पाठशाला Pathshala · नियम Niyam, Law and compliance · Lesson 17 · Build

FEMA for founders: the rules when a foreigner invests

Foreign money arrives with a clock. Shares within sixty days, the FC-GPR within thirty more, a price no lower than fair value and a return every July. Miss one and the fix is compounding.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

The Bandra-Worli Sea Link in Mumbai lit up at night over dark water. — Photograph: Yogesh Gaikwad · Pexels

A Singapore fund wires ₹6 crore for preference shares on 10 May. The board is busy, the lawyers are slow, and the shares are allotted on 20 July. By then the company has breached the Foreign Exchange Management Act: the shares were due by 9 July, and the money should have gone back by 24 July if they were not. Nobody did anything dishonest. The fix is an application to the Reserve Bank, a fee and three months of correspondence.

This lesson is the founder’s map of what FEMA asks of a private company when a person resident outside India invests: the checks before the money arrives, the two clocks after it does, the returns that recur every year and what lateness costs. Every date comes from the Reserve Bank’s Master Direction on Foreign Investment, updated to 15 June 2026, and the reporting regulations amended to 13 June 2026, both read on 10 October 2026.

Two regimes, one round

A domestic round answers to the Companies Act and the Income-tax Act. A round with any non-resident investor answers to FEMA as well, and FEMA is administered by the Reserve Bank through the company’s authorised dealer bank, the bank that receives the money. The Act treats foreign investment as permitted only on its terms: through a route, at a price, with reports. Breaching any of them is a contravention even when the money and the investor are entirely legitimate.

That framing changes how founders should think about the paperwork. The term sheet decides what the investor gets. FEMA decides whether the company is allowed to give it, on what date, at what minimum price and with which forms. A competent law firm handles both, but the dates fall on the company, and the company is the one that pays for missing them.

Before the money: route, sector and price

Route. Foreign investment comes in under the automatic route, which does not require prior approval from the Central Government, or the government route, which does. Which route applies depends on the sector and its caps and conditions in the Master Direction. Confirm the route before signing a term sheet, not after, because a government-route investment cannot close on an automatic-route timetable.

The Mumbai skyline at night with lit towers reflected in still water. — The rules are written in Mumbai and administered through the company’s own bank. Settle the route and the price before the money moves. Photograph: Vijit Bagh · Pexels

Price. An unlisted company may not issue equity instruments to a non-resident below fair value, worked out under an internationally accepted pricing methodology on an arm’s length basis and certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant. The certificate must be no more than ninety days old on the date of investment. For compulsorily convertible preference shares, the conversion price or formula is fixed upfront and cannot be below fair value at issue. The [angel tax lesson](/library/angel-tax-after-abolition-valuation-reports) explains how this floor sits beside the income-tax tests.

Instrument. Most priced rounds use equity shares or compulsorily convertible preference shares, which the [CCPS lesson](/library/ccps-instrument-indian-vcs-actually-use) explains. A startup company, as the Master Direction defines one, can also issue convertible notes to a non-resident for ₹25 lakh or more in a single tranche, convertible or repayable at the holder’s option within ten years, which is the FEMA-compliant route for a foreign angel’s bridge. The [bridge instrument lesson](/library/isafe-safe-and-ccd-choosing-bridge-instrument) compares it with the alternatives.

Put together, the order of work before a foreign close is fixed. Confirm the route and any sectoral conditions. Commission the fair value certificate, timed so that it will be under ninety days old on the realistic closing date. Draft the board and shareholder resolutions for the allotment. Only then let the investor wire. Each step depends on the one before it, and doing them in reverse is how companies end up with money in the bank and no lawful way to issue shares against it.

The sixty days after the money arrives

The company must issue the equity instruments within sixty days of receiving the consideration. If it cannot, it must refund the money within fifteen days of the sixtieth day. For partly paid shares the sixty days run from each call. The clock starts when the money reaches the company’s account, not when the share subscription agreement is signed or the investor approves the closing memo, which is why a closing that slips by a fortnight can quietly burn half of it. A round that closes in two tranches has two receipts, and each starts its own clock.

Practically, this means the board meeting and the shareholders’ resolution for the allotment should be drafted, and ideally the meeting scheduled, before the investor wires. Many companies time the money to arrive within a week of a board meeting that already has the allotment on its agenda.

The thirty days after allotment: FC-GPR

Once the shares are allotted, the company reports the issue to the Reserve Bank in Form FC-GPR, not later than thirty days from the date of issue. The form is filed online on the Reserve Bank’s FIRMS portal. Keep the valuation certificate and the allotment resolution ready on the day of allotment, because the form rests on both. File well inside the thirty days, so that a query can be answered without crossing the line.

The figure below runs both clocks for a single receipt. Slide the allotment past day sixty and the refund date appears; slide the filing past thirty days and the form turns late.

The returns that follow every year

Foreign investment brings recurring filings under regulation 4 of the reporting regulations. Every company with foreign investment files the Annual Return on Foreign Liabilities and Assets on or before 15 July each year for the year to 31 March. Any transfer of shares between a resident and a non-resident is reported in Form FC-TRS within sixty days of the transfer or of the receipt or remittance of funds, whichever is earlier. An issue of employee stock options to a non-resident employee is reported in Form ESOP within thirty days of issue. A startup that issues convertible notes to a non-resident reports them within thirty days.

Put the FLA return in the compliance calendar beside the annual filings, because it falls in the same season as the audit and is the one most often missed in a company whose foreign investor arrived only once.

When reporting is late

The reporting regulations make the person responsible for a filing liable to a late submission fee decided by the Reserve Bank in consultation with the government. A late submission fee settles a delay in reporting. A contravention of substance, such as shares allotted after sixty days without a refund, or a price below fair value, is regularised by compounding: the company applies to the Reserve Bank, admits the contravention and pays a compounding amount. The Master Direction expects the authorised dealer bank to have completed its own steps before the application is made. Both cost money and time, and a pending compounding is the kind of open item a future investor’s lawyers will ask about.

Return to the opening example. Had the board allotted on day fifty-five, the company would have owed nothing but an FC-GPR within thirty days. Allotting on day seventy-one turned a routine filing into a contravention that has to be admitted and compounded, and the next investor’s diligence questionnaire will ask whether any such proceeding has ever been open. The difference between the two outcomes was a board meeting held two weeks earlier.

The Lakshmikumaran and Sridharan analysis of the angel tax abolition makes a related point: with the tax test gone, valuation certificates matter more for exchange control than ever, because rule 21 of the Non-debt Instruments Rules still requires the issue price to be at least fair value.

FEMA does not ask whether the money is welcome. It asks whether the company allotted, priced and reported on time.

The FEMA file, kept from the first foreign rupee

Keep one folder for every non-resident investment. Before the money: the route and sector check, the valuation certificate with its date, and the board resolution ready for allotment. On the day the money lands, write the sixtieth and seventy-fifth days in the company calendar. On the day of allotment, write the thirtieth day for FC-GPR and file within ten. Every April, put 15 July in the calendar for the FLA return. Every time a share changes hands across the border, write the sixtieth day for FC-TRS. And every quarter, ask the company secretary one question: is any FEMA filing open, returned or late? A company that answers no for every quarter of its life has a clean diligence file. One that cannot answer will find out during the next round.

Nothing here is legal or tax advice; confirm the current rule with a chartered accountant or lawyer before acting.