When a company or an individual raises funds abroad and needs to route or transfer these funds to India, it must comply with various regulations set by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA). The process of routing funds raised abroad to India is subject to the nature of the funds being raised (such as equity capital, debt, loans, or other financial instruments), the entity receiving the funds, and the regulations governing such transfers.

Here’s an overview of the process and the key considerations for routing funds raised abroad to India:

1. Regulatory Framework and Compliance under FEMA

• FEMA governs foreign exchange transactions in India, including the inflow of funds raised abroad.
• RBI Regulations: Any transfer of funds from abroad to India is regulated by the RBI, and the transaction must be routed through Authorized Dealer (AD) banks.
• The nature of the funds (equity, debt, or other) determines the specific RBI and FEMA regulations that apply.

2. Types of Funds Raised Abroad and Their Routing

a. Equity Capital (Foreign Direct Investment – FDI)

• FDI into Indian Companies: When funds are raised abroad through the issuance of equity, it typically comes under Foreign Direct Investment (FDI) regulations. Process for Routing:
  1. FDI Compliance: The foreign investor must ensure that the investment complies with the sectoral caps and other FDI policies.
  2. Authorized Dealer (AD): The funds are routed through an AD bank in India (typically a bank authorized by the RBI to deal in foreign exchange).
  3. Filing of Forms: The Indian company receiving the funds must file Form FC-GPR (Foreign Currency – Gross Provisional Report) with the RBI within 30 days of receiving the FDI.
  4. Repatriation of Funds: FDI funds received in foreign currency can be repatriated to the investor’s home country, subject to FEMA compliance.
  Documents Required:
  • KYC (Know Your Customer) documentation of the investor and the company.
  • FC-GPR form to report the foreign investment.
  • Shareholder agreement and board resolutions.

b. Loans Raised Abroad (External Commercial Borrowing – ECB)

• ECB Regulations: If the funds are raised abroad through loans or debt instruments (like bonds or syndicated loans), they come under the External Commercial Borrowing (ECB) framework. Process for Routing:
  1. RBI Approval: The company needs to ensure the loan is within the ECB framework limits (such as maximum interest rate, eligible borrowers, end-use restrictions).
  2. Authorized Dealer (AD): Funds raised through ECB are routed through an AD bank.
  3. Form ECB2: The borrower needs to file Form ECB2 with the RBI for any foreign borrowings that exceed certain limits or that require specific approval.
  Documents Required:
  • Loan agreement, ECB approval, and financial statements of the borrower.
  • KYC and other compliance documents for the entity borrowing the funds.

c. Overseas Fund Transfer for Non-Residents

• Non-Resident Indians (NRIs) can transfer funds raised abroad to India under specific conditions, especially if the funds are related to personal or business remittances. Process for Routing:
  1. NRE/NRO Accounts: If an NRI is transferring funds to India, it must be routed through an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account.
  2. AD Bank: Transfers should be routed via authorized dealers (ADs) in India.
  3. Documentation: The AD may require proof of the source of funds, such as tax records, bank statements, or evidence of the source of funds.
  Documents Required:
  • Source of Funds Declaration (if required).
  • KYC for the NRI or non-resident entity.

d. Investment Funds (Private Equity or Venture Capital)

• Private Equity (PE) / Venture Capital (VC) investments raised abroad may involve funds coming from foreign investors seeking equity stakes in Indian startups or businesses. Process for Routing:
  1. FDI Route: If the funds are in the form of equity, the transfer should be routed under the FDI policy, and the company receiving the funds must file Form FC-GPR.
  2. Portfolio Investment: If the funds are raised as portfolio investment, the investment should comply with the Foreign Portfolio Investor (FPI) route.
  3. Authorized Dealer (AD): Funds must be transferred through an AD bank to the Indian entity.
  Documents Required:
  • Investment Agreement, KYC of the investor, and FC-GPR (in case of equity).
  • Proof of PE/VC firm’s registration and identity.

3. Transfer of Funds from Foreign Bank Accounts to Indian Bank Accounts

a. Repatriation of Funds

• When funds are raised abroad, and the entity intends to repatriate these funds to India, the following must be done:
  1. Routing Through AD Bank: The funds must be transferred through an authorized dealer (AD) bank in India.
  2. Foreign Exchange Conversion: The funds will typically be converted into Indian Rupees (INR) unless the recipient maintains a foreign currency account (e.g., FCNR(B) or NRE account).
  3. Payment for Foreign Investment: In case of investments or loans, the RBI and FEMA regulations will apply to determine whether the payment is eligible for remittance or repatriation.

b. Documentation and Reporting

• Form FC-GPR: Used for reporting FDI to RBI for foreign investments in Indian companies.
• Form ECB: Used for external commercial borrowings or loans raised abroad.
• FEMA Declaration: In some cases, a declaration of compliance with FEMA must be filed with the RBI or the AD bank.

4. Tax Considerations for Routing Funds Raised Abroad

1. Taxation on Funds Transferred:
   • Income Tax: The funds routed from abroad may attract taxation if they are associated with income earned in India or through investments in Indian assets.
   • GST (Goods and Services Tax): If the transfer involves the sale of goods or services, GST may apply.
2. Transfer Pricing:
   • If the funds raised abroad are routed through an affiliate, transfer pricing regulations may apply to ensure that transactions between related parties are conducted at arm’s length.

5. Key Points for Compliance

• RBI Authorization: Certain types of foreign investments (e.g., investment by a foreign entity in Indian real estate) may require specific RBI approval.
• Sectoral Caps: Ensure that investments do not exceed the sectoral limits set by the FDI policy.
• Tax Compliance: Ensure compliance with Indian tax laws, including any withholding tax or capital gains tax on the funds raised abroad.
• Reporting Requirements: Ensure that proper reporting forms like FC-GPR (for equity investment) and ECB2 (for foreign loans) are filed with the RBI.

Conclusion

Routing funds raised abroad to India involves compliance with FEMA and RBI guidelines. Depending on the nature of the funds—whether through equity investments (FDI), external commercial borrowings (ECB), personal remittances, or venture capital investments—the process involves coordination with authorized dealers (ADs) and filing specific regulatory forms such as Form FC-GPR, Form ECB, and others. Compliance with these regulations ensures that funds are transferred smoothly while adhering to India’s foreign exchange management policies.