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

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)

👉 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

✅ Summary Checklist for Your Case

🚩 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).