Corporate Law Practical Advisory
Compliant with ICAI Standards on Auditing, Central Board of Direct Taxes (CBDT), and CBIC GST notifications.
What You Need to Know at a Glance
- Shares must be allotted within 60 days of receiving foreign inward remittance, failing which funds must be refunded to the foreign investor within 15 days.
- Form FC-GPR must be filed on the RBI FIRMS portal within 30 days of share allotment.
- Shares cannot be issued to foreign investors below fair market value determined by a Chartered Accountant / Merchant Banker using the DCF method.
- FEMA violations can be regularized voluntarily through RBI’s compounding procedure without severe court litigation.
1. The Regulatory Landscape of FDI in India
Foreign Direct Investment (FDI) into Indian companies is governed by the Foreign Exchange Management Act (FEMA), 1999, alongside regulations issued by the Reserve Bank of India (RBI) and Department for Promotion of Industry and Internal Trade (DPIIT).
While India has liberalized most sectors allowing up to 100% FDI under the automatic route, procedural adherence regarding remittance reporting and share valuation is enforced with zero tolerance.
2. Automatic Route vs Government Approval Route
Foreign investment enters India through two distinct channels:
1. Automatic Route: Requires no prior approval from the Government or RBI. The company simply receives funds, allots shares, and reports to RBI post-allotment (e.g., IT services, manufacturing, consulting).
2. Government Route: Requires prior approval from the concerned line ministry via the Foreign Investment Facilitation Portal (FIFP) before funds can be received (e.g., defense, print media, satellites, or investments from countries sharing land borders with India under Press Note 3).
3. Inward Remittance, Share Allotment & Form FC-GPR
When foreign capital is received into your company bank account, the following chronology must be followed:
- Foreign Inward Remittance Certificate (FIRC) & KYC: Obtain the FIRC and overseas investor KYC report from your Authorized Dealer (AD) Category-I bank.
- 60-Day Allotment Rule: The company must allot equity shares, fully convertible preference shares, or debentures within 60 days from receipt of funds.
- Form FC-GPR Filing: File Form FC-GPR on the RBI FIRMS (Foreign Investment Reporting and Management System) portal within 30 days from the date of share allotment.
- Annual FLA Return: File Foreign Liabilities and Assets (FLA) return annually by July 15th on the RBI FLAIR portal.
4. Valuation Norms under FEMA Pricing Guidelines
FEMA lays down strict pricing guidelines to prevent undervalued transfer of Indian business ownership to overseas entities:
For unlisted Indian companies, shares issued to non-residents must not be priced lower than the fair value computed by a Chartered Accountant or SEBI-registered Merchant Banker using the internationally accepted Discounted Cash Flow (DCF) methodology.
5. Compounding of Contraventions with RBI
If your company missed filing Form FC-GPR, delayed share allotment beyond 60 days, or failed to submit the annual FLA return, do not panic.
Under FEMA Section 15, businesses can file an application for Compounding of Contravention before the Regional Office of the Reserve Bank of India. The RBI imposes a quantified compounding fee to regularize the omission without criminal proceedings.
Frequently Asked Questions
CA Pranav Peddi
Partner & Corporate Advisory Head
Guiding corporations, startups, and NRIs on tax planning, GST structuring, and regulatory audits. P. Ramesh & Associates has provided dependable financial counsel since 1988.