The fintech transfer mistake that can convert a simple Singapore setup into a FEMA offence
By Prashant Kumar
Introduction
Indian founders increasingly incorporate companies in Singapore, Dubai, and Delaware to raise global capital, hold intellectual property, or expand into foreign markets. Digital platforms make this process appear fast, clean, and incredibly convenient. But foreign exchange law in India does not operate on convenience. It operates on compliance. Under the Foreign Exchange Management Act (FEMA), every rupee an Indian resident sends abroad to invest in a foreign entity is a regulated capital account transaction.
The problem is surprisingly simple but widespread: founders incorporate foreign entities, open bank accounts, and then transfer money using consumer fintech platforms such as Wise, Payoneer, or Nette*r — believing they are merely “funding their own company abroad.” In reality, they are bypassing India’s Authorised Dealer banking system and inadvertently creating an unauthorised overseas investment. This issue becomes even more pronounced when founders have read only surface-level incorporation guides and miss the compliance depth required. Those who have already gone through my earlier articles — one on Singapore Holding Company Strategy and another on How to Open a Singapore Company from India — will immediately recognise how FEMA sits at the centre of all foreign structuring.
This piece unpacks the legal risks, clarifies the correct process, and explains how a founder can regularise past mistakes before they become serious liabilities.
Why Fintech Transfers Lead to FEMA Violations
Most Indian founders unintentionally violate FEMA by funding their overseas company through fintech platforms. These transfers bypass India’s Authorised Dealer bank system and become unauthorised foreign investments, attracting penalties, scrutiny, and questions about round-tripping or siphoning of funds.
The biggest misconception Indian founders have is that once a Singapore or Dubai company is incorporated, funding it is simply a matter of sending money abroad. But under FEMA, any money sent for acquiring shares, injecting capital, or gaining control in an overseas entity is treated as Overseas Direct Investment (ODI) or Overseas Portfolio Investment (OPI). These are highly regulated categories requiring routing through RBI-monitored Authorised Dealer banks. The bank must apply the correct purpose code, check valuation, and file ODI or LRS reports.
Fintech platforms do not perform these controls. They do not issue purpose codes required for overseas investment. They cannot file Form ODI. They cannot validate valuation or ensure compliance with the Overseas Investment Rules, 2022. The outcome is predictable: the transfer becomes an unauthorised capital account transaction, even if the founder had no intention of breaking the law.
What FEMA Actually Requires
FEMA’s logic is strict but clear. Overseas investment must be traceable, reported, valued, and approved through India’s formal banking system. The law requires a valuation trail by a recognised valuer or merchant banker. It requires a clear statement of purpose for the investment. It requires the remittance to go through a bank that can monitor the transaction, record the investment, and file the necessary forms with the Reserve Bank of India. Once the investment is made, the founder must obtain the shareholding documents abroad, file them with the bank, and then update India’s Annual Performance Report every year. The Overseas Investment Rules, 2022 are built around transparency and auditability. Fintech transfers undermine both.
How These Mistakes Escalate into Bigger Problems
What starts as a harmless remittance quickly snowballs into multiple compliance issues. Banks begin questioning the nature of the outward transfer. The Enforcement Directorate treats such transfers as potential siphoning of funds. Any money routed back to India through the foreign entity creates round-tripping concerns. During tax assessments, the Income Tax Department scrutinises whether foreign assets were properly declared in the Foreign Asset (FA) schedule of the ITR.
The most devastating scenario emerges during due diligence. Investors ask for ODI filings, valuation certificates, share allotment proofs, and APR filings. When founders cannot produce these, the entire foreign structure is treated as non-compliant. Deals are delayed or cancelled. In some cases, investors mandate immediate regularisation before proceeding. What founders thought was “just a transfer through Wise” becomes a material compliance breach.
The Correct Way to Make an Overseas Investment
Legal overseas investment flows smoothly when the right process is followed. The Indian side must first prepare a valuation certificate for the proposed investment. A company investing abroad must pass a board resolution authorising the transaction, while an individual must make an LRS declaration. The remittance must then go through the Authorised Dealer bank using the correct capital account purpose code. After remittance, the shareholding documents issued abroad must be filed with the bank. The RBI’s records are updated, and the investment becomes fully legitimate. Annual filings maintain compliance.
This process is not complex, but it is precise. When done correctly, the structure becomes clean, tax-efficient, and fully defensible during any audit or investor verification.
If You Already Used Wise, Payoneer, or Nette*r, Can It Be Fixed?
Yes. Most violations are not malicious — they are a result of convenience and lack of awareness. FEMA allows regularisation through delayed reporting or compounding. A founder can work with an experienced legal team to recreate the valuation trail, document the capital structure, file the delayed ODI or LRS submissions, and prepare a detailed compounding application if required. The earlier this is done, the more favourable the outcome. Investors take comfort when founders proactively correct compliance issues rather than waiting for them to surface.
A Realistic Founder Scenario
Imagine an Indian founder who incorporates a Singapore entity in January, funds it through Wise, and begins operations. For two years, nothing goes wrong. The company grows, receives revenue, and signs customers. Then the founder approaches a VC fund. During diligence, the VC asks for ODI filings, valuation reports, RBI acknowledgments, and APR submissions. The founder has none. The Singapore entity is perfectly valid under Singapore law but completely non-compliant under Indian law. The VC pauses the deal. Bankers raise questions about the source of offshore assets. The founder faces avoidable delays and legal exposure.
This scenario repeats more often than most founders realise.
Why FEMA Compliance Should Precede Incorporation
FEMA compliance is not an afterthought. It is the foundation of every foreign structure. This is why, in the earlier article How to Open a Singapore Company from India, I emphasised that incorporation and FEMA filings must move in sync. And this is why the Singapore Holding Company Strategy article explains how Indian founders can create global structures while remaining completely aligned with Indian law. Without FEMA compliance, even the best foreign structure collapses under regulatory scrutiny.
How Eclectic Legal Manages Both Jurisdictions Seamlessly
Most Singapore consultants handle only Singapore paperwork — incorporation, nominee director services, bank account setup, and local filings. They cannot handle Indian FEMA law. Eclectic Legal bridges this gap through a dual-jurisdiction model. Our India team manages ODI/LRS compliance, valuation, APR, and RBI reporting, while our affiliate office in Singapore handles incorporation, local compliance, banking, and visas. The result is a structure that is legally recognised in both countries and holds up during any audit or investment round.
Summary Insight
FEMA violations are rarely intentional, but their consequences are always serious. Founders follow convenience — regulators follow compliance. When funds move abroad, India’s legal system demands a transparent trail. Overseas companies are powerful tools for global growth, but only when the money flowing into them is properly reported, valued, and documented. The smartest founders treat FEMA as the backbone of their foreign structure, not a footnote. With proper guidance, a Singapore or Dubai entity becomes a powerful, compliant, investor-friendly global platform.
FAQs
1. Do fintech transfers always violate FEMA when investing abroad?
For overseas investment, yes. Platforms like Wise, Payoneer, and Nette*r are designed for personal outward remittances or cross-border payments, not for capital account transactions. FEMA classifies any investment in a foreign entity — even your own Singapore or Dubai company — as Overseas Direct Investment (ODI) or Overseas Portfolio Investment (OPI). Such transactions must be routed through an RBI-regulated Authorised Dealer Bank. Fintech platforms cannot generate purpose codes, cannot process ODI/LRS filings, and cannot provide RBI-compliant reporting. Even if the foreign company is validly incorporated and the purpose is legitimate, the method of remittance makes the transaction unlawful. This is why founders later face issues during bank scrutiny, investor due diligence, and tax assessments. A fintech transfer may look simple, but legally it is categorised as an unauthorised capital account transaction under Sections 3 and 4 of FEMA.
2. What happens if I do not report my foreign company to the RBI?
If an Indian resident acquires shares of a foreign company but does not file the required ODI or LRS reports, the RBI treats the investment as unreported foreign assets. This creates a compliance gap that persists until formally addressed. During tax assessments, the Income Tax Department cross-checks the Foreign Asset (FA) schedule in your ITR with information available from foreign jurisdictions and your bank. If the foreign entity is not declared, it can be treated as suppression of offshore assets under the Black Money Act. During investor due diligence, lack of RBI filings signals structural weakness, as investors rely heavily on clean compliance histories. Even if the foreign company is genuine and revenue-generating, non-reporting makes the investment irregular under Indian law until properly regularised.
3. Is it possible to correct the violation after an incorrect transfer is made?
Yes. FEMA provides mechanisms for correction, and early action significantly reduces consequences. The first step is establishing a valuation trail and reconstructing the intent of the transaction. Founders must then work with their Authorised Dealer Bank to prepare the missing ODI or LRS documentation, submit the correct purpose codes, and disclose the foreign share allotment details. If the delay or violation is material — for example, if funds were transferred multiple times or if the foreign company has already issued shares — a FEMA compounding application may be necessary. RBI reviews such applications and typically regularises the structure upon payment of a compounding fee. Once the filings, valuation, and share allotment records are aligned, the investment becomes compliant. This process not only protects against penalties but also restores credibility in the eyes of investors, auditors, and regulators.
4. Does my foreign company become invalid if I do not comply with FEMA?
No. The foreign company itself remains valid under foreign law. The issue is not with the existence of the company but with the legality of the investment under Indian law. Singapore, Dubai, and other jurisdictions recognise and validate incorporation independently of Indian regulations. However, India evaluates whether the Indian resident’s investment in that entity is lawful. If the investment is not routed or reported correctly, it is considered unauthorised under FEMA. This distinction becomes critical during tax filings, banking scrutiny, and investor diligence. In summary, the overseas company remains a valid legal entity abroad, but your ownership in that entity is considered irregular in India until you complete the required FEMA regularisation.
5. Can non-compliance affect future funding rounds?
Yes, and often severely. Investors — particularly institutional VCs — conduct deep compliance checks before deploying capital. A Singapore or Dubai structure backed by Indian founders invites particular scrutiny because regulators globally track cross-border investments. If ODI or LRS filings, valuation certificates, APR filings, and banking trails are missing, investors treat this as a structural defect. Many term sheets explicitly require founders to represent that their foreign shareholding is fully compliant with Indian law. If your structure is not, investors may demand immediate regularisation, restructure the deal, delay funding, or decline investment entirely. In some cases, investors advise founders to undergo FEMA compounding before closing the transaction. Thus, compliance gaps do not merely create legal risk — they undermine funding readiness and valuation.
6. How does FEMA interact with the Black Money Act and Income Tax Act?
FEMA regulates outward remittances and foreign investments, while the Black Money Act penalises undisclosed offshore assets. The Income Tax Act requires founders to disclose all foreign shareholdings in the Foreign Assets (FA) schedule of the ITR. If a founder fails to file ODI/LRS reports and also omits the foreign company from the FA schedule, the combined regulatory exposure increases. The Black Money Act imposes severe penalties, including tax at 30% of asset value, penalty up to 90%, and potential prosecution. Even without intent, the absence of declared foreign assets triggers deeper scrutiny. Thus, proper FEMA reporting protects founders on multiple legal fronts — RBI, tax authorities, and international information exchange systems.
7. Does using a Singapore or Dubai company create round-tripping issues?
Round-tripping becomes a concern when money leaves India and returns to India through the foreign entity, often as investment or loans. If the foreign company has no substantive business, employees, or commercial purpose abroad, regulators may view it as a conduit. However, when a foreign entity has legitimate purpose — for example, global fundraising, IP ownership, licensing, or revenue generation — and when all FEMA filings, valuation records, and purpose codes are clean, there is no round-tripping concern. Maintaining minutes of foreign board meetings, transfer pricing documentation, and clear tax residency evidence further reduces risk. The key is substance, purpose, and documentation.
8. Can founders pay expenses from their Singapore company for Indian activities?
This depends on the nature of the expense. Payments from a foreign company to India — whether royalties, service fees, reimbursements, or inter-company charges — must comply with transfer pricing rules, withholding tax obligations, and FEMA regulations. For example, if a Singapore holding company licenses IP to the Indian subsidiary, the royalty rate must be at arm’s length and must comply with India–Singapore DTAA provisions. If the Singapore company pays for marketing, travel, or operational support, the Indian entity must book the expense appropriately and deduct withholding tax where applicable. Improper flow of funds can create both FEMA and taxation disputes. This is why foreign entity structuring must be coordinated between legal, tax, and FEMA specialists.
9. Does sending money abroad “just once” still require FEMA compliance?
Yes. Even a single rupee invested abroad triggers the Overseas Investment Rules. RBI does not distinguish between one-time investors and frequent investors. FEMA compliance is based on the nature of the transaction, not the frequency. Even the smallest share subscription must be routed through an Authorised Dealer Bank with proper purpose codes and valuation records. Non-compliance with even a one-time transfer can create recurring issues during tax filings and due diligence, especially if the foreign company continues to operate or grows in value.
10. Can regularising past violations protect my future credibility?
Absolutely. Regularisation demonstrates maturity, governance discipline, and legal awareness. Investors appreciate founders who proactively correct structural issues rather than ignoring them. Banks cooperate more smoothly with compliant structures. Tax authorities view clean documentation favourably. Once a compounding approval is obtained or delayed filings are rectified, the foreign structure becomes legally robust and fully defensible. The earlier regularisation is completed, the better positioned the founder becomes for fundraising, international partnerships, and expansion into new jurisdictions.
About the Author
Prashant Kumar is a Company Secretary, Published Author, and Partner at Eclectic Legal, specialising in cross-border structuring, FEMA compliance, and overseas business setup. He advises founders, family businesses, and investors on creating legally sound global structures across Singapore, Dubai, and other jurisdictions. Reach him at prashant@eclecticlegal.com or +91-9821008011.
[…] issue is so widespread that our related article — FEMA Compliance for Overseas Investments: The Legal Risks Indian Founders Overlook — will focus entirely on how to legally remit funds, avoid prosecution, and cure past […]