FEMA Act, 1999 on start-ups facilitates the repatriation of funds earned for the international markets. FEMA, Foreign Exchange Management Act has a pivotal role in the upbringing of India’s economic rules. The role of the FEMA Act is to manage foreign business and investment, but also impacts Indian startups who are planning to set up businesses in other countries. However, the compliance of FEMA doesn’t set any limitation to the Indian founders from starting the business abroad but there are various rules and policies and sometimes complicated for the business looking to expand globally. One of the noticeable hurdles that lies under FEMA is the complexity of moving shares from one Indian company to a foreign one. The rules of the Foreign Exchange Management Act also state that any Indian resident entity can move its shares to a foreign company without permission from the RBI(Reserve Bank of India). The RBI is subjected to control the financial flow that could impact the foreign exchange and overall economy of India.
Addressing India’s legal system, the Foreign Exchange Management Act(FEMA) has significant implications for start-ups engaging with foreign investment and transactions. However, the law of FEMA was first enacted in 1999 to liberalise foreign exchange control and promote foreign investment in the country. Delving into the article will explain the impact of the FEMA Act on startups and the purpose of upbringing.
FEMA, Foreign Exchange Management Act regulates foreign exchange transactions in India in compliance with the guidelines and restrictions imposed by the RBI(Reserve Bank of India). The primary purpose of the FEMA Act is to promote the inflow and outflow of foreign exchange and transactions by simplifying the procedure for foreign exchange transactions and liberalising control. Furthermore, the FEMA Act is a replacement of FERA which was supposed to be more restrictive and cumbersome for businesses with foreign investment and transactions. FEMA is a modernised and updated framework of the Indian government to promote foreign exchange transactions in compliance with RBI guidelines and restrictions.
There are several significant implications of the FEMA for startups in India and some of them are highlighted below.
Facilitates Foreign Investment and Transactions: The act of FEMA facilitates foreign investments and transactions and simplifies the procedure of upbringing foreign exchange transactions in India. The new startups in India can easily engage with foreign exchange and transactions in compliance with the RBI without imposing any significant restrictions. Furthermore, the act of FEMA in the ongoing startups leads to the increased growth and expansion of business opportunities.
Enable Cross-Border Transactions: The FEMA regulatory framework entails the startup to streamline the process of cross-border transactions most effectively and conveniently. The act of FEMA regulates the transfer of shares or assets between the Indian and foreign entities. It enables startups to efficiently merge with foreign companies.
Quick Deportation of Funds: The Foreign Exchange Management Act, of 1999 ensures the deportation of funds earned from the foreign investment. Any of the startups can deport their profit, shares, dividends, or any assets through foreign investment.
Regulatory Compliance: The Foreign Exchange Management(FEMA) Act imposes certain guidelines and restrictions by the RBI. It ensures that every startup in India complies with the FEMA guidelines to achieve smooth and efficient foreign investment and transactions. However, FEMA regulatory compliance is crucial for startups and businesses to avoid any legal circumstances, ensuring the smooth functioning of operations.
Nourish Investor Confidence: The FEMA Act, of 1999 ensures all the legal framework for the investor to efficiently make their investment overseas. Further, it assures that all the investments are secure and project, boosting the self-confidence of the investor to engage in foreign investment.
Every startup in India needs to comply with the FEMA guidelines to engage with foreign investment and transactions. Some of the FEMA checklists for startups are highlighted below.
Eligibility Criteria: Before investing overseas, businesses should investigate the eligibility criteria for smooth and secure investments and transactions.
Investing Threshold: Before investing in foreign business must check whether the FDI meets the specific threshold but is not less than the prohibited sector.
Sector Limit: It is a must to ensure that foreign direct investment doesn’t exceed the sector limits.
Annual Returns: Make sure to file an annual return of foreign liabilities and assets before July 15 of each year.
In compliance with FEMA regulations, at the funding stage startups can build strong reputations in the business field. The regulatory framework is committed to the upbringing of ethical and legal business practices, attracting more customers, investors, and partners. In addition to this, startups should adhere to the FEMA regulations while raising funds through the FDI. So, it is essential to go through certain guidelines and frameworks provided by the government and RBI before making any FDI. If you want to know more about the FEMA startup guidelines, you must consult CA. Manoj K. Pahwa provides in-depth research and assistance to ensure the FEMA regulations.