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CS Executive · Setting Up of Business, Industrial and Labour Laws

Setting up of Business outside India and Issues Relating thereto

Setting up business outside India means an Indian entity or resident expanding abroad, mainly through overseas direct investment. FEMA controls this. Section 4 bars residents from holding foreign assets unless the Act allows it. Section 37A lets authorities seize equivalent Indian assets, and Section 13 sets penalties. Write the provision, apply it, then conclude.

What this chapter covers

This chapter covers how an Indian business can expand abroad and which FEMA rules apply when it does. You start with the modes of going overseas, such as a subsidiary, joint venture or branch. Then you study overseas direct investment, its conditions and its reporting.

The legal core is the FEMA, 1999. Section 4 sets the general rule: a person resident in India shall not acquire, hold, own, possess or transfer foreign exchange, foreign security or immovable property outside India, save as the Act provides. Section 6 is a key exception: a resident may hold such assets if they were acquired or held while the person was resident outside India, or inherited from a person resident outside India. Section 37A then deals with assets held abroad in contravention of Section 4, and Section 13 deals with penalties.

This chapter links to the rest of Paper 3 Part I, which covers setting up business in India. It also connects to Paper 6, where FEMA is studied in more depth. Read both together, because the same Act and the same terms recur.

This chapter is short and rule-based, so it rewards precise recall. Questions often ask you to apply a section to facts, such as whether a resident may hold a property abroad, or what happens on seizure. In a written paper, marks go to naming the provision, stating its conditions exactly and reaching a clear conclusion. Time spent on Sections 4, 6, 13 and 37A is repaid in answers that are easy to structure.

Setting up of Business outside India and Issues Relating thereto: topics in the order to study them

  1. 1Setting Up Business Outside India: Modes and OverviewStart with the big picture of how businesses go abroad so the later FEMA rules have context.
  2. 2Overseas Direct Investment under FEMAThis is the main route for expansion, and it brings in Section 6 on capital account transactions and the permitted limits and conditions.
  3. 3Section 4 FEMA: Holding Assets Outside IndiaLearn the general bar on residents and its exceptions before you study what happens on breach.
  4. 4Section 37A: Assets Held Abroad in Contravention of Section 4It builds directly on Section 4 and needs the exact procedure: seizure, the Competent Authority, time limits and appeal.
  5. 5Compliance, Reporting and Penalties for Overseas InvestmentFinish with the consequences under Section 13 and the reporting duties, which tie all earlier topics together.

How to prepare Setting up of Business outside India and Issues Relating thereto

Treat this as a rule-and-procedure chapter. Your aim is to reproduce provisions accurately and apply them to short facts.

  1. Read the modes of overseas expansion once and list the features of each in a short comparison note.
  2. Learn Section 4 word for word in plain terms, then pair it with the exceptions in Section 6(4) and 6(5).
  3. Make a Section 37A flow chart: reason to believe, written reasons, seizure of equivalent value in India, placing before the Competent Authority within thirty days, disposal within one hundred eighty days, appeal to the Appellate Tribunal.
  4. Note the proviso: no seizure below the prescribed value, and the disclosure and bring-back route that can set aside the seizure.
  5. Make a table of Section 13 penalties: the general penalty, and the heavier penalty and imprisonment for assets above the prescribed threshold.
  6. Practise three or four short fact-based questions, each written as provision, analysis and conclusion, and time them.
  7. Revise the numbers (thirty days, one hundred eighty days, thrice the sum, five years) the day before the exam.

Common mistakes in Setting up of Business outside India and Issues Relating thereto

  • Saying a resident can never hold foreign assets.

    Fix: Always add the exceptions, including Section 6(4) for assets acquired while non-resident or inherited from a non-resident.

  • Thinking Section 37A seizes the foreign asset itself.

    Fix: Write that the Authorised Officer seizes the value equivalent situated within India, because the asset is outside India.

  • Mixing up the time limits.

    Fix: Thirty days is to place the order before the Competent Authority; one hundred eighty days is for the Competent Authority to dispose of the matter.

  • Quoting penalties without the conditions.

    Fix: State that it applies on adjudication, where the amount is quantifiable, and give the ₹2,00,000 alternative and the daily amount of ₹5,000 separately.

  • Ignoring the prescribed value threshold.

    Fix: Mention that seizure under Section 37A and the heavier consequences under Section 13(1A) and 13(1C) depend on the prescribed threshold being exceeded.

  • Ending the answer without a conclusion.

    Fix: Close each answer with a line applying the section to the facts, such as whether the holding is permitted or the seizure is valid.

Last-day revision: Setting up of Business outside India and Issues Relating thereto

  • Section 4: a resident in India shall not acquire, hold, own, possess or transfer foreign exchange, foreign security or foreign immovable property, save as the Act provides.
  • Section 6(4): a resident may keep foreign assets acquired while resident outside India, or inherited from a person resident outside India.
  • Section 6(1): a person may sell or draw foreign exchange through an authorised person for a capital account transaction, subject to Section 6(2).
  • Section 37A: the Authorised Officer may seize the value equivalent in India after recording reasons in writing.
  • No seizure under Section 37A if the aggregate foreign asset value is below the prescribed value.
  • The seizure order goes to the Competent Authority within thirty days; the Competent Authority must be an officer not below Joint Secretary rank.
  • The Competent Authority decides within one hundred eighty days, after hearing the Directorate of Enforcement and the aggrieved person.
  • Court stay periods are excluded from the one hundred eighty days, and at least thirty more days are given after the stay is vacated.
  • Disclosing the asset and bringing it back into India can lead to the seizure being set aside.
  • Appeal against the Competent Authority's order lies to the Appellate Tribunal.
  • Section 13(1): penalty up to thrice the sum involved if quantifiable, or up to ₹2,00,000 if not, plus up to ₹5,000 per day for a continuing contravention.
  • Section 13(1C): above the threshold, imprisonment up to five years and fine, and court cognizance only on a written complaint by an officer not below Assistant Director.

Setting up of Business outside India and Issues Relating thereto practice questions

Setting up of Business outside India and Issues Relating thereto in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Setting up of Business outside India and Issues Relating thereto: frequently asked questions

What is the main FEMA rule on holding assets outside India?

Section 4 says that, save as the Act provides, a person resident in India shall not acquire, hold, own, possess or transfer foreign exchange, foreign security or immovable property outside India. Section 6(4) gives an exception for assets acquired while resident outside India or inherited from a non-resident.

What does Section 37A of FEMA do?

It applies when foreign assets are suspected to be held in breach of Section 4. The Authorised Officer can seize the value equivalent in India after recording reasons in writing. The order then goes to the Competent Authority for confirmation or setting aside.

Can a seizure under Section 37A be reversed?

Yes. If the aggrieved person discloses the asset and brings it back into India, the Competent Authority or Adjudicating Authority can pass an appropriate order, including setting aside the seizure. An appeal against the Competent Authority's order lies to the Appellate Tribunal.

What is the penalty under Section 13 of FEMA?

On adjudication, the penalty is up to thrice the sum involved if it can be quantified, or up to ₹2,00,000 if not. A continuing contravention attracts up to ₹5,000 for each day after the first. For foreign assets above the prescribed threshold, there is also imprisonment up to five years and fine.