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FEMA Regulations Pertaining to Information Technology (IT) Sector

Indian Information Technology industry is one of the rapid growing industries in the country.IT industry comprises of software ITes (Information Technology Enabled Services), BPO (Business Process Outsourcing) industry.

IT has been valued contributor to growth of India in the services and rise as the biggest IT Hub in the modern world. This sector has to their credit creation of more than 15 million direct & indirect employment in India. Its revenue for Financial Year 20 is estimated at US$ 191 billion, growing at 7.7% year-over-year and expected to reach $ 350 billion by 2025. Being a global player, this industry has witnessed significant FDI (Foreign Direct Investment), ODI (Overseas Direct Investment), hiring of expats in India or deputation of Indian citizens to Projects Overseas etc.

What is the Provision on Foreign Direct Investment?

As per the Finance Act 2015 central Government is empowered to legislate for Capital Account Transactions. Department of Economic Affairs under Ministry of Finance has issued FEMA (Non-debt Instrument) Rules, 2019 (herein after referred as NDI Rules) for acceptance of foreign investment/FDI in India. Non-debt Instrument Rules supersedes Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017, also known as TISPRO. FDI is subject to sectoral cap, entry route, pricing guidelines & attendant conditionalities as mentioned in Schedule 1 of NDI Rules.

Important Terms in NDI Rules

Foreign Investment simply referred to an investment made by a person resident outside India (aka PROI), on a repatriation basis, in the equity instruments of an Indian company or to the capital of a LLP.

Before going ahead let’s have a quick look on some important terms related with this.

Equity Instrument is related with these instruments issued by an Indian Company

  1. Equity shares,
  2. Fully mandatorily convertible debentures,
  3. Fully compulsorily convertible preference shares,
  4. Share warrants issued in accordance with regulations by SEBI.

FDI means these investments by PROI on repatriation basis in equity:

  1. Any investment in unlisted Indian company, irrespective of amount.
  2. Investment of 10% or more of post issue paid up capital, on fully diluted basis, in a listed Indian company.

Term “fully diluted basis” referred to total number of shares that would be outstanding if all possible sources of conversion are exercised. Once an Investment categorized as FDI will always remain as FDI even though the investment comes down below 10%.

Entry Route: There are two kinds of entity rules the first one is “Automatic Route” and second one is “Government Route” through which foreign investment may be done in India.

  1. Automatic route refers to that entry route through which investment by PROI does not require prior RBI/Government approval.
  2. Government route refers to that entry route in which investment by a PROI requires prior government approval.

Sectoral Cap – It consists of limits up-to which total foreign investment (TFI) can be accepted by an Indian Company in equity instrument or in capital of LLP, operating in that sector. TFI means Foreign Investment plus Indirect Foreign Investment. This is composite limit of Indian investee entity. The sector (Other than Financial Services) which is neither specified in the table of Schedule 1 nor is a part of prohibited sector for FDI, 100% foreign investment is permissible under Automatic Route.

Foreign Investment for IT Sector According to the NDI Rules

In the table of Schedule 1 of NDI Rules IT sector is not mentioned thus 100% Foreign Investment is permitted under Automatic Route subject to applicable laws or regulations, security and other conditionalities.

Investment by person resident outside India in the equity instrument of an Indian Company/ to the capital of LLP in IT sector, is under automatic route, but FDI comes from the below mentioned point would be subject to government approval:

  1. Any entity of a country which shares land border with India, or
  2. Beneficial owner who is either situated in that country or is a Citizen of that country which shares land border with India

FDI from the companies incorporated of Pakistan, Bangladesh, Myanmar, Afghanistan, Nepal, Bhutan, & China, would be subject to government approval according to the NDI amendment rules 2020.

Equity Instruments to PROI: It needs to be issued within 60 days from the date of receipt of consideration, failing which consideration need to be remitted back, to PROI within 15 days from the date of completion of 60 days, via banking channels or by credit to his/her  FCNR (B) or NRE account.

What will be Pricing Guidelines?

  1. Listed Company: Price worked out as per SEBI guidelines.
  2. Un-listed Company: According to the internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a CA or a Merchant Banker registered with SEBI.

For equity instrument, mode of payment and the reporting compliances are governed by FEMA (Mode of Payment and Reporting of Non-debt Instruments) Regulations 2019, issued by RBI.


Form FC-GPR : FC-GPR is also known as Foreign Currency-Gross Provisional Return, Under FDI, if an Indian Company issuing equity instruments to person resident outside India needs to report such issue in Form FC-GPR.

Annual Return on FLA (Foreign Liabilities and Assets): An LLP who has received foreign investment/ Indian Company, who has received FDI need to submit form Foreign Liabilities and Assets to RBI by 15th July of each year.

FC-TRS (Foreign Currency-Transfer of Shares): It needs to be filed for transfer of equity instruments as per the NDI rules, between: PROI

  1. Person resident outside India holding equity instruments on a repatriable basis in an Indian company and PROI holding equity instruments on a non-repatriable basis.
  2. Person resident outside India holding equity instruments on a repatriable basis and PRI in an Indian company.

Transfer of Equity Instrument of an Indian Company by/to PROI is governed by NDI Rules -Rule 9 and 13.

  1. Form LLP (I): LLP receiving amount towards capital contribution/acquisition of profit shares from PROI, need to file Form LLP (I), within 30 days from the receipt of consideration.
  2. Form LLP (II): On disinvestment / transfer of capital contribution/profit share between PRI and PROI (or vice versa) Form LLP (II) need to be filed within 60 days from the receipt of funds. Onus of reporting is on the resident transferor / transferee.

ODI Regulations Under FEMA from IT Perspective

Investment in Overseas JV/ WOS, by Indian Companies in the IT sector, is a common occurrence and quite pervasive. Here are some essential provisions of ODI regulated under “Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004” (Notification 120/RB-2004), as amended time to time.

Financial investment by an Indian Party up-to 400% of its Net Worth (based upon last audited Balance Sheet) is permissible under automatic route, provided:

Overseas Joint Venture or Wholly Owned Subsidiary should be engaged in a legal business activity;

  1. Indian Party is not on exporters caution list of RBI /list of defaulters/under investigation by any investigation agency.
  2. Indian Party has submitted Annual Performance Report (APR) for its existing overseas JV/WOS.
  3. Transactions relating to investment in JV/WOS should be routed through one branch of AD Bank, designated by it and investment in Overseas JV/WOS should be subject to adherence of valuation norms prescribed under the regulations.

400% limit is on the total financial commitment by an Indian party in all of its overseas JV/WOS. This limit is relevant only at time of making remittance.

It should be noted that any financial commitment exceeding USD 1 billion/ its equivalent, in a financial year would need prior approval of RBI even when total financial commitment of Indian party is under eligible limit in automatic route.

FEMA Provision for Foreign National Employee Appointment In India By a Company

Migrant of employees is a common practice in the IT Industry. Such Foreign Nationals can remit 100% of their net salary outside India according to the Current Account Transactions (Amendment) Rules 2015.

Foreign Citizens (except Pakistan) or Indian Citizens on deputation to Office/ Subsidiary/ JV of foreign company in India, may make remittance up to his/her net salary (net of taxes/ PF/ other deductions), if he/she is in India for

  1. Employment or deputation of a specified duration (irrespective of length) or
  2. Deputation for a specific job or assignments up-to 3 years,

Above employees are categorized as resident but not ordinary resident (RNOR) and are allowed to remit 100% of their net salaries.

Employee Stock Option Plan (ESOP) – ESOP by IT Industry to their employee is regular phenomena. ESOP by Indian Company to PROI is notified under NDI Rules- rule 8. An Indian IT company may issue ESOP to employees who is person resident outside India, under SEBI Act 1992 or Companies (Share Capital and Debentures) Rules, 2014 and should comply with entry route and sectoral cap. ESOPs to an employee or director who is a citizen of Bangladesh or Pakistan will need prior approval of government.