FEMA DUE DILIGENCE
CS RICHA KUMAR & ASSOCIATES
FEMA Due Diligence: A Practitioner's Note
Scope, core filings, red flags, and documentation for cross-border compliance review
What FEMA Due Diligence Covers
FEMA — the Foreign Exchange Management Act, 1999 — governs foreign currency transactions in India, aiming to facilitate external trade, balance payments, and maintain an orderly foreign exchange market. For any company with cross-border exposure, compliance isn't a one-time filing exercise — it's a continuous discipline, and increasing volumes of both inbound and outbound funds have raised the level of regulatory scrutiny on exactly these transactions.
FEMA Due Diligence exists to get ahead of that scrutiny: it verifies that a company's cross-border transactions — import, export, debt funding, equity capital infusion, and share transfers — have actually been conducted in compliance with sectoral caps, investment caps, and reporting requirements, before a regulator, an investor, or an acquirer finds a gap.
When FEMA Due Diligence Is Typically Required
Prior to an equity investment or acquisition involving a foreign investor
As part of broader legal due diligence in M&A, private equity, or joint venture transactions where the target has any foreign shareholding or cross-border dealings
Before a company converts to, or exits, a Wholly Owned Subsidiary, Joint Venture, Liaison Office, Branch Office, or Project Office structure
As part of periodic internal compliance review for companies that have received FDI or made outbound investments
Ahead of a funding round, where investors want assurance that prior capital was brought in and recorded correctly
Scope of FEMA Due Diligence
1. Capital Account Transactions — review of all transactions altering assets or liabilities — including the outside assets/liabilities of Indian residents — such as FDI, ODI (Overseas Direct Investment), ECBs (External Commercial Borrowings), and share transfers between residents and non-residents.
2. Current Account Transactions — review of trade-related and other transactions not altering assets/liabilities abroad — imports, exports, remittances for services, royalty and technical fee payments, and similar flows.
3. Currency Transactions — verification of foreign currency dealings generally, including compliance with authorised dealer channel requirements.
4. Regulatory Instruments — cross-checking transactions against the relevant RBI Master Directions, FEMA Regulations, and Circulars in force at the time each transaction occurred — not just current rules, since FEMA regulations change periodically and historical transactions are judged against the rules that applied when they happened.
5. FDI Policy and Approvals — confirming the correct route was used (automatic vs. government approval route), sectoral caps were respected, and any required prior approvals were actually obtained — not just assumed to be unnecessary.
6. Entry Structure Review — verifying the company's chosen mode of India entry was itself compliant and consistently maintained:
Liaison Office — confirming no commercial/revenue-generating activity ever occurred
Branch Office — confirming activity stayed within RBI-approved scope
Project Office — confirming activity stayed tied to the specific approved project
Wholly Owned Subsidiary / Joint Venture — confirming FDI was reported correctly at each stage
FII/FVCI and NRI/PIO-linked investments — confirming registration and reporting compliance
Core Filings a FEMA Due Diligence Will Check
FC-GPR — filed within 30 days of share allotment to a foreign investor; a common source of undetected non-compliance since companies often allot shares correctly but miss or delay the filing
FC-TRS — filed within 60 days of receipt of funds or transfer of capital instruments between a resident and non-resident, whichever is earlier
FLA Return — the annual, census-based return due 15 July every year; frequently missed by companies that assume it's a one-time filing tied to the year FDI was received, rather than a recurring annual obligation for as long as the foreign investment remains on the books
Form DI — downstream investment reporting, where an FDI-recipient company invests further into another Indian entity
ECB Forms 1 and 2 — for external commercial borrowings, confirming reporting to the AD Category-I bank was current
Red Flags a FEMA Due Diligence Typically Surfaces
Share allotments to foreign investors with no corresponding FC-GPR on record
FLA Returns not filed in years where the company had zero transactions but still held foreign investment on its books
Valuation certificates missing or inconsistent with the actual price at which shares were issued
A Liaison Office found to have generated revenue, or a Branch Office operating outside its RBI-approved scope
Downstream investments made without the required Form DI reporting
Sectoral cap breaches that were never flagged or corrected at the time
Historical transactions assessed against outdated understanding of RBI rules that had since changed
Why This Matters More Than a Routine Compliance Check
Findings from a FEMA due diligence aren't just administrative — a lapse here is treated as a technical contravention under FEMA, not a mere procedural oversight.
⚠ Depending on severity, this can require formal compounding with RBI, and penalties on compoundable contraventions can run up to three times the amount involved in the transaction. For an acquirer or investor conducting due diligence on a target, an unresolved FEMA contravention is a genuine deal-value issue — not a footnote.
Documents Typically Requested
Foreign Inward Remittance Certificates (FIRCs) and KYC reports from the AD Bank
Copies of FC-GPR, FC-TRS, FLA Returns, and Form DI filings, with acknowledgment receipts
Valuation certificates for all share issuances to non-residents
Board and shareholder resolutions authorising foreign investment or overseas investment
Shareholding pattern showing resident/non-resident split, historically and currently
Copies of any RBI approvals obtained (where the transaction required government/RBI route)
Correspondence with the AD Bank regarding any queries, show-cause notices, or compounding applications
CS Richa Kumar & Associates
www.csrichakumar.com · richakumar86@gmail.com ·
This post is for general informational purposes and does not constitute legal advice. For guidance specific to your situation, consult a qualified professional.
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