Foreign Exchange Management Act (FEMA) and Indian Startups

Overview

The Foreign Exchange Management Act (FEMA) is a key part of India's economic rules. It mainly manages the country's foreign exchange but also impacts Indian startups planning to set up businesses in other countries, especially in the United States.

The FEMA Challenge

FEMA does not directly stop Indian founders from starting businesses abroad. But its rules can make the process complicated and sometimes hard for those looking to expand globally.

Share Transfers: A Practical Challenge

A noticeable hurdle under FEMA is the rule about moving shares from an Indian company to a foreign one. These rules say that Indian residents can't move shares to a foreign company without getting permission from the Reserve Bank of India (RBI). The intent of this rule is to control large financial transactions that could impact India's foreign exchange and overall economy. However, it can slow down startups trying to incorporate in the U.S.

Raising Money and Investments: A Delicate Balance

FEMA also affects how startups raise money and attract investments. For example, the Act requires startups to tell the RBI about any money they get from other countries. These rules help keep track of foreign investment and ensure transparency, but they can also add extra work for startups and may slow down the process of getting foreign investments.

FEMA: A Double-Edged Sword

FEMA plays a crucial role in keeping the economy stable and transparent, which is very important in today's global economy. However, for an Indian founder who dreams of setting up a business in the U.S., FEMA's rules can seem like big obstacles.

To deal with this, Indian founders need to understand FEMA and its rules deeply. Getting legal and financial advice is important to help them work within the law while still aiming for their business goals.

💡 Commenda is here to help. Our cross-border compliance experts can guide you through the entire process, from entity formation to ongoing compliance. We offer a free consultation to help you understand your options and make informed decisions about your cross-border business needs.

FEMA and the Future of Indian Startups: A Story Still Being Written

The relationship between FEMA and Indian startups is not fixed. As India's startup scene grows, FEMA needs to change to encourage innovation.

For example, the RBI circular from August 2022 brought a lot of clarity and standardization to the process of an Indian founder starting a foreign C-Corp. This new process allows Indian founders to buy shares in a US C-Corp through an LLP, with the share ownership structure (cap table) based in the US, often in Delaware. The US C-Corp then fully owns a Private Limited company in India, which handles all expenses in the country. This setup allows Indian founders to raise capital in the US while maintaining RBI compliance.

Like any policy tool, FEMA must evolve to reflect the changing landscape. For Indian startups, the hope lies in this evolution creating more avenues for growth, enabling them to flourish domestically and abroad. The goal is to strike an optimal balance between safeguarding India's economic interests and fostering the global ambitions of its startups.