FEMA: Current vs Capital Account - The Foundational Distinction
FEMA classifies foreign exchange transactions into two buckets. Current account transactions - trade in goods and services, interest payments, dividends, remittances of earnings - are generally permissible without RBI approval under Schedule I of the Foreign Exchange Management (Current Account Transactions) Rules 2000. Capital account transactions - equity investments, capital repatriation, loans - require compliance with specific RBI regulations.
For a GCC, the most important current account transactions are: receiving payment from the foreign parent for services rendered (permitted, must be within FEMA pricing norms), paying Indian vendors for services used in the GCC operations (permitted), and remitting dividends to the parent after paying Indian withholding tax (permitted, with Form 15CA/15CB). The most important capital account transactions are: receiving FDI (FC-GPR), receiving loans from the parent (ECB framework), and making equity investments in other Indian entities (FEMA domestic investment regulations).
The 10 FEMA Rules That Matter for GCCs
Rule 1: FC-GPR within 30 days. File FC-GPR on FIRMS portal within 30 days of share allotment. Rule 2: FLA return by 15 July annually. File FLA on FLAIR portal every year the company has outstanding FDI. Rule 3: Repatriation of export proceeds. The GCC must receive payment for exported IT services within 9 months of the invoice date. Overdue debtors (parent not paying on time) can be a FEMA issue.
Rule 4: Arm's-length pricing for services. Payments from the Indian entity to the parent (royalty, technical fees) and from the parent to the Indian entity (service fees) must be at arm's length under both FEMA and the Income Tax Act transfer pricing rules. Rule 5: ECB framework for parent loans. If the parent lends money to the Indian GCC (not as equity), it is an External Commercial Borrowing and must comply with maturity, end-use restrictions, and pricing norms.
Rule 6: 15CA/15CB for remittances. Any outward remittance from India above INR 50,000 (and more practically, above USD 5,000) requires Form 15CA uploaded online and Form 15CB (CA certificate) for non-exempt transactions. Rule 7: Prior permission for branch offices. Rule 8: ODI (Overseas Direct Investment) requires RBI approval through the OI portal if the Indian entity invests abroad. Rule 9: Compounding is the right route for past violations - do not ignore. Rule 10: AD bank is your first line of compliance; work with your bank's FEMA desk for every significant cross-border transaction.
Export realization within 9 months is a FEMA rule, not a courtesy
Under FEMA, the proceeds of exported services must be realized (received in India in foreign currency or INR equivalent) within 9 months from the date of export. If the foreign parent is consistently paying late (beyond 9 months), every unpaid invoice is technically a FEMA non-compliance. Maintain an invoice-level receivables tracker and escalate overdue payments promptly.
FEMA Enforcement and Compounding
FEMA violations are civil, not criminal (unlike the previous FERA regime). Penalties can be up to three times the amount involved (for capital account violations) or INR 2 lakh (for others), plus a daily penalty for continuing violations. The Enforcement Directorate (ED) handles willful FEMA violations; the RBI handles compounding for inadvertent or technical violations.
Compounding is the process of settling a FEMA contravention by paying a determined sum to RBI. Applications are made to the RBI's Compounding Authority. The compounding sum is calculated on the amount involved multiplied by a rate (typically 12% per annum) for the contravention period. Once compounded, the entity receives a compounding order which is public record (published on RBI website) but resolves the liability. Voluntary compounding before a notice is received typically results in a lower compounding amount.
Glossary terms referenced in this guide