"The money's in the bank, so we're compliant": what FDI into your Pvt Ltd actually requires | pvtltd.co

A Bengaluru SaaS company closed a $400,000 angel round from a Singapore-based investor in March. The money landed in the company's account on 14 March. The board passed the allotment resolution on 2 April and issued 8,000 equity shares. The founders celebrated, updated the cap table, and moved on. In August, during due diligence for their Series A, the acquirer's counsel asked for the FC-GPR acknowledgement. There wasn't one. The company had missed the reporting deadline by four months, and the round could not be certified as FEMA-compliant until the contravention was regularised.

This is the single most common cross-border compliance failure in Indian startups. Founders treat the receipt of foreign money as the compliance event. Under FEMA, it is not. The reportable event is the allotment of capital instruments, and the clock is 30 days.

What the law actually requires

Foreign direct investment into an Indian company is governed by the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 ("NDI Rules") notified under Section 6 of the Foreign Exchange Management Act, 1999, read with the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 ("Mode of Payment Regulations").

Three separate questions must be answered before, during, and after a foreign investment. Founders usually only think about the first.

1. Is the sector on the automatic route or does it need government approval?

Under Schedule I of the NDI Rules, most sectors permit 100% FDI under the automatic route — meaning no prior approval from the Government of India is needed. This covers software and IT services, most manufacturing, e-commerce marketplaces (not inventory-based), and professional services.

The government approval route applies to a defined list, including multi-brand retail trading (51%, with conditions), print media (26%), broadcasting content services (49%), and certain defence, telecom, and pharma brownfield investments above stated caps. Approvals are processed through the Foreign Investment Facilitation Portal (FIFP) administered by DPIIT, with the concerned administrative ministry as the competent authority.

There is a separate and frequently missed restriction. Press Note 3 of 2020, now codified in Rule 6(a) of the NDI Rules, requires prior government approval for any investment by an entity of a country that shares a land border with India — Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan, and Afghanistan — or where the beneficial owner of the investment is situated in or a citizen of such a country. This applies regardless of sector and regardless of investment size. A Singapore SPV with a Chinese beneficial owner falls within it. Founders taking money from a fund with any China-linked LP structure must diligence beneficial ownership before allotment, not after.

2. Are you issuing an instrument that qualifies as FDI?

Rule 2(k) of the NDI Rules defines "capital instruments" as equity shares, fully and compulsorily convertible debentures (CCDs), fully and compulsorily convertible preference shares (CCPS), and share warrants. Only these qualify as FDI.

Optionally convertible or partially convertible instruments are not capital instruments. They are treated as external commercial borrowing (debt) and must comply with the ECB framework instead — which has entirely different eligibility, end-use, and maturity conditions. A US-style SAFE, which converts at the holder's option or on a discretionary trigger, does not fit the compulsory-conversion requirement. This is why Indian rounds with foreign investors use CCPS or a compulsorily convertible note rather than a SAFE.

Pricing is not free either. Under Rule 21 of the NDI Rules, shares issued to a person resident outside India must be priced at or above the fair value, determined by any internationally accepted pricing methodology on an arm's-length basis, certified by a SEBI-registered Category I merchant banker or a practising Chartered Accountant. For unlisted companies, this is typically a discounted cash flow or net asset value certificate. Issuing below fair value to a non-resident is a contravention on its own, separate from any reporting failure.

3. Have you reported it within 30 days?

Paragraph 4 of the Mode of Payment Regulations requires an Indian company issuing capital instruments to a person resident outside India to report the issue in Form FC-GPR within thirty days from the date of issue of the capital instruments.

Read that again: thirty days from the date of issue, not from the date the money arrived. If your board allots on 2 April, your FC-GPR is due by 2 May, even if the funds hit the account in March. Conversely, if money arrived in January and you allot in June, the deadline runs from June — but the funds sitting unallotted for five months raise a separate problem, because inward remittance towards share subscription should ordinarily result in allotment within 60 days under Section 42(6) of the Companies Act, 2013, failing which the money must be refunded within 15 days.

Filing is done exclusively through the RBI's FIRMS portal (firms.rbi.org.in) under the Single Master Form module. Paper or email submissions are not accepted. Your authorised dealer (AD) Category-I bank — the bank that received the inward remittance — is the entity that verifies and approves the filing.

The FC-GPR submission requires:

FIRN (Foreign Investment Reporting Number), generated by first registering the company as a Business User on FIRMS via the Entity Master module
FIRC (Foreign Inward Remittance Certificate) from the AD bank for each remittance
KYC report on the non-resident investor, issued by the investor's overseas bank and routed to your AD bank
Valuation certificate from a CA or merchant banker, dated on or before the allotment date
Board resolution approving the allotment
Company Secretary's certificate confirming compliance with the Companies Act and FEMA
PAS-3 (Return of Allotment) filed with the MCA, which is a separate obligation under Section 39(4) of the Companies Act — also due within 30 days of allotment

Note the parallel deadline. FC-GPR goes to RBI through your AD bank. PAS-3 goes to the MCA through MCA21 v3. Both are 30 days from allotment. Missing one does not excuse the other, and MCA21 v3's linked-filing validations increasingly flag companies whose PAS-3 shows non-resident allottees without a corresponding foreign-investment trail.

Practical implications

The Late Submission Fee. RBI's LSF framework, set out in the AP (DIR Series) Circular No. 16 dated 30 September 2022, allows a delayed FC-GPR to be regularised by paying a computed fee rather than going through formal compounding — but only for delays up to three years from the due date. The LSF is calculated as ₹7,500 plus 0.025% of the amount involved, multiplied by the number of years of delay (rounded up). On a ₹3.5 crore round delayed by one year, that is roughly ₹7,500 + ₹8,750 = ₹16,250. Modest. On a ₹50 crore round delayed by three years, it climbs materially.

Beyond three years: compounding. Once you cross the three-year window, LSF is off the table and you must apply to RBI for compounding under Section 15 of FEMA. This is a formal adjudication. The Regional Office of RBI issues a compounding order, the penalty is discretionary and can substantially exceed LSF, and the process routinely takes six to nine months. During that period, the investment is a disclosed contravention on your record.

Penalty exposure under Section 13. Any contravention of FEMA attracts a penalty of up to three times the sum involved where the amount is quantifiable, or up to ₹2 lakh where it is not, plus ₹5,000 per day for a continuing contravention. In practice, RBI rarely applies the maximum for a pure reporting delay, but the exposure is legally live until the contravention is compounded or regularised.

The deal-blocking problem. This is the cost founders actually feel. No serious acquirer, Series B lead, or IPO merchant banker will proceed with an unregularised FEMA contravention on the cap table. Legal DD will surface it, the SPA will carry a specific indemnity for it, and closing gets held pending an RBI compounding order you cannot accelerate. A ₹16,000 LSF that was ignored becomes a six-month delay on a ₹100 crore round.

Subsequent filings are blocked. A pending or unfiled FC-GPR sits in the FIRMS Entity Master as an open item. Your AD bank may decline to process the next round's filing until the prior one is closed, which compounds the problem across successive rounds.

The annual return. Separately from transaction reporting, every Indian company with outstanding FDI must file Form FLA (Foreign Liabilities and Assets) with RBI by 15 July each year, covering the financial year ended 31 March. This applies even if no fresh investment came in that year and even if the company received FDI only in a prior year. Non-filing of FLA is itself a FEMA contravention. A large number of companies file their FC-GPR correctly and then forget FLA entirely.

Step-by-step: what to do

Before you sign the term sheet, run a beneficial ownership check on the investor entity. If any beneficial owner traces to a land-border country, you need prior government approval under Rule 6(a) and the timeline changes completely. Do not allot first and diagnose later.
Confirm your sector's entry route against Schedule I of the NDI Rules. If it is a government-route sector, file on the FIFP portal and wait for approval before allotment.
Register on FIRMS and obtain your Entity Master record before the round closes. First-time registration requires your AD bank to authorise the Business User. This alone can take a week — do not start it on day 25.
Get the valuation certificate dated on or before the allotment date. A certificate dated after allotment invites questions about whether pricing was actually determined before issue.
Confirm the exact allotment date in your board resolution and calendar the FC-GPR deadline at allotment date + 30 days. Set an internal reminder at day 15.
Collect the KYC report early. This has to travel from the investor's overseas bank to your AD bank through SWIFT. It is the most common cause of a missed deadline because it depends on a third party you do not control.
File FC-GPR on FIRMS and PAS-3 on MCA21 in the same week. Treat them as one task with two filings.
Track the AD bank's approval status. Submission is not completion. If the AD bank raises a query and you do not respond, the filing sits pending and the delay continues to accrue.
Calendar Form FLA for 15 July every year, permanently, from the year of your first FDI onwards.
If you have already missed a deadline, calculate the delay today. Under three years, instruct your AD bank to process the filing with LSF immediately — the fee grows with each completed year. Over three years, engage counsel and start the compounding application now rather than at the point a buyer discovers it.

FAQ

We received the money but haven't allotted shares yet. Is FC-GPR due?
No. FC-GPR is triggered by allotment, not remittance. But you have a different clock running: under Section 42(6) of the Companies Act 2013, share application money must be applied to allotment within 60 days of receipt, or refunded within the following 15 days. Holding unallotted foreign funds indefinitely creates both a Companies Act and a FEMA problem.

Does a SAFE work for a foreign investor in an Indian Pvt Ltd?
Not as a capital instrument. FEMA recognises only compulsorily convertible instruments as FDI. A SAFE with optional or discretionary conversion is treated as debt and falls under the ECB framework, which most startups cannot satisfy. Use CCPS or a compulsorily convertible note with a defined conversion trigger instead.

Our investor is a Singapore fund but one of its LPs is Chinese. Does Press Note 3 apply?
Potentially yes. Rule 6(a) of the NDI Rules looks at the beneficial owner, not just the immediate investing entity. There is no de minimis threshold specified, and practice has been conservative. Get a written beneficial ownership declaration from the fund and take a legal view before allotment — regularising a Press Note 3 breach is materially harder than an LSF filing.

What if we filed PAS-3 with the MCA but not FC-GPR with RBI?
You have satisfied the Companies Act and contravened FEMA. They are independent obligations to different regulators. The MCA filing does not report anything to RBI, and RBI's records will show your foreign shareholding as unreported. File the FC-GPR with LSF as soon as possible.

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