Step 1: Confirm the Nature of Transaction

  • You are acquiring shares in a foreign company.
  • Consideration: your knowledge, services, expertise (i.e. non-cash).
  • This falls under: Rule 5(1)(a)(v): acquisition through sweat equity shares, ESOPs or similar schemes.

ODI applicable — reporting mandatory under FEMA (Overseas Investment) Rules, 2022.


Step 2: Eligibility Check

CriteriaCheck
Investor TypeResident Individual or Indian Entity
Is sector permitted?Check if the foreign business is in permitted sector
Not prohibited?Yes (e.g., gambling, real estate, etc. are prohibited)
Legal structure?Foreign company, JV, or WOS properly incorporated

Step 3: Valuation

  • Even if no money is paid, valuation of shares is necessary.
  • RBI wants to know:
    • Fair market value of shares being allotted.
    • Fair value of services / skills being provided.

Documents Required:

  • Foreign company’s valuation report (from local accountant/CPA/valuer).
  • Valuation of services (contract, consultancy agreement, independent assessment if required).

👉 This will justify the allotment of shares.


Step 4: Mode of Acquisition Document

  • A formal Share Subscription Agreement or Sweat Equity Agreement should be signed.
  • Agreement must mention:
    • Number of shares allotted.
    • Basis of valuation.
    • Services being provided.
    • Governing law.
    • Timelines.

Step 5: Filing with AD Bank / RBI

A. Liberalized Remittance Scheme (LRS) Check

  • Since no remittance is involved → LRS remittance not applicable.
  • But still ODI reporting required under RBI ODI Master Direction 2022.

B. ODI Reporting Documents (Form OI – Part I and II)

DocumentNotes
Form OI (Online filing on RBI FIRMS Portal)Mandatory
Valuation CertificateFrom foreign valuer
Board Resolution (if entity investor)Yes
KYC DocumentsPAN, Address proof, etc.
Declaration & UndertakingTo AD bank
FEMA DeclarationStating compliance with Rule 5(1)(a)(v)

👉 In most cases, you need to approach your Authorized Dealer Bank (AD Category I Bank).


Step 6: Post-Investment Compliance

A. Annual Performance Report (APR)

  • Must be filed every year before 31st December.
  • APR contains:
    • Financials of foreign company.
    • Status of investment.
    • Any changes in shareholding.

B. FC-TRS (if transfer later)

  • If shares are transferred later, FC-TRS reporting required.

Step 7: Tax Considerations

A. In India

  • If considered as “income”, value of shares may be taxed under Income Tax Act.
  • If considered capital receipt (rare), may not be taxed immediately.
  • Consult tax advisor for exact treatment.

B. In Foreign Country

  • Tax on allotment of shares for services may apply.
  • Usually, treated as “compensation income” abroad.

Step 8: RBI Review / AD Bank Clarification

  • AD Bank may ask for:
    • More documents.
    • Clarifications on services.
    • External Auditor certificate.
  • RBI may review high-value or complex cases.

Key FEMA Rules Referenced

RuleDescription
Rule 5(1)(a)(v)Sweat equity / services-based acquisition
Rule 6ODI conditions
Master Direction (2022)Procedural compliance
Schedule IReporting format

Summary Checklist for Your Case

StepStatus
Eligibility Check
Valuation Obtained🔲
Share Agreement Drafted🔲
Form OI Filed🔲
KYC Done🔲
Annual Performance Report Prepared🔲
Tax Planning Done🔲

🚩 Special Caution:

  • Even if no remittance → you are still under FEMA radar.
  • RBI takes non-reporting very seriously.
  • Many professionals overlook this; resulting in compounding penalties later.
  • ODI violations = heavy compounding cost (INR 1 lakh to several lakhs).

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