India is the third largest FDI recipient globally. Most companies discover FEMA only when something goes wrong.

India is the third largest recipient of FDI globally. In FY 2024-25 alone, inbound foreign investment crossed 80 billion dollars. Outbound Indian investment in foreign entities exceeded 30 billion dollars. The economic activity governed by the Foreign Exchange Management Act 1999 is staggering.

Yet most companies discover FEMA only when something goes wrong: a delayed FC-GPR filing, an unreported FLA return, a sectoral cap breach, a pricing guideline violation, a Press Note 3 trigger that was missed.

By that point, the consequences are real: penalty proceedings, compounding fees, deal disruption, regulatory scrutiny, and reputational damage. For listed companies, disclosure obligations to the stock exchanges. For unlisted companies, audit qualifications and investor concerns.

This page is the operational compliance map for cross border investment under FEMA, the NDI (Non Debt Instrument) Rules 2019, and the ODI (Overseas Investment) Rules 2022.

Press Note 3 of 2020, issued by DPIIT in April 2020 in the wake of the pandemic, fundamentally altered the FDI landscape for investments from countries sharing a land border with India.

The provision: any FDI from China, Pakistan, Bangladesh, Bhutan, Myanmar, Nepal, or Afghanistan requires prior government approval through the Foreign Investment Facilitation Portal, regardless of sector and regardless of amount.

The provision is broadly applied. It covers:

• Direct investment from these countries

• Indirect investment through intermediate entities (beneficial ownership tests)

• Follow on investments by existing investors from these countries

• Conversion of debt into equity by lenders from these countries

Beneficial ownership analysis is rigorous. If the ultimate beneficial owner of the investing entity is from a land border country, even an investment routed through Singapore, Mauritius, or Cayman is treated as requiring approval. Single percentage point thresholds for beneficial ownership do not apply: the analysis is qualitative and focuses on actual control.

For Chinese investment particularly, the provision creates substantial uncertainty. Many Chinese venture capital funds structured their Indian investments through Hong Kong, Singapore, or Cayman entities. Under Press Note 3, these structures do not avoid the approval requirement if Chinese persons are the ultimate beneficial owners.

Practical implication: any deal involving investors from or beneficially owned by residents of land border countries must factor in 12 to 16 weeks for government approval, with no certainty of outcome. Some applications have been pending for over 18 months. Others have been refused without specific reasons.

NDI Rules 2019 impose pricing discipline on cross border investment to prevent under valuation of inbound investment and over valuation of outbound investment.

Inbound investment. Issue price for fresh shares to foreign investors must not be less than fair value as per internationally accepted pricing methodology certified by a SEBI registered Category I merchant banker or Chartered Accountant. For unlisted companies the discounted cash flow or other recognised methods. For listed companies, SEBI ICDR Regulations specify the framework. Issuing shares at less than fair value to a foreign investor is a contravention attracting penalty.

Outbound transfer (resident to non resident). Transfer price must not be less than fair value. The resident transferor cannot accept consideration below fair value because that would be capital flight without value.

Inbound transfer (non resident to resident). Transfer price must not be more than fair value. The resident transferee cannot pay above fair value because that would be capital outflow above value.

Bonus shares, rights issues, sweat equity. Specific rules apply. Bonus issues to existing non resident shareholders are permitted without pricing scrutiny. Rights issues at less than fair value require justification.

Convertible instruments. CCPS, CCDs, optionally convertibles. Pricing applies at conversion. The conversion price formula must be specified at issuance and must result in conversion at not less than fair value.

Valuation reports must be by a SEBI registered Category I merchant banker for fresh issues to non residents, or by a chartered accountant. Valuation reports must be supported by methodology, assumptions, and sensitivity analysis. Valuation reports older than six months may be challenged in scrutiny.

Two annual filings track ongoing cross border investment exposure.

FLA (Foreign Liabilities and Assets) Return.

Filed by all Indian companies that have received foreign investment OR made foreign investment in any of the preceding financial years. The obligation continues even if the foreign investment was received many years ago and no further activity has occurred.

Due date: 15 July annually for the financial year ending 31 March.

Filed online with RBI through the FLA reporting platform.

Information required: balance sheet of foreign investments inward (foreign investor wise), foreign investments outward (foreign entity wise), sectoral and country wise classification, share capital position, retained earnings, foreign liability accruals.

Penalty: compounding for non filing or late filing. The compounding fee is generally modest for first time defaults. Persistent non filing accumulates and can attract scrutiny.

APR (Annual Performance Report).

Filed by Indian companies (and resident individuals in some cases) that have made overseas direct investment under FEMA ODI Rules.

Due date: 31 December annually for the financial year ending 31 March of the foreign entity.

Filed with the Authorised Dealer Category I bank that handled the original outward remittance.

Information required: financial statements of the foreign entity (audited where required), performance metrics (revenue, profits, dividends), capital structure changes, dividend repatriation to India, and any structural changes in the foreign entity.

Persistent non filing of APR can result in restrictions on further outward remittances by the same Indian party. The authorised dealer bank cannot process additional outward investment until APR is current.

FEMA contraventions are subject to penalties under Section 13 of the Act.

Quantum of penalty.

• Up to three times the amount involved in the contravention if quantifiable.

• Up to two lakh rupees if not quantifiable.

• Continuing default: five thousand rupees per day until remedied.

The 3x penalty is the most material risk. For a 100 crore investment that violated pricing guidelines, the maximum penalty is 300 crore. For a 10 crore late filing, the maximum is 30 crore. The penalty is determined by the adjudicating authority based on the nature, gravity, duration, and impact of the contravention.

Compounding.

FEMA (Compounding Proceedings) Rules 2024 (which replaced the 2000 rules) permit voluntary compounding of contraventions. Compounding is a procedure where the contravener acknowledges the contravention, pays the compounding fee determined by the compounding authority, and avoids formal penalty proceedings.

Compounding is permitted for most contraventions except those involving money laundering, terrorism financing, or serious threats to economic security. The compounding fee is determined based on the quantum of contravention, period of default, and aggravating or mitigating factors.

Strategic late filings (delayed FC-GPR, FC-TRS, FLA) are routinely compounded. Pricing violations, sectoral cap breaches, and Press Note 3 violations have been compounded subject to specific facts. Compounding orders are published on the RBI website and create precedential value for future cases.

Strategic considerations.

Compounding is preferable to formal penalty proceedings. The fee is generally lower than the maximum penalty and the process is faster (3 to 6 months versus 12 to 24 months).

Voluntary disclosure followed by compounding is treated more favourably than scrutiny initiated proceedings. Self disclosure demonstrates good faith.

Some compoundings are mandatory before the Indian party can undertake further inbound or outbound transactions. Authorised dealer banks may decline to process new transactions if existing contraventions are uncompounded.