Introduction
Indian entrepreneurs must familiarise themselves with the provisions of the Foreign Exchange Management Act of 1999 (FEMA), as there are many Indian Entrepreneurs who are beginning to expand their Business Globally.
FEMA provides guidance for Indian Residents to invest, create or purchase Companies Outside of India.
Any Company that is incorporated in another Country by an Indian Person or entity must comply with FEMA and any Regulations issued by the Reserve Bank of India (RBI).
Serious consequences will occur if an individual violates the provisions of FEMA. If an individual does not comply with the provisions of FEMA, they will likely face criminal prosecution for Violation of FEMA, increased Penalities and may lose their ability to Invest in Foreign Companies going forward.
An individual must understand all of the FEMA Guidelines applicable, Limits, Mandatory Reporting Obligations and Compliance Requirements prior to beginning the process of creating a business in a foreign country.
Who Can Open a Foreign Company Under FEMA?
The Foreign Exchange Management Act (FEMA) provides for resident individuals and Indian-based entities to be able to establish or invest in foreign businesses provided certain conditions are met.
The following are eligible under FEMA to open a foreign business:
A resident individual
An Indian corporation registered under the Companies Act
A limited liability partnership (LLP) formed in India
A partnership firm and trust with certain restrictions
Eligibility and limits vary based on whether the person or entity is investing directly or through the Indian entity.
Key FEMA Routes for Opening a Foreign Company
Under FEMA, there are two primary methods of investing outside of India:
1. Liberalized Remittance Scheme (LRS)
As a resident Indian, you have the option to invest overseas through this program where you can send a maximum of $250,000 each year, per individual.
Who typically uses this option: entrepreneurs, freelancers, small businesses and startups that wish to explore new markets internationally. In order to qualify for this scheme, you must satisfy all of the following conditions:
* The source of the funds must be from personal savings.
* The investment must be legitimate and not in any of the following areas that are prohibited: gambling, real estate trading, etc.
* All investments must be reported to the Reserve Bank of India through financial institutions.
2. Overseas Direct Investment (ODI) Route
According to the ODI regulations created by the Reserve Bank of India in 2022, Indian corporates and partnership-type businesses (LLPs) can invest abroad. This regulation was created to simplify the process of establishing ODIs, which enables Indian companies to establish majority owned or 100% owned subsidiaries in foreign countries and also to invest in international joint ventures with companies that are based outside of India. Companies that want to grow their international business need to carefully comply with the ODI regulations.
Permissible Business Activities Under FEMA
As per the FEMA regulations, Indian investors can establish foreign corporations to conduct legitimate business activities within their country. There are several Permitted Activities under FEMA:
These include the following:
Trading businesses and Import and Export,
Computer and Information Technology (IT) services, software, or consulting,
Manufacturing and processing,
Online retail (e-commerce) and Digital Services,
Investment Holding companies and Investment Companies (restrictions may apply).
Additionally, FEMA has some restricted areas where an Indian national is not allowed to invest funds outside of India; these include gambling, betting, and lottery companies; most of real estate trading except for development; and speculative cryptocurrency investments as they will need to comply with future government regulations.
Investment Limits Under FEMA
Investment limits differ based on the route taken to make the investment.
An Indian resident may invest (through LRS) up to $250,000 each financial year in foreign investments; which includes all investments made outside of India and not just those relating to establishing companies.
For an Indian company, the amount of an automatic route investment may not exceed four times the company's net worth unless the company receives special approval for investments greater than four times its net worth.
All sources of funds must be from legitimate and verifiable sources.
Reporting and Compliance Requirements
Post-investment reporting is highly important to FEMA:
FILE FORM FC for an international investment
File Annual Performance Reports (APR) from foreign affiliates
Report changes to your foreign ownership or if closing down a foreign affiliate
Report any foreign assets in your Indian tax return
If you do not report, it will be considered a FEMA violation, even if the investment was legal at the time.
PROFITS WILL BE REPATRIATED TO INDIA WITHIN TIMEFRAMES SPECIFIED BY FEMA AND WILL HAVE TO BE DISCLOSED IN INDIAN TAX RETURNS
If you wish to retain any earnings outside India, you may only use them for certain types of business. If earnings are not repatriated, you will be liable to regulatory scrutiny.
TAX AND FEMA INTERACTION
Compliance with FEMA does not eliminate your obligation to pay taxes. If you wish to establish a foreign company, you must comply with the following regulations:
You must comply with the Indian Income Tax Act
Your country has a Double Taxation Avoidance Agreement (DTAA) with India
You must also comply with the foreign country's laws on taxation
If applicable, you must comply with transfer pricing regulations in place.
You should have a structure that complies with FEMA but is also tax effective and transparent.
MISTAKES THAT INDIAN ENTREPRENEURS MAKE RELATING TO FEMA
Many Indian entrepreneurs are not aware of the various regulations within FEMA; thus, they might unintentionally break the regulations. Some examples of this are:
Using your personal bank account without reporting it through the LRS
Exceeding the amount able to be remitted
Not filing the APR
Opening a business activity that is prohibited
Not reporting any of your foreign assets in your Indian tax return
You may face a penalty of up to three times the amount involved in the violations listed above.
Recent FEMA Developments (2025–26 Perspective)
Recent updates to the policies from the Reserve Bank of India (RBI) are aimed at simplifying the reporting requirements under the Overseas Direct Investment (ODI) scheme, encouraging the overseas expansion of genuine businesses, and improving the RBI’s ability to monitor shell companies. The tightening of the evaluation of round-tripping has also been announced within this update.
Being compliant with FEMA is critical; hence moving forward compliance is now top-of-mind for everyone who has international business aspirations.
Conclusion
To enable Indians to develop and operate foreign companies there is an established legislative framework which is allowed under FEMA, compliance is necessary and without it you will not be able to proceed with your international expansion.
A carefully thought out and designed structure for complying with FEMA protects the entrepreneur from fines and penalties and increases the trust of financial institutions, investors, and other parties interested in forming business relationships with him/her. For an Indian entrepreneur wanting to go global, compliance with FEMA is an absolute necessity, not an obstacle.
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