India rules · all investors

Funding & FEMA: India rules for foreign companies

CA Utsav Dogra, Chartered Accountant, ICAI M. No. 542375

Equity is the simplest way to fund a new Indian company: no interest withholding, no ECB limits and no repayment schedule. Its drawback is that capital can only be returned through dividends, buybacks or a capital reduction.

Choosing between equity and debt

Debt from the parent can suit working capital or projects with a clear repayment profile. It must be registered as an external commercial borrowing before drawdown, priced within the all-in cost ceiling, used for permitted purposes and reported every month. Interest paid abroad also carries withholding tax and transfer pricing review.

Instruments convertible into equity, such as compulsorily convertible preference shares or debentures, count as equity for FEMA if their conversion terms are fixed upfront. They are useful when the parent wants a preference return without ECB rules.

Equity

The Indian bank converts the foreign currency into rupees and issues an inward remittance certificate. Shares are priced in rupees, so fix the number of shares against the rupee amount actually received.

Loans from the parent

A loan from the parent needs a loan registration number before drawdown, must meet cost, maturity and end-use rules, and is reported monthly. Interest paid abroad carries withholding tax and transfer pricing scrutiny.

Checklist

Decide equity, debt or convertible instruments
Valuation where shares are issued above face value
Allot within 60 days of receipt
FC-GPR within 30 days of allotment
LRN before drawing any parent loan
FLA return by 15 July each year

Common mistakes

Parent paying Indian expenses directly instead of funding the company
Treating advances as share money without allotting
Drawing a loan before registration
Forgetting the FLA return in years with no new investment

How this applies to your country

Our service: FEMA and RBI reporting

Questions

Can the parent pay Indian expenses directly?

It should fund the Indian company, which then pays its own expenses. Direct payments create accounting, tax and FEMA problems.

Are convertible instruments treated as debt?

Compulsorily and fully convertible instruments with conversion terms fixed upfront are treated as equity under FEMA.

What if FC-GPR is filed late?

A late submission fee applies within the permitted window; beyond it, the contravention is compounded with the RBI.

Queries

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