Ans. It is a mandatory form for reporting FDI inflow after share allotment to a non-resident investor, filed within 30 days on the FIRMS portal.

Q5. Is RBI approval required for every cross-border transaction?

Ans. No. Most transactions fall under the automatic route, but certain limits or sensitive sectors may require RBI or government approval.

Q6. What happens if I miss filing FEMA returns?

Ans. Delayed or non-filing can lead to monetary penalties under Section 13 and even action by the Enforcement Directorate.

Q7. Can individuals invest in foreign companies or stocks?

Ans. Yes, under LRS, individuals can invest in foreign equity, subject to the overall annual cap and RBI rules.

Q8. Are startups also required to comply with FEMA?

Ans. Yes. Startups receiving FDI or investing abroad must follow FEMA provisions, including valuation, reporting, and sectoral caps.

Q9. What is the Single Master Form (SMF)?

Ans. SMF is an online RBI form used for submitting all foreign investment-related filings via the FIRMS Portal.

Q10. Who can help with FEMA compliance?

Ans. Chartered Accountants, Company Secretaries, and FEMA experts can assist with transaction classification, reporting, and compliance matters.