Decoding RBI’s Revised Fema Reforms: Impact On Cross-border Transactions

1. INTRODUCTION

The Reserve Bank of India (“RBI”) issued three significant notifications on January 14, 2025, amending various regulations under the Foreign Exchange Management Act, 1999 (“FEMA”). These amendments include key amendments namely Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt instruments) (Third Amendment) Regulation, 2025 (“FEMA-NDI Amendment”)¹; the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) (Fifth Amendment) Regulation, 2025 (“FEMA-Foreign Currency Amendment”)²; and Foreign Exchange Management (Deposit) (Fifth Amendment) Regulations. 2025 (“FEMA-Deposits Amendment”)³.

These amendments impact various aspects of foreign exchange transactions, including deposit regulations, foreign currency accounts, and non-debt instruments, streamlining foreign exchange transactions, enhancing operational flexibility, and aligning with the regulatory framework with evolved market practices.

This legal update provides a comprehensive analysis of these amendments, detailing the newly introduced regulations and their ramifications for individuals engaging in cross-border financial transactions.

1. FEMA-NDI AMENDMENT

RBI has amended the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019⁴, to streamline the payment and reporting mechanisms for investments in non-debt instruments, thus aiming for faster execution of cross-border investments and disinvestments, and encouraging the foreign participation in start-up funding, improving access to capital for Indian Businesses. The key amendments include:

1. Mode of Payment for Equity Instruments

The amendment introduces detailed provisions regarding the mode of payment for the purchase or sale of equity instruments of an Indian company by a person resident outside India. The key points include:

1. The consideration for equity instruments can be paid through inward remittance from abroad, or from funds held in any repatriable foreign currency or rupee account maintained under the Foreign Exchange Management (Deposit) Regulations, 2016.

1. Equity instruments must be issued to the investor within 60 days from the date of receipt of consideration. In case of partly paid shares, the 60-day period is reckoned from the date of receipt of each call payment.
2. If equity instruments are not issued within the stipulated period, the consideration must be  refunded to the investor within 15 days from the completion of the 60-day period, either through outward remittance or by crediting the funds to the investor’s repatriable account.

• Mode of Payment for Foreign Portfolio Investors (“FPIs”)

The amendment specifies that FPIs can make payments for investments in equity instruments, units of REITs, InvITs, and domestic mutual funds using funds held in a foreign currency account or a SNRR account. The sale proceeds (net of taxes) can be remitted outside India or credited to the FPI’s foreign currency or SNRR account.

• Mode of Payment for Limited Liability Partnership (“LLPs”)

Investors can make capital contributions to LLPs through inward remittance or from funds held in any repatriable foreign currency or rupee account. The disinvestment proceeds can be remitted outside India or credited to the investor’s repatriable account.

• Mode of Payment for Foreign Venture Capital Investors (“FVCIs”)

FVCIs can make payments for investments using funds held in a foreign currency account or an SNRR account. The sale or maturity proceeds (net of taxes) can be remitted outside India or credited to the FVCI’s foreign currency or SNRR account.

• Mode of Payment for Indian Depository Receipts (“IDRs”)

Non-Resident Indians (“NRIs”) and Overseas Citizens of India (“OCIs”) can invest in IDRs using funds held in their NRE/FCNR(B) accounts. FPIs can invest in IDRs using funds held in a foreign currency account or an SNRR account.

• Issuance of Convertible Notes by Start-ups

The amendment clarifies that start-up companies issuing convertible notes to persons resident outside India can receive consideration through inward remittance or from funds held in the investor’s repatriable foreign currency or rupee account. Repayment or sale proceeds can be remitted outside India or credited to the investor’s repatriable account.

• Inclusion of Special Rupee Vostro Accounts (“SRVA”)

A Special Rupee Vostro Account is an account that allows Indian banks to settle international trade in rupees. In layman’s term SRVA accounts enables foreign entity’s holding in the Indian bank, in Indian rupees. Thus, when an Indian importer wants to make a payment to foreign trader in rupees, the amount will be credited to this vostro account. In the same fashion, when an Indian exporter has been paid for goods and services in rupees, the vostro account will be deducted and amount will be credited to the exporter’s regular account.

With the aid of this amendment, it explicitly includes SRVA within the definition of “banking channels” for the purpose of these regulations. This ensures that transactions involving such accounts are treated on par with other banking channels.

3. FEMA-DEPOSITS AMENDMENT

RBI has amended the Foreign Exchange Management (Deposit) Regulations, 2016(“2016 Directives”) ⁵, to provide greater flexibility in the operation of repatriable Rupee accounts and Special Non-Resident Rupee (“SNRR”) accounts. The key amendments are as follows:

1. Transfer of Funds between Repatriable Rupee Accounts

Repatriable rupee accounts are bank accounts that allow funds to be transferred from India to foreign country. These funds are converted into foreign currency before being transferred.

RBI with the intent to expand banking access and reduce the restriction on fund transfers for non-residents has introduced Regulation 9 to its 2016 Directivespermitting the transfer of funds between the repatriable rupee accounts for all bona fide transactions. This allows the facilitation of smoother financial operations for account holders, allowing for inter-account transfer without prior approval, ensuring that the transactions are legitimate and in compliance with the FEMA regulations.

• Expansion of Special Non-Resident Rupee (“SNRR”) Accounts Operations

The amendment allows persons resident outside India with an interest in operation in India to open and maintain the SNRR account not only with the authorized dealers in India but also with their branches located outside of India. This further aims to enhance the ease of doing business for foreign entities by providing them with greater flexibility in managing their Indian operations.

Further, the tenure of the SNRR accounts has been clarified to be concurrent with the tenure of the contract, period of operation, or business of the account holder.⁶ This ensures that the account remains operational as long as the business or contractual obligations exist, hence reducing the administrative cost.

• Clarifications on SNRR Account Usage

Further, with the amendment in place, it attempts to clear the ambiguity with respect to the usage of SNRR accounts. This is done through the inclusion of “in India” within the regulations, ensuring that provisions apply only to SNRR accounts maintained in India, eliminating the ambiguity regarding the applicability of these regulations to accounts held outside India.

1. FEMA-FOREIGN CURRENCY AMENDMENT

RBI has introduced amendments to the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015⁷, to facilitate exporters in managing their foreign currency earnings more effectively.

The key amendment includes:

1. Opening of Foreign Currency Accounts Abroad by Exporters

With the intention to provide for greater autonomy in managing foreign currency transactions, and to ensure smoother international trade transactions with reduced forex conversion losses, Regulation 5(CA)⁸ has been inserted, allowing the Indian exporters to open, hold, and maintain the foreign currency accounts with the banks outside India. These funds in the account could be catered to the following:

1. Realization of full export value and advance remittances received towards the export of goods or services.
2. Payment for imports into India.
3. Repatriation of funds to India within a period not exceeding the end of the next month from the date of receipt of funds, after adjusting for forward commitments.

This amendment provides exporters with greater flexibility in managing foreign currency earnings and reduces the need for frequent currency conversion, thereby minimizing exchange rate risk. However, the exporters must ensure compliance with the realization and repatriation requirements specified under Regulation 9 of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015⁹, which inter alia provides that the export proceeds for goods, software, and services must be realized and repatriated to India within nine months from the date of export, or within such period as prescribed by the RBI in consultation with the Government. In cases where goods are exported to RBI-approved warehouses abroad, the realization period extends to fifteen months. The RBI or authorized dealers may grant extensions for sufficient and reasonable cause.¹⁰

• CONCLUSION

The amendments introduced by the RBI reflect a concerted effort to simplify and streamline foreign exchange regulations, particularly in the areas of deposit management, foreign currency accounts, and non-debt instruments. These changes are expected to enhance operational flexibility for businesses, reduce compliance burdens, and promote ease of doing business in India. However, stakeholders must ensure strict adherence to the amended regulations to avoid any potential legal or regulatory pitfalls.

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^[1] Foreign Exchange Management (Mode of Payment and Reporting of Non- Debt Instruments) (Third Amendment) Regulations, 2025 (Notification No.FEMA 395(3)/2025-RB)

^[2] Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) (Fifth Amendment) Regulations, 2025 (Notifcation No. FEMA 10(R)(5)/2025-RB)

^[3] Foreign Exchange Management (Deposit) (Fifth Amendment) Regulations, 2025 (Notification No. FEMA 5(R)(5)/ 2025-RB)

[4] Refer to [Notification No. FEMA.395/2019-RB dated October 17, 2019]

^[5] Foreign Exchange Management (Deposit) Regulations, 2016 (Notification No. FEMA 5 (R)/2016-RB dated April 01, 2016)

[6] Refer to Schedule 4, Paragraph 8 of ^[6] Foreign Exchange Management (Deposit) Regulations, 2016 (Notification No. FEMA 5 (R)/2016-RB dated April 01, 2016)

^[7] Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulation, 2015 (Notification: FEMA 10(R)/ 2015-RB)

[8] Refer to Notification No. FEMA 10(R)(5)/2025-RB

^[9] Foreign Exchange Management (Export of Goods and Sevices) Regulation, 2015. Available at: https://enforcementdirectorate.gov.in/sites/default/files/Act%26rules/Foreign%20Exchange%20Management%20%28Export%20and%20import%20of%20currency%29%20Regulations%2C%202015.PDF

^[10] Refer to Regulation 9 of the Foreign Exchange Management (Export of Goods and Sevices) Regulation, 2015. Available at: https://enforcementdirectorate.gov.in/sites/default/files/Act%26rules/Foreign%20Exchange%20Management%20%28Export%20and%20import%20of%20currency%29%20Regulations%2C%202015.PDF