How Global Money Really Moves
Every international transfer, whether investing abroad, receiving funds, or taking a foreign loan, is regulated under the Foreign Exchange Management Act (FEMA).
FEMA ensures transparency in foreign exchange transactions, maintains India’s balance of payments, and regulates how money enters or leaves the country.
In short:
- Current account transactions (trade, travel, education) → Mostly free
- Capital account transactions (investments, loans, asset transfers) → Regulated by RBI
Understanding which regulation applies to your transaction helps ensure smooth, compliant global operations.
1. FEMA - The Foundation of Cross-Border Compliance
FEMA (Foreign Exchange Management Act) governs all cross-border money movement, inward or outward.
It distinguishes between:
- Current account transactions: For business, travel, studies, or imports, generally unrestricted.
- Capital account transactions: For investments, loans, and transfers, require compliance and documentation.
If you’re expanding or transacting internationally, FEMA compliance is the backbone of your operations.
2. LRS - Liberalized Remittance Scheme
Under the Liberalized Remittance Scheme (LRS), individuals can send up to USD 250,000 per year abroad for permitted purposes.
LRS applies only to individuals (not companies) and is tracked using your PAN across banks.
You can use LRS for:
- Overseas travel and education
- Buying property abroad
- Investments or gifting money internationally
You cannot use LRS for:
- Lottery or speculative trading
- Crypto or margin-based investments
LRS is ideal for founders expanding abroad personally, such as setting up a small US office or funding an international entity.
3. ODI - Overseas Direct Investment
When an Indian company invests in or incorporates a business abroad, it’s treated as Overseas Direct Investment (ODI).
Key ODI guidelines:
- Applies when an Indian company holds 10% or more ownership in a foreign entity
- The investment limit is up to 400% of your net worth (under the automatic route)
- Round-tripping (India → foreign entity → India) is allowed up to two layers
Incorporating a company in the US or elsewhere? ODI reporting and RBI filings are mandatory for compliance.
4. FDI - Foreign Direct Investment
When a foreign investor puts money into an Indian company, it falls under Foreign Direct Investment (FDI).
There are two routes:
- Automatic Route: No prior government approval (for most sectors)
- Government Route: Required for sensitive sectors like defense, media, and telecom
Prohibited sectors include:
- Gambling and betting
- Real estate trading
- Tobacco manufacturing
5. ECB - External Commercial Borrowings
When an Indian company raises funds through foreign loans, it’s known as External Commercial Borrowing (ECB).
Key points:
- Borrow from foreign lenders or investors
- Minimum tenure: 3–5 years
- Allowed for: business expansion, infrastructure projects
- Not allowed for: real estate or stock market investments
- Must register with RBI using Form ECB and obtain an LRN (Loan Registration Number)
ECB is a preferred route for startups and corporates raising capital from international partners or funds.
How to Know Which Regulation Applies
Here’s a quick guide to identify your transaction type:
- Sending money abroad personally → LRS
- Investing abroad via company → ODI
- Receiving funds from foreign investors → FDI
- Taking a foreign loan → ECB
- Any forex transaction → FEMA applies
Each route has its own reporting, limits, and documentation requirements, often managed through RBI-authorized banks.
Go Global, Stay Compliant
Expanding internationally doesn’t have to be complicated.
With the right guidance, you can move money across borders confidently while staying compliant with FEMA, LRS, ODI, FDI, and ECB rules.
At FinStackk, we simplify global compliance, from US incorporation and ODI filings to FEMA reporting and foreign loan registration.
Reach out to FinStackk today to make your cross-border journey seamless and compliant.