The Enforcement Directorate (ED) has announced a strategic change in its enforcement priorities for 2025, emphasizing stricter oversight on violations related to the Foreign Exchange Management Act (FEMA), 1999. In his address during the ED’s foundation day, Director Rahul Navin highlighted that the agency will intensify efforts to detect and address FEMA-related irregularities, especially those involving cross-border financial transactions. This renewed focus aims to strengthen compliance and curb illicit financial activities impacting India’s foreign exchange framework.
Key areas under heightened ED scrutiny will include:
- Misuse and diversion of Foreign Direct Investment (FDI) channels
- Manipulation of export-import pricing structures
- Unauthorized External Commercial Borrowings (ECBs)
- Illegal ownership of foreign property by Non-Resident Indians (NRIs)
- Unauthorized outward remittances
- Delays and lapses in mandatory FDI reporting such as FC-GPR, FCTRS, and Annual Performance Reports (APR)
Growing Foreign Investment Trends and Compliance Gaps
India has experienced a significant surge in foreign investments, notably through:
- Wholly-Owned Subsidiaries (WOS) established by foreign parent companies
- Equity financing in startups from foreign venture capitalists, angel investors, and institutional funds
- Use of convertible financial instruments (like CCPS and CCDs) through automatic FDI routes
While these investment structures are supported by India’s liberal FDI regime, many companies face challenges in ensuring full regulatory compliance. Oversights and procedural lapses in documentation and reporting have become common pitfalls.
Process of Bringing FDI into India: A Stepwise Overview
The typical FDI inflow process involves the following steps:
- The foreign investor transfers capital in foreign currency to the Indian company’s designated bank account through an Authorized Dealer (AD) Category-I bank.
- The Indian entity issues equity shares or convertible instruments corresponding to the investment received.
- The company files Form FC-GPR with the Reserve Bank of India (RBI) via the FIRMS portal within 30 days of share allotment and submits Form PAS-3 with the Ministry of Corporate Affairs (MCA).
- Comprehensive documentation is maintained, including:
- Know Your Customer (KYC) details of the remitter
- Foreign Inward Remittance Certificate (FIRC) issued by the AD bank
- Valuation reports from RBI-registered Merchant Bankers or Registered Valuers (RVs)
- Board resolutions authorizing share issuance and share certificates duly stamped
- Certifications from Company Secretaries (CS) or Chartered Accountants (CA)
Common Compliance Issues Faced by Foreign Investors and Startups
Despite clear procedural requirements, many startups, foreign subsidiaries, and WOS face compliance failures such as:
- Delayed or non-submission of mandatory forms including FC-GPR, FCTRS, and APR filings
- Missing or invalid valuation reports, sometimes expired by the date of allotment or filing, rendering filings defective
- Lack of valid FIRC or incomplete KYC due to procedural lapses or incorrect purpose codes at AD banks
- Failure to issue share certificates within the prescribed 60-day timeline
- Non-payment of applicable stamp duty on share allotments
- Inadequate maintenance of statutory registers such as the Register of Members and non-filing of annual returns like MGT-7A
- Non-compliance with filing the Annual Return on Foreign Liabilities and Assets (Form FLA)
- Absence of compounding applications after defaults are identified
Consequences of FEMA Non-Compliance
Violations of FEMA provisions, even if inadvertent, constitute civil offences and may lead to:
- Penalties imposed by the RBI, potentially up to three times the amount involved in the violation (including Late Submission Fees – LSF)
- Enforcement Directorate notices, investigations, and adjudication proceedings
- Damage to reputation among investors and financial institutions, potentially impacting future fundraising and business growth
Challenges in Future Funding Rounds: Common FDI Compliance Pitfalls
As startups and wholly-owned subsidiaries (WOS) advance to Series A, B, or C funding rounds, institutional and international investors intensify their due diligence processes. During these reviews, several common FDI compliance issues often surface, potentially jeopardizing funding opportunities:
- Missing RBI acknowledgments for previous FDI inflows
- Discrepancies between shareholding records filed with the Registrar of Companies (ROC) and the company’s capitalization table
- Incomplete or undocumented board approvals for share allotments
- Convertible instruments (such as SAFE notes or CCPS) not properly reported
- Failure to file essential disclosures like MGT-6 and BEN-2, which reveal nominee and shareholding details
- Outstanding compounding applications with the RBI for past defaults
Proactive Steps to Ensure FDI Compliance for Smooth Fundraising
To avoid roadblocks in funding rounds, startups and foreign subsidiaries should implement a strategic compliance framework by:
- Timely filing of critical reports including Form FC-GPR, Form FLA, and Annual Performance Reports (APR)
- Securing FEMA-compliant valuation certificates from SEBI-registered merchant bankers or qualified Chartered Accountants, as mandated under Rule 11UA
- Reconciling share issuance data with bank statements and official MCA filings to maintain consistency
- Organizing all compliance documentation in a well-maintained digital folder to facilitate investor due diligence
- Applying proactively for FEMA compounding to regularize any filing delays or defaults
- Avoiding fund transfers through complex or high-risk jurisdictions that may raise regulatory concerns
Importance of Professional Guidance in FDI Compliance
Many founders mistakenly assume FDI compliance concludes with receiving funds or submitting initial filings. However, ongoing regulatory obligations demand continuous attention, which can be efficiently managed with expert support. Professional advisors assist with:
- Coordinating RBI compliance, including communication with Authorized Dealer (AD) banks and timely FEMA filings
- Preparing and maintaining comprehensive documentation for foreign investors, such as declarations and financial projections
- Handling ROC filings specific to foreign investments, including FC-1, BEN-2, and MGT-6 forms, and ensuring MCA records remain current
- Structuring complex instruments like SAFE notes or Compulsorily Convertible Preference Shares (CCPS) in a legally compliant manner
By engaging skilled advisors, startups and WOS can mitigate compliance risks, maintain investor confidence, and streamline future funding rounds.
How CertificationsBay Supports Your FDI Compliance Needs
At CertificationsBay, we offer specialized expertise in navigating the complex landscape of FEMA and FDI regulations. Our comprehensive services include:
- Expert FEMA advisory and strategic FDI structuring
- Filing of essential returns such as SMF-FCGPR, FCTRS, FLA, APR, and ECB returns
- Preparation of FEMA-compliant valuation reports alongside CS/CA certifications
- Assistance with RBI compounding applications for resolving past defaults
- Thorough FEMA due diligence and detailed documentation reviews
With the Enforcement Directorate intensifying its scrutiny on FEMA violations, staying ahead with proactive compliance is not just advisable—it’s essential. Our team ensures your startup or wholly-owned subsidiary (WOS) is fully compliant and investor-ready, safeguarding your business against regulatory risks.
If you seek expert guidance to minimize risks and maintain investor confidence through every funding round, connect with us at contact@certificationsbay.com. CertificationsBay delivers end-to-end FDI compliance support, covering investments in NBFCs, Overseas Direct Investment (ODI), and all FEMA-related transactions. Because raising capital is only the beginning—maintaining strict compliance is what ensures sustainable growth in today’s vigilant regulatory environment.
