India’s foreign exchange policies have evolved alongside the country’s development and its dynamic relationship with the global economic landscape. A pivotal moment in this journey was the introduction of the Foreign Exchange Management Act, 1999 (FEMA), which marked a clear shift from the earlier Foreign Exchange Regulation Act, 1973 (FERA).
While FERA was predominantly control – oriented, FEMA ushered in a facilitative approach – encouraging business and individuals to be largely self-compliant, with regulators playing the role of facilitators and post-facto evaluators. This shift aims to balance responsible economic growth with accountability and public trust.
The government maintained a “trust but verify” stance, delegating compliance assurance to Authorized Dealer Bankers (AD Banks). However, with growing global emphasis on curbing tax avoidance, evolving interpretations of FEMA, and advancement in digitization and data analytics, regulators have adopted a more vigilant, eagle-eyed approach. Their goal is to ensure that FEMA’s principles are upheld not only in letter but in spirit.
Key areas currently under increased regulatory scrutiny include:
1) Leveraging Family Trust: Navigating Compliance with Overseas Limits
Resident Individuals are allowed to gift up to US$ 250,000 annually to non-resident beneficiaries, which represents the maximum cap for investments abroad under Liberalized Remittance Scheme (LRS). Additionally, transfer of securities up to US$ 50,000 are permitted under LRS.
However, banks and regulators are increasingly vigilant about cases where trust structures are being used to channel earnings to non – resident beneficiaries in ways that exceed these limits. The heightened scrutiny aims to ensure adherence to regulatory caps and prevent misuse of family trusts for overseas transfers.
2) Gifting of Offshore Proceeds: A Closure Look at Compliance
As per FEMA Regulations, proceeds from the maturity or sale of offshore investments must be repatriated to India within 180 days. In case where such proceeds are gifted, they must adhere to LRS limits and capital account transactions norms.
Regulators are increasingly examining instances where funds are directly transferred from offshore accounts to next-generation family members living abroad, bypassing the required repatriation to India, such practices raise red flags around potential non- compliance with FEMA’s repatriation and gifting rules.
3) Round-Tripping: A Continued Focus of Regulatory Scrutiny
Where funds are routed out of India and subsequently reinvested into Indian entities – remains a key area under regulatory watch. Under the earlier Overseas Direct Investment (ODI) guidelines, such structures required prior RBI approval. However, with the liberalized framework introduced in August 2022, round-tripping through two layers of overseas investment is now permitted, subject to compliance.
Despite the relaxation, regulators are maintaining close scrutiny – especially where such structures lack commercial substance or clear business rational, to ensure the route isn’t misused for regulatory arbitrage or tax avoidance.
4) FEMA Compliance: From Obligation to Strategic Imperative
With the Enforcement Directorate (ED) set to step up monitoring of foreign exchange violations in 2025, regulatory focus is expected to intensify around areas such as export- import mispricing, LRS breaches, land ownership violations, FDI non-compliance, misuse of ECBs, and unauthorized overseas transfer.
This signals a shift from mere procedural compliance to a deeper, more substantive approach – aligning with the government’s commitment to protect the integrity of India’s financial ecosystem.
As security tightens, businesses must treat FEMA compliance not just as legal formality, but as a strategic priority – backed by transparent processes, strong documentation, and proactive planning of overseas transactions.
5) Compliance with Substance: A Strategic Pillar for Cross-Border Success
As regulatory scrutiny intensifies, it’s critical for businesses and individuals to ensure that cross-border structures are backed by genuine commercial rationale, not just legal form. Avoiding unnecessary layering and entity creation without operational substances is key.
Strong governance and internal compliance frameworks – board oversight, internal audits, expert opinions, and transparent documentation – are now essential. Moreover, aligning all key functions – Finance, tax, legal and operations – helps foster a culture of compliance and informed decision making.
Where risk exist, proactive steps like approaching the RBI for compounding can help reset and ensure future readiness.
Compliance is no longer an afterthought. It’s a strategic investment that safeguards against regulatory risks, builds stakeholder trust, and enables sustainable global growth.
Conclusion:
In today’s evolving regulatory environment, FEMA compliance must move beyond ticking boxes. Businesses and individuals must adopt a substance – over – form approach, backed by robust governance, transparent documentation, and cross-functional alignment.
By proactively investing in compliance and revisiting existing, organizations can not only mitigate regulatory risks but also strengthen stakeholder confidence and unlock long-term global opportunities.
