Executive Summary

The gift city vs mainland india fund debate has emerged as one of the most consequential structural decisions facing fund managers, treasury departments, and financial intermediaries in India as of 2026. Gujarat International Finance Tec-City (GIFT City), located in Gandhinagar, Gujarat, hosts India’s sole International Financial Services Centre (IFSC) and operates under a distinctive regulatory and fiscal architecture that differs materially from the mainland Indian framework. The International Financial Services Centres Authority (IFSCA), established under the IFSCA Act 2019, functions as the unified regulator for all financial services conducted within the IFSC, consolidating oversight that on the mainland would be distributed across the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Insurance Regulatory and Development Authority of India (IRDAI).

This article provides a structured comparative analysis of the key dimensions — taxation, currency regime, regulatory framework, eligible investor base, listing infrastructure, and operational costs — that should inform the domicile decision for funds and treasury structures. The analysis is grounded in the statutory framework as it stands in June 2026, including the Income Tax Act 1961, the Foreign Exchange Management Act 1999 (FEMA), IFSCA (Fund Management) Regulations 2022, and applicable CBDT notifications. The article is strictly educational and does not constitute legal or financial advice.

Statutory Framework

The IFSCA Act 2019 and the GIFT City IFSC

The IFSCA Act 2019 established the International Financial Services Centres Authority as a statutory body with jurisdiction over all financial products, financial services, and financial institutions operating within an IFSC. Prior to the enactment of the IFSCA Act, entities in GIFT City operated under the concurrent jurisdiction of multiple regulators — SEBI for capital markets, RBI for banking and forex, and IRDAI for insurance — which created jurisdictional ambiguity. The IFSCA Act resolved this by vesting consolidated regulatory authority in a single body, making GIFT City a genuine single-window regulatory jurisdiction.

The IFSC is a notified zone under Section 2(q) of FEMA 1999, and the Foreign Exchange Management (International Financial Services Centre) Regulations 2015 (as amended) govern foreign exchange transactions within the IFSC. The fundamental premise is that for FEMA purposes, an IFSC unit is treated as a person resident outside India, enabling it to transact in foreign currencies without the exchange control restrictions that apply to mainland entities.

IFSCA (Fund Management) Regulations 2022

The IFSCA (Fund Management) Regulations 2022 (FMR 2022) govern the registration, operation, and winding up of fund management entities (FMEs) and funds within the GIFT City IFSC. The FMR 2022 establishes three principal categories of funds: Venture Capital Schemes, Restricted Schemes (analogous to Category I and II AIFs on the mainland), and Retail Schemes. Registration requirements, minimum corpus thresholds, and eligible investor criteria are set out in the FMR 2022 and differ in significant respects from the SEBI (Alternative Investment Funds) Regulations 2012 that govern mainland AIFs.

Under the FMR 2022, FMEs are permitted to manage funds that primarily invest in assets outside India, as well as certain domestic Indian assets through specified routes. The regulations permit a fund established in the IFSC to be structured as a company, limited liability partnership, trust, or contractual arrangement, offering structural flexibility that exceeds what is available to mainland AIFs which are predominantly trust-based.

Taxation: Section 80LA of the Income Tax Act 1961

The most significant fiscal incentive for IFSC entities is the deduction available under Section 80LA of the Income Tax Act 1961. An IFSC unit is eligible to claim a deduction of 100 percent of its income from specified activities for any ten consecutive years within the first fifteen years of commencement of operations. The qualifying income encompasses income from banking, insurance, fund management, and specified financial services conducted from the IFSC. It is important to note that the deduction applies to income arising from operations within the IFSC and is subject to conditions including filing of a return of income and obtaining a report from a chartered accountant.

Beyond Section 80LA, the fiscal architecture for IFSC entities includes: exemption from Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT) on transactions on IFSC exchanges; exemption from Dividend Distribution Tax (DDT) (now subsumed into the dividend income regime post the Finance Act 2020, but the IFSC regime provides for specific carve-outs); favourable treatment of capital gains arising from transfer of securities listed on IFSC exchanges to non-residents under Section 47(viiab) of the Income Tax Act; and a reduced withholding tax rate of 4 percent (under Section 194LC and 194LD in applicable contexts) on interest income paid by IFSC units to non-residents.

Foreign Exchange and Currency Regime

FEMA 1999 and the FEMA (IFSC) Regulations establish the operative currency framework. Transactions within the IFSC are denominated in foreign currencies — principally the United States Dollar — rather than in Indian Rupees. An IFSC unit is permitted to open and maintain accounts in foreign currency with banks operating in the IFSC. The notional treatment of IFSC units as non-residents under FEMA means that capital flows between an IFSC unit and overseas counterparties are largely free of exchange control approvals that would otherwise be required under the Liberalised Remittance Scheme or the External Commercial Borrowing framework.

Mainland Indian entities, by contrast, operate in Indian Rupees and are subject to the full ambit of FEMA capital account controls, RBI approval requirements for certain transactions, and the hedging obligations that accompany foreign currency exposures.

Procedural Landscape

Comparative Table: GIFT City IFSC vs Mainland India — Fund and Treasury Domicile

Registration Process for an FME in GIFT City IFSC

The process for establishing a Fund Management Entity in the GIFT City IFSC under the FMR 2022 involves the following sequential steps.

First, the applicant entity must be incorporated or registered in the IFSC — this may be a company incorporated under the Companies Act 2013 with a registered office in the IFSC, an LLP formed under the Limited Liability Partnership Act 2008, or a trust constituted under applicable law. Second, the applicant submits an application for registration as a Fund Management Entity to the IFSCA in the prescribed form, along with prescribed fees, a business plan, details of key managerial personnel, and disclosures relating to the principal shareholders. Third, the IFSCA reviews the application, may seek clarifications, and upon satisfaction grants a Certificate of Registration in the applicable category (Retail FME, Restricted FME, or Venture Capital FME). Fourth, the registered FME must appoint a compliance officer, a principal officer with specified qualifications, and establish risk management and compliance frameworks. Fifth, for each fund to be launched, a scheme document (private placement memorandum or scheme information document) is filed with the IFSCA, and the fund is constituted in accordance with the structural requirements of the FMR 2022.

Treasury Domicile Considerations

For corporate treasury operations, the GIFT City IFSC permits the establishment of IFSC Banking Units (IBUs) by Indian and foreign banks. An IBU is a branch of a bank operating within the IFSC and is treated as a foreign branch for FEMA purposes. Corporates with significant foreign currency borrowings, trade finance requirements, or multi-currency treasury operations may find that housing treasury activities through an IFSC-domiciled structure — either through a wholly-owned subsidiary or through IFSC-eligible instruments — reduces FEMA compliance burdens and provides access to competitive international interest rates. However, the inability of IFSC units to directly serve Indian residents in many product categories means that a hybrid structure maintaining both mainland and IFSC entities is common in practice.

Key Judicial Precedents

Indian courts have not, as of June 2026, produced a definitive body of jurisprudence specifically on GIFT City IFSC fund structures, reflecting the relative novelty of the framework. However, several precedential principles from the Supreme Court of India bear on the interpretation of IFSC-related provisions.

The Supreme Court’s decision in Commissioner of Income Tax v. Vodafone International Holdings BV (2012) 6 SCC 613 established the primacy of substance and form in international tax structuring and the importance of examining the true character of transactions. While the case predates the IFSC framework, its analytical approach to treaty and statutory interpretation remains relevant to IFSC entities relying on beneficial tax provisions: the court emphasised that legitimate structuring aimed at tax efficiency within statutory parameters is permissible, but the substance of the arrangement must match its form.

On the interpretation of Section 80LA, the Madras High Court in CIT v. Sak Soft Ltd (2009) 180 Taxman 89 considered the conditions for claiming special economic zone deductions (under the predecessor SEZ framework) and affirmed that the deduction is available provided the statutory conditions are strictly complied with. The principle of strict but not pedantic compliance with tax incentive provisions in SEZ/IFSC contexts has been applied in subsequent ITAT orders.

Regarding the FEMA treatment of IFSC units, the Reserve Bank of India’s operational guidelines and IFSCA circulars constitute the primary quasi-regulatory instruments, and there are no Supreme Court decisions specifically addressing the non-resident characterisation of IFSC units under FEMA. The legal framework has largely operated within the administrative domain.

On the question of whether SEBI regulations apply to IFSC entities, the jurisdictional delineation established by the IFSCA Act 2019 — specifically Section 13, which gives IFSCA primacy over financial services in IFSCs — has been consistently applied at the administrative level, with SEBI formally recognising IFSCA’s exclusive jurisdiction over IFSC fund managers.

Conclusion

The gift city vs mainland india fund domicile decision in 2026 involves a nuanced balancing of significant fiscal advantages against structural constraints. The GIFT City IFSC offers a compelling proposition for fund managers and treasury units targeting non-resident capital: a unified regulatory framework under IFSCA, a 100 percent income tax deduction under Section 80LA for ten of the first fifteen years of operation, exemption from STT/CTT, favourable capital gains treatment for non-residents on IFSC exchange-listed securities, and full foreign currency operations outside the domestic FEMA capital account controls.

The mainland India framework, by contrast, offers access to resident Indian investors, an established infrastructure and service provider ecosystem, and regulatory familiarity. For fund managers whose target investor base includes Indian resident HNIs, family offices, or domestic institutions, a mainland AIF registration under SEBI regulations remains the appropriate structure.

In practice, the most sophisticated fund architectures in 2026 employ parallel structures — an IFSC-domiciled FME or fund for international capital, and a SEBI-registered AIF on the mainland for domestic capital — with appropriate ring-fencing to ensure regulatory compliance in each jurisdiction. The IFSCA has signalled a continued legislative and regulatory push to expand the scope of permissible activities within the IFSC, and the framework is expected to evolve further.

Practitioners and fund managers navigating the GIFT City vs mainland India domicile question should undertake detailed due diligence across the regulatory, tax, and investor relations dimensions, taking particular care to assess whether the investor base sought is eligible to invest in an IFSC-domiciled fund and whether the substance requirements for Section 80LA claims will be satisfied.

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Introduction: From Regulatory Framework to Operational Implementation

Setting up a GIFT City PMS in 2026 is not merely a matter of understanding the legal and regulatory framework. It requires translating that framework into a practical and operational structure that can withstand scrutiny from the International Financial Services Centres Authority, satisfy substance requirements, comply with cross-border investment rules, and operate efficiently in practice.

Parts 1 through 5 of this India Market Access Series have already established the legal, regulatory, and tax architecture for a foreign investment adviser seeking to offer discretionary portfolio management services to Indian residents through the GIFT City IFSC:

• Part 1: Why the onshore Securities and Exchange Board of India framework forecloses the route (Regulations 23(1), 24(3), 24(9), 24(10), the 2011 Outsourcing Circular, and the ASK Wealth Advisors informal guidance)
• Part 2: How the IFSCA (Fund Management) Regulations, 2025 open the GIFT City PMS pathway (FME categories, branch structure, Regulation 7(7) substance requirements, and PMS provisions)
• Part 3: How Indian residents can be lawfully solicited through the mainland-distributor model confirmed by the LGT Wealth India guidance of August 2025
• Part 4: Why the GIFT City PMS must be structured as an outbound-only vehicle (FEMA round-tripping restrictions, LRS mechanics, and FPI registration barriers)
• Part 5: The complete tax framework (Section 147 holiday for the FME, investor-level capital gains taxation, and DTAA treatment)

This final article translates the legal and regulatory structure into a complete GIFT City PMS setup guide—explaining the two entities required, why each is necessary, how they interact commercially and legally, what physical presence in GIFT City actually requires (with the Neo Asset Management Private Limited warning order serving as a cautionary precedent), the realistic implementation timeline from strategic decision to first live client, and the key unresolved questions where informal guidance from IFSCA should be sought before making operational commitments.

Key question this article answers: What does it actually take to establish and operate a compliant, commercially viable, and regulatorily robust GIFT City PMS for Indian clients?

Part 1: GIFT City PMS Two-Entity Framework — The Complete Operational Architecture

The Two Entities and Their Roles

A compliant GIFT City PMS structure generally requires two legally distinct but commercially connected entities.

Why the IFSC Branch Is Necessary

The IFSC branch of the foreign parent is the only viable structure under which a foreign investment adviser can lawfully offer discretionary PMS over global securities to Indian residents.

Four reasons support this conclusion:

1. The onshore route is foreclosed. A SEBI-registered mainland PMS cannot manage foreign securities under Regulation 24(3), cannot act on foreign parent advice under Regulation 24(10), and cannot receive intra-group investment research under the 2011 Outsourcing Circular. These prohibitions are structural.
2. The branch form avoids the outsourcing problem. A subsidiary is a separate legal entity. Advice and research from the foreign parent may become “advice of another entity” or “outsourcing.” A branch is the same legal entity as the parent.
3. The IFSC expands the investment universe. Regulation 73(3) of the IFSCA (Fund Management) Regulations permits investment in global securities.
4. The IFSC provides tax benefits. Section 147 of the Income Tax Act, 2025 applies only to IFSC units.

Why the Mainland Distributor Is Necessary

The mainland distributor is necessary because, without it, the IFSC FME would be forced to rely on reverse solicitation, which is commercially restrictive and legally uncertain.

The LGT Wealth India guidance of August 2025 confirmed that a SEBI-regulated mainland entity can actively solicit Indian clients for IFSC products and receive commissions from the IFSC issuer.

The mainland distributor operationalises that model.

The Commercial and Legal Relationship Between the Two Entities

The IFSC FME and mainland distributor are connected through a distribution agreement.

The key commercial and legal features include:

• The distributor is compensated through a trail commission paid periodically from the FME’s management fee pool.
• The distributor performs client acquisition and servicing.
• The distributor does not perform discretionary portfolio management.
• The IFSC FME retains regulatory responsibility and performs all portfolio management functions.

Where the distributor is an affiliate of the foreign parent, related-party compliance issues may arise under both SEBI and IFSCA frameworks. These can typically be managed through:

• proper disclosures,
• conflict-of-interest policies, and
• arm’s-length commission structures.

The intra-group nature does not invalidate the structure.

Part 2: GIFT City PMS Physical Presence Requirements — The Neo Asset Management Warning

Why Physical Presence Is Operationally Critical

The substance requirement under the Fund Management Regulations is one of the most operationally significant obligations in a GIFT City PMS setup.

Substance is not satisfied by:

• an office address on letterhead,
• a lease agreement alone,
• a Principal Officer who resides in Mumbai and visits weekly,
• or a Compliance Officer working remotely from Bengaluru.

Physical presence means genuine operational presence in GIFT City.

The Neo Asset Management Warning Order — 2 May 2025

On 2 May 2025, IFSCA issued a formal warning order to Neo Asset Management Private Limited (IFSC Branch) under Regulation 143 of the IFSCA (Fund Management) Regulations, 2022.

The sequence was as follows:

1. July–October 2024: IFSCA conducted surprise visits and found the Principal Officer and KMPs absent.
2. September 2024: Advisory letter issued.
3. February 2025: Show Cause Notice issued.
4. 3 April 2025: Personal hearing conducted.
5. 2 May 2025: Formal warning issued stating further non-compliance could lead to cancellation of registration.

Lessons from the Neo Asset Management Precedent

Lesson 1 — Enforcement is physical.
IFSCA uses surprise visits, not merely paperwork review.

Lesson 2 — Escalation is real.
The path from advisory to cancellation is structured and serious.

Lesson 3 — “Based out of IFSC” is substantive.
It means the primary place of work, not an occasional presence.

What Genuine Physical Presence Requires

In practice, this generally requires:

• The Principal Officer to live in the Gandhinagar / Ahmedabad region;
• The Compliance Officer to be practically resident;
• The office to be genuinely staffed during working hours;
• Senior investment decision-makers to be physically present when IFSC decisions are made.

This creates real operational costs, including:

• relocation costs,
• housing allowances,
• and staffing overhead.

Part 3: GIFT City PMS Implementation Timeline — From Decision to First Live Client

Overview of the Timeline

A realistic GIFT City PMS implementation timeline is generally 9 to 15 months.

Key Decision Points in Phase 1

Choice of FME Category

For discretionary PMS, Registered FME (Non-Retail) is generally correct.

Requirements:

• USD 500,000 net worth.

Retail FME requires:

• USD 1,000,000 net worth,
• additional KMPs.

Branch vs Subsidiary

The branch structure remains preferable because subsidiaries may reintroduce inter-entity outsourcing issues.

Mainland Distributor Identity

Existing affiliates may reduce timelines.

A new SEBI entity may add 4–8 months.

Principal Officer Identification

This is often the critical path.

The candidate must:

• meet qualification requirements;
• meet experience requirements;
• be willing to relocate.

Part 4: Key Regulatory Questions for GIFT City PMS Setup

The framework is mostly settled, but some operational questions remain unresolved.

Open Question 1 — Trade Execution Through Foreign Infrastructure

Can trades initiated in GIFT City be executed through foreign infrastructure?

Defensible answer: likely yes.

Reasoning:

• branch and parent are same legal entity;
• decision is made in GIFT City;
• execution is implementation.

Risk remains due to lack of explicit guidance.

Open Question 2 — Proactive Servicing Calls

Can the IFSC FME proactively communicate with Indian clients post-onboarding?

Defensible answer:

Likely servicing rather than solicitation.

Risk remains.

Open Question 3 — Self-Marketing Within IFSC

Can an IFSC FME market directly to IFSC-based entities?

Defensible answer:

Likely yes.

Conservative firms may seek separate distributor registration.

Recommended action:

Seek IFSCA informal guidance before operational commitment.

Part 5: GIFT City PMS Compliance Requirements

Ongoing IFSCA Compliance

A GIFT City PMS must maintain:

• quarterly reporting;
• annual audit;
• KYC/AML compliance;
• valuation procedures;
• periodic client reporting;
• grievance redressal;
• net worth maintenance.

Required Appointments

A GIFT City PMS requires:

• custodian;
• fund administrator;
• auditor.

These should be appointed before launch.

SEBI Compliance for Mainland Distributor

The mainland distributor must maintain:

• valid SEBI registration;
• suitability assessment records;
• commission disclosures;
• conflict-of-interest controls.

Conclusion: The GIFT City PMS Framework Is Established — Execution Is the Key Risk

The GIFT City PMS setup framework is established and commercially viable.

The model is:

• IFSC branch for portfolio management;
• mainland distributor for client acquisition.

The practical roadmap is:

1. adopt the two-entity structure;
2. seek IFSCA guidance on open questions;
3. build genuine operational substance in GIFT City;
4. keep the structure outbound-only;
5. plan for a 9–15 month implementation cycle.

For foreign investment advisers, GIFT City offers what the mainland SEBI route cannot: a tax-efficient, regulated, globally invested discretionary PMS platform for Indian residents.

Complete Series Index — India Market Access Series: GIFT City PMS

FAQs

What is a GIFT City PMS?
A discretionary portfolio management service set up in GIFT City IFSC under International Financial Services Centres Authority regulations.

How do you set up a GIFT City PMS?
Obtain IFSCA FME registration, establish operational substance, appoint key officers, and complete compliance setup.

What is the two-entity framework?
An IFSC FME manages portfolios, while a Securities and Exchange Board of India-registered mainland distributor solicits Indian clients.

Is physical presence mandatory in GIFT City?
Yes. Genuine office presence and IFSC-based key personnel are required.

How long does it take to set up a GIFT City PMS?
Typically 9–15 months.

What is IFSCA FME registration?
Registration as a Fund Management Entity under IFSCA regulations.

What net worth is required?
USD 500,000 for Non-Retail FME; USD 1,000,000 for Retail FME.

Can Indian residents invest in GIFT City PMS?
Yes, usually through LRS and FEMA compliance.

Can GIFT City PMS invest in Indian securities?
Usually structured as outbound-only to avoid round-tripping issues.

Why is a mainland distributor needed?
To actively solicit clients in India without relying on reverse solicitation.

What are the compliance requirements?
Quarterly reporting, audits, AML/KYC, and client reporting.

Can trades be executed outside GIFT City?
Possibly, but IFSCA guidance is advisable.

Can IFSC FME directly contact Indian clients?
Likely for servicing, but formal guidance is recommended.

What are the tax benefits?
Tax holidays and potential treaty benefits may apply.

Is GIFT City PMS better than onshore SEBI PMS?
For global investing, it may offer more flexibility and tax advantages.

This article is part of the India Market Access Series published by Bhatt & Joshi Associates. It is intended for lawyers, investment professionals, and corporate officers and does not constitute legal advice.

The post How to Set Up a GIFT City PMS in 2026: IFSCA FME Registration, Compliance & Timeline appeared first on Bhatt & Joshi Associates.

Introduction

The Foreign Exchange Management Act, 1999 (FEMA) is the primary legislation governing foreign exchange transactions in India, aiming to facilitate external trade and payments while promoting an orderly foreign exchange market. A crucial aspect of FEMA is its enforcement, which is primarily entrusted to the Directorate of Enforcement (ED). For lawyers advising clients on FEMA compliance and for individuals potentially facing scrutiny, a thorough understanding of the ED’s investigation powers is indispensable. This practical guide explores the authority, procedures, and key considerations related to the investigation powers of the Directorate of Enforcement under FEMA.

The Role of the Directorate of Enforcement under FEMA

The ED is the designated agency responsible for enforcing and administering FEMA. This includes conducting inquiries, initiating investigations, issuing show cause notices, and imposing penalties for contraventions of FEMA, its rules, and regulations. Headed by a Director, with its main office in New Delhi, the ED plays a vital role in ensuring compliance with India’s foreign exchange laws.

Legal Basis for Investigation: Section 37 of FEMA

The cornerstone of the ED’s investigative authority lies in Section 37 of FEMA. This section specifically empowers the Director and subordinate officers (not below the rank of an Assistant Director) to undertake investigations into contraventions referred to in Section 13 of FEMA, which deals with penalties.

Scope and Nature of Investigation Powers of Enforcement Directorate Under FEMA

Under Section 37, the ED’s officers are bestowed with powers similar to those conferred on Income Tax authorities under the Income Tax Act, 1961. These powers include, but are not limited to:

• Power to issue summons: The ED can summon individuals whose attendance is deemed necessary for providing statements or information relevant to the investigation. It’s important to note that the Madras High Court has clarified that the concept of summons under FEMA is analogous to that under the Income Tax Act, not strictly the Code of Civil Procedure or Criminal Procedure.
• Power to call for information: The investigating officers can demand the furnishing of specific information that may be useful or relevant to the proceedings under FEMA.
• Power to enter and survey: Officers can enter and survey any place within their jurisdiction to inspect books of accounts or other relevant documents. They can also check or verify cash, stock, or other valuable assets found therein.
• Power to inspect documents: The authority to inspect books of accounts and other documents is crucial for gathering evidence of potential FEMA contraventions.

Investigation Procedures and Key Stages 

While the specific course of an investigation can vary, the general process under FEMA can be broadly divided into stages:

1. Initiation of Investigation: Investigations are typically initiated when the ED has reason to believe that a FEMA contravention has occurred, often based on references from the Reserve Bank of India (RBI) or other sources.
2. Gathering of Information: This stage involves the exercise of the powers mentioned above, such as issuing summons, calling for information, and inspecting documents to collect evidence and facts related to the alleged contravention. The ED can record statements from individuals during this phase.
3. Filing of Complaint: Upon completion of the investigation, if sufficient evidence of a contravention is found, the investigating officer files a formal complaint before the Adjudicating Authority (AA) appointed by the Central Government under Section 16 of FEMA. This complaint details the nature of the alleged contraventions, the relevant facts and circumstances, and the list of relied-upon documents.

Rights of Individuals During FEMA Investigations

While FEMA aims for efficient enforcement, individuals under investigation are entitled to certain rights:

• Right to be heard: Before any penalty is imposed, the Adjudicating Authority must issue a show cause notice to the alleged defaulter, providing them with an opportunity to present their case and explain why an inquiry should not be held against them. This aligns with the principles of natural justice.
• Right to legal assistance: Under Section 32 of FEMA, an alleged offender has the right to obtain assistance from a legal practitioner or a chartered accountant to present their case before the Adjudicating Authority. While at the initial investigation stage, there might not be a formal right to assistance during the recording of statements, seeking legal advice early is crucial.

Important Considerations for Lawyers and Individuals

• Absence of Explicit Limitation Period: It’s critical to note that, for most FEMA contraventions, there is no explicit limitation period prescribed for initiating investigations. This means the ED can potentially investigate even older cases. However, the principles of natural justice and reasonable timelines remain paramount.
• Distinction from FERA: FEMA replaced the Foreign Exchange Regulation Act, 1973 (FERA). Unlike FERA, where contraventions often carried criminal liabilities, FEMA generally treats violations as civil offences, attracting monetary penalties. However, certain serious contraventions post-2015 can also attract criminal prosecution.
• Power to Seize Equivalent Value: Section 37A of FEMA allows the Authorised Officer (ED officer not below the rank of Assistant Director) to seize the value equivalent of foreign exchange, foreign security, or immovable property held outside India in contravention of Section 4 of FEMA, if the actual foreign assets cannot be seized.
• Importance of Compliance: Given the ED’s powers and the potential for penalties (up to thrice the sum involved or ₹2 lakh, with continuing penalties for ongoing contraventions), proactive FEMA compliance is essential for businesses and individuals involved in foreign exchange transactions.

Conclusion 

Understanding the investigation powers of the Directorate of Enforcement under FEMA is crucial for navigating the complexities of India’s foreign exchange regulations. This practical guide highlights the key aspects of the ED’s authority, procedures, and the rights of individuals facing investigation. By being aware of these provisions and ensuring robust FEMA compliance, individuals and businesses can mitigate the risk of contraventions and effectively address any notices or inquiries from the Directorate of Enforcement. Lawyers advising clients in this area must be well-versed in these powers to provide effective representation and guidance.

Article by: Aditya Bhatt

Association: Bhatt and Joshi

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Introduction

Foreign exchange regulations are a critical component of India’s economic framework, with the Reserve Bank of India (RBI) playing a central role in their implementation. This comprehensive guide examines RBI’s role under FEMA and how the RBI regulates and manages cross-border transactions under the Foreign Exchange Management Act (FEMA), providing clarity for businesses, individuals, and legal professionals navigating this complex regulatory landscape.

Understanding FEMA and RBI’s Regulatory Authority

The Foreign Exchange Management Act, 1999 (FEMA) replaced the more restrictive Foreign Exchange Regulation Act (FERA), signaling a paradigm shift from control to management of foreign exchange. This fundamental change reflects India’s evolving approach toward economic liberalization and global integration.

Legislative Framework and RBI’s Mandate

FEMA provides the RBI with extensive regulatory powers to oversee foreign exchange transactions in India. These powers are derived from several sections of the Reserve Bank of India Act, including sections 45J, 45JA, 45K, 45L, and 45MA. The RBI exercises these powers through a comprehensive framework of rules, regulations, and circulars that govern all aspects of foreign exchange transactions.

Key responsibilities entrusted to the RBI include:

• Formulating and implementing regulations to carry out FEMA provisions
• Issuing general and special directions to authorized entities dealing in foreign exchange
• Restricting, prohibiting, or regulating various categories of foreign exchange transactions
• Setting limits for different types of cross-border remittances and investments
• Ensuring timely repatriation of foreign exchange earned through exports and other sources

While the RBI possesses significant autonomy in managing foreign exchange, it often works in consultation with the Central Government, particularly when establishing rules for capital account transactions or when addressing matters of broader economic policy.

RBI as the Authorizing Authority for Forex Transactions

A fundamental aspect of FEMA is that all foreign exchange dealings must be conducted through an “Authorised Person” unless otherwise permitted by the Act. The RBI serves as the gatekeeper for this system.

Licensing and Authorization Framework

The RBI’s authorization process includes:

• Issuing licenses to banks and financial institutions to function as Authorized Dealers
• Granting permissions to money changers and other entities to handle specific foreign exchange operations
• Establishing operational guidelines for offshore banking units
• Setting conditions and limitations for each type of authorization

These authorizations are typically granted in writing and are subject to specific conditions determined by the RBI. The central bank retains the authority to revoke authorizations if it determines such action is in the public interest, if an authorized entity fails to comply with established conditions, or if FEMA provisions are violated.

Ongoing Compliance Requirements

Authorized entities must adhere to the RBI’s directions regarding foreign exchange transactions and must ensure that all transactions they facilitate comply with FEMA provisions. This creates a two-tier compliance structure where both the authorized entity and the individual or business conducting the transaction bear responsibility for regulatory adherence.

RBI’s Policy Formulation and Directional Role

The RBI plays a decisive role in shaping India’s foreign exchange policies, which extend beyond mere implementation of FEMA provisions to include broader economic objectives.

Cross-Border Transaction Facilitation

Recent initiatives by the RBI demonstrate its commitment to facilitating smoother cross-border transactions. In January 2025, the RBI updated FEMA regulations to encourage international transactions in Indian rupees (INR), allowing:

• Overseas branches of authorized dealer banks to open INR accounts for non-residents
• Non-residents to use balances in repatriable INR accounts for transactions with other non-residents
• Non-residents to utilize INR account balances for foreign investments, including FDI in non-debt instruments
• Indian exporters to open foreign currency accounts abroad for trade settlements

These amendments represent a significant step toward internationalizing the Indian rupee and expanding India’s economic connections globally.

Market Development Initiatives

The RBI has actively worked to develop India’s foreign exchange market through:

• Increasing the availability of derivative instruments like forward and swap contracts
• Introducing rupee-foreign currency swaps and other risk management tools
• Implementing regulatory frameworks for options, futures, and other sophisticated financial instruments
• Issuing regular notifications and circulars to clarify and update FEMA regulations

These efforts create a more robust and sophisticated foreign exchange market that can better serve India’s growing international economic engagement.

Market Oversight and Intervention Mechanisms

The RBI maintains active oversight of India’s foreign exchange market to ensure stability and prevent disruptive fluctuations.

Monitoring and Market Operations

The central bank employs various approaches to monitor and intervene in the forex market:

• Continuous surveillance of developments in both domestic and international financial markets
• Direct intervention through buying or selling of foreign currencies when necessary
• Indirect market operations through public sector banks acting as intermediaries
• Regulatory adjustments to influence market dynamics without direct intervention8

This multilayered approach allows the RBI to maintain equilibrium in the foreign exchange market while accommodating legitimate economic activities.

RBI’s Approach to FEMA Violations

The RBI’s role extends to addressing contraventions of FEMA provisions, though with a perspective that differs significantly from the previous FERA regime’s punitive approach.

Compounding and Remediation

The RBI has the authority to compound (settle) contraventions committed under Section 13 of FEMA. This mechanism allows for the resolution of violations without necessarily resorting to lengthy enforcement proceedings.

Post-facto Approval Mechanism

A landmark Supreme Court judgment in Vijay Karia v. Prysmian Cavi E Sistemi SRL (2020) clarified the RBI’s power to grant post-facto approval for actions that technically breach FEMA regulations. The Court held that:

• FEMA violations can potentially be condoned through RBI’s post-facto approval
• A breach of FEMA does not automatically render a transaction void
• FEMA is based on a policy of managing foreign exchange, unlike the previous FERA which focused on policing it
• FEMA violations cannot be considered violations of the “fundamental policy of Indian law”

This judicial interpretation reflects the more facilitative approach of FEMA compared to its predecessor, recognizing that technical violations need not invalidate legitimate economic activities.

Regulatory Coordination

While the Enforcement Directorate (ED) is primarily responsible for investigating FEMA contraventions, the RBI’s regulatory perspective remains paramount in the overall framework. The Supreme Court has noted that the RBI alone has the authority to determine whether FEMA requirements have been fulfilled.

Even when foreign arbitral awards are enforced despite potential FEMA violations, the actual outflow of funds typically requires RBI approval, maintaining the central bank’s ultimate regulatory authority over foreign exchange.

Conclusion: RBI’s Evolving Role in India’s Economic Framework

The RBI’s role under FEMA represents a careful balance between regulatory oversight and economic facilitation. By shifting from the strict control paradigm of FERA to the management approach under FEMA, India has created a more flexible foreign exchange regime that supports international trade and investment while safeguarding the nation’s economic interests.

The RBI continues to adapt its regulatory framework to meet evolving global economic challenges, as evidenced by recent amendments to encourage cross-border rupee transactions and facilitate derivatives trading. These ongoing refinements demonstrate the dynamic nature of India’s approach to foreign exchange management under RBI’s stewardship.

For businesses and individuals engaging in cross-border transactions, understanding the RBI’s role and approaches under FEMA is essential for both compliance and effective financial planning in an increasingly interconnected global economy.

Article by: Aditya Bhatt

Association: Bhatt and Joshi

The post RBI’s Role Under FEMA: Complete Guide to FEMA appeared first on Bhatt & Joshi Associates.

India’s G20 Presidency and the Alignment of Economic Policies with Sustainable Development Goals

Introduction: India’s Leadership in Global Economic Governance

India’s assumption of the G20 presidency in December 2022 marked a transformative moment in global economic governance. Under the theme “Vasudhaiva Kutumbakam” or “One Earth, One Family, One Future,” India steered international discourse toward inclusive growth, climate action, and accelerated progress on the 2030 Sustainable Development Goals agenda [1]. This presidency represented not merely a ceremonial role but a strategic opportunity to align domestic economic policies with international commitments while addressing the developmental needs of the Global South.

The G20 represents a powerful coalition of nations accounting for more than 80 percent of global GDP, 75 percent of international trade, and encompassing 60 percent of the world’s population [2]. India’s leadership came at a critical juncture when the world grappled with multiple crises including the aftermath of the COVID-19 pandemic, geopolitical tensions, rising inflation, and the urgent need to address climate change. Through its presidency, India successfully advocated for 87 outcomes and 118 adopted documents, demonstrating unprecedented diplomatic achievement in steering consensus among diverse economies.

This article examines how India’s economic policies and legal frameworks align with G20 objectives, particularly focusing on sustainable development goals. It explores the regulatory mechanisms, legislative instruments, and judicial precedents that form the backbone of India’s approach to balancing economic growth with environmental sustainability.

Legal Framework: Constitutional and Legislative Foundations

Constitutional Provisions for Environmental Protection

India’s commitment to sustainable development finds its roots in the Constitution itself. Article 48A of the Directive Principles of State Policy mandates that “the State shall endeavour to protect and improve the environment and to safeguard the forests and wildlife of the country.” Similarly, Article 51A(g) imposes a fundamental duty upon every citizen “to protect and improve the natural environment including forests, lakes, rivers and wildlife, and to have compassion for living creatures.” These constitutional provisions establish the legal foundation for India’s environmental jurisprudence and its alignment with global sustainability objectives.

The Supreme Court has consistently interpreted Article 21, which guarantees the right to life and personal liberty, to include the right to a clean and healthy environment. This expansive interpretation has enabled courts to address environmental degradation as a fundamental rights violation, creating a robust framework for enforcing sustainable development principles through judicial intervention.

The Environment Protection Act, 1986: Umbrella Legislation

The Environment Protection Act of 1986 serves as India’s principal legislative instrument for environmental regulation. Enacted as Act No. 29 of 1986 under Article 253 of the Constitution, this legislation emerged as a direct response to the Bhopal gas tragedy and India’s participation in the Stockholm Conference on the Human Environment in 1972 [3]. The Act came into force on November 19, 1986, providing the Central Government with comprehensive powers to protect and improve environmental quality.

Section 3 of the Act empowers the Central Government to take measures for protecting and improving environmental quality, including laying down standards for emissions and discharges of environmental pollutants, restricting areas for industrial operations, and prescribing procedures to prevent environmental pollution. The Act defines “environment” broadly under Section 2(a) to include “water, air and land and the inter-relationship which exists among and between water, air and land, and human beings, other living creatures, plants, micro-organism and property.”

Section 5 grants the Central Government authority to issue directions to any person, officer, or authority for environmental protection, including powers to order closure, prohibition, or regulation of any industry, operation, or process. Section 15 prescribes penalties for violations, including imprisonment for up to five years with fine, or both, demonstrating the Act’s stringent approach toward environmental offences.

The Act has been implemented through various rules and notifications addressing specific environmental concerns such as the Coastal Regulation Zone Notifications of 1991 and 2011, the Wetland Conservation and Management Rules of 2010 and 2017, and numerous standards for emission and effluent discharge. These regulatory frameworks directly support India’s commitments under the Sustainable Development Goals, particularly Goal 13 on climate action, Goal 14 on life below water, and Goal 15 on life on land.

Judicial Interpretation: Case Laws Shaping Environmental Jurisprudence

Landmark Judgments Establishing Sustainable Development Principles

Indian courts have played a pivotal role in interpreting and enforcing environmental laws through progressive judgments. The case of M.C. Mehta v. Union of India has become synonymous with environmental protection in India, spawning multiple landmark decisions that have shaped the country’s approach to sustainable development.

In M.C. Mehta v. Union of India (1986), AIR 1986 SC 1086, following the Oleum gas leak at Shriram Food and Fertilizer Industries in Delhi, the Supreme Court introduced the doctrine of absolute liability for enterprises engaged in hazardous activities [4]. The Court held that an enterprise carrying on hazardous or inherently dangerous activity owes an absolute and non-delegable duty to the community to ensure that no harm results from such activity, regardless of whether it has taken reasonable care. This doctrine went beyond the traditional rule of strict liability established in Rylands v. Fletcher by eliminating all exceptions and making liability absolute.

The judgment established that the magnitude of compensation must be correlated with the capacity of the enterprise to pay, reflecting the deep pockets theory. This principle ensures that large industrial enterprises cannot escape their environmental responsibilities by paying nominal compensation, thereby promoting responsible industrial practices aligned with sustainable development objectives.

Application of Sustainable Development in M.C. Mehta v. Union of India (1996)

In another significant decision, M.C. Mehta v. Union of India (1996), decided on October 11, 1996, the Supreme Court applied principles of sustainable development while addressing mining operations near tourist areas in Haryana [5]. The Court observed that the traditional concept treating development and ecology as opposed to each other is no longer acceptable, and “sustainable development” is the answer. The judgment explicitly recognized sustainable development as part of the law of the land.

The Court referenced the Brundtland Report’s definition of sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” This principle has since become a cornerstone of Indian environmental law, influencing numerous subsequent decisions and policy formulations.

The Taj Trapezium Case: Cultural Heritage and Environmental Protection

The Taj Trapezium case, M.C. Mehta v. Union of India (1997) 2 SCC 353, represents one of the most significant environmental judgments in Indian legal history. The Supreme Court, in its decision dated December 30, 1996, addressed the deterioration of the Taj Mahal caused by industrial pollution [6]. The Court found that pollutants from coal and coke-consuming industries were causing severe damage to the monument within the Taj Trapezium Zone, a 10,400 square kilometer area surrounding the Taj Mahal.

The judgment mandated the closure or conversion of 292 industries to cleaner fuels, specifically compressed natural gas, within the Taj Trapezium Zone. The Court applied the precautionary principle, polluter pays principle, and sustainable development doctrine, demonstrating how environmental law can protect both natural resources and cultural heritage. This decision established a precedent for prioritizing environmental protection over immediate economic considerations when cultural and environmental values are at stake.

Public Trust Doctrine in M.C. Mehta v. Kamal Nath

In M.C. Mehta v. Kamal Nath (1997) 1 SCC 388, the Supreme Court recognized the public trust doctrine as part of Indian law. The case involved unauthorized construction by Span Motels on forestland near the Beas River in Himachal Pradesh. The Court held that the State is the trustee of all natural resources meant for public use and cannot convert them into private ownership [7]. The judgment stated that natural resources, environmental assets, and ecological systems cannot be permitted to be eroded for private, commercial, or any other use unless the resource is publicly owned and the uses serve public interest.

The Court cancelled the lease granted to the motel and directed restoration of the area to its original natural condition, along with payment of compensation for environmental restitution. This doctrine aligns perfectly with the G20’s emphasis on sustainable resource management and intergenerational equity, core principles of the 2030 Agenda.

National Action Plan on Climate Change: Policy Framework for Sustainable Development

Overview and Objectives

India’s National Action Plan on Climate Change, launched on June 30, 2008, represents the country’s commitment to addressing climate change while pursuing developmental objectives [8]. The NAPCC operates under the guidance of the Prime Minister’s Council on Climate Change and outlines strategies for climate change mitigation and adaptation through eight national missions.

The Plan is guided by seven key principles: protecting poor and vulnerable sections through inclusive and sustainable development sensitive to climate change; achieving national growth through ecological sustainability; devising efficient and cost-effective strategies for demand-side management; deploying appropriate technologies for adaptation and mitigation of greenhouse gas emissions; engineering innovative market, regulatory, and voluntary mechanisms for sustainable development; implementing programmes through civil society and local government partnerships; and welcoming international cooperation for research, development, and technology transfer.

The Eight National Missions

The NAPCC comprises eight missions addressing critical sectors. The National Solar Mission, launched in 2010 as the Jawaharlal Nehru National Solar Mission, initially targeted 20 gigawatts of solar capacity by 2022, later revised to 100 gigawatts by Prime Minister Modi in 2015. The National Mission for Enhanced Energy Efficiency, approved in 2009, mandates energy consumption decreases in large energy-consuming industries with tradeable energy-saving certificates.

The National Mission on Sustainable Habitat, approved in 2010, focuses on energy efficiency in buildings through the Energy Conservation Building Code, improved urban planning, efficient public transport, and better waste management. The National Water Mission, launched in 2011, addresses water conservation and management, particularly critical given that India possesses only 4 percent of the world’s water resources despite having 17 percent of its population.

The National Mission for Sustaining the Himalayan Ecosystem focuses on protecting the ecologically sensitive Himalayan region, while the National Mission for a Green India, launched in 2014, aims to increase forest cover by 5 million hectares and improve quality on another 5 million hectares. The National Mission for Sustainable Agriculture promotes climate-resilient crops and sustainable farming practices. Finally, the National Mission on Strategic Knowledge for Climate Change facilitates knowledge networks and international collaboration on climate science.

Aligning NAPCC with G20 Objectives and Sustainable Development Goals

The NAPCC missions directly align with multiple SDG targets. The Solar Mission contributes to SDG 7 on affordable and clean energy and SDG 13 on climate action. The Enhanced Energy Efficiency Mission supports SDG 12 on responsible consumption and production. The Sustainable Habitat Mission addresses SDG 11 on sustainable cities and communities. The Water Mission directly targets SDG 6 on clean water and sanitation. The missions on sustainable agriculture and green India contribute to SDG 2 on zero hunger and SDG 15 on life on land.

During India’s G20 presidency, these domestic commitments found expression in international forums. India successfully advocated for the G20 2023 Action Plan to Accelerate Progress on the Sustainable Development Goals, adopted by G20 Development Ministers in Varanasi in June 2023 [9]. This multi-year living document guides future G20 efforts toward implementing the 2030 Agenda, building upon the 2016 Action Plan and its subsequent updates.

India’s G20 Presidency: Key Achievements in Sustainable Development

India’s G20 presidency achieved remarkable consensus on critical sustainability issues. The New Delhi Leaders’ Declaration unanimously adopted by all G20 members reflected India’s inclusive approach. Key outcomes included commitment to the Green Development Pact promoting integrated, balanced, environmentally sustainable, and inclusive economic growth; agreement to triple renewable energy globally by 2030; acceleration of zero and low-emission hydrogen production; and scaling development and climate finance from billions to trillions of dollars.

The presidency established a dedicated Working Group on Empowerment of Women, recognizing gender equality as central to sustainable development. India’s passage of the Women’s Reservation Bill in 2023, reserving one-third of Parliament and state assembly seats for women, exemplified this commitment domestically while advocating for women-led development internationally.

India championed Digital Public Infrastructure as a transformative tool for SDG achievement. The Digital Public Infrastructure Repository, featuring over 50 DPIs from 16 countries, enables developing nations to build, adopt, and scale digital infrastructure for inclusive growth. India’s own experience with Aadhaar, UPI, and Digilocker demonstrated how DPI can revolutionize service delivery, financial inclusion, and governance.

Challenges and Future Directions

Despite significant achievements, challenges remain in fully aligning economic policies with sustainable development objectives. The NAPCC has faced implementation difficulties including limited budgetary allocations, coordination issues among multiple implementing ministries, and gaps between targets and actual achievements. The Prime Minister’s Council on Climate Change, which oversees NAPCC implementation, has faced criticism regarding transparency and accountability.

India requires an estimated $2.5 trillion in investments to achieve its climate goals, with most funding needed from capital markets rather than government budgets alone. This financing gap presents a significant challenge in scaling up renewable energy infrastructure, sustainable agriculture practices, and climate adaptation measures. The G20 platform provides opportunities for mobilizing international climate finance and technology transfer to bridge these gaps.

Environmental enforcement remains uneven across states due to variations in institutional capacity, political will, and resource availability. The National Green Tribunal, established under the National Green Tribunal Act of 2010, handles environmental cases but faces backlogs and resource constraints. Strengthening regulatory institutions, improving monitoring systems, and ensuring swift justice in environmental matters remain priorities for effective implementation of sustainable development policies.

Conclusion

India’s alignment of economic policies with G20 objectives and Sustainable Development Goals (SDGs) represents a multifaceted approach combining constitutional commitments, legislative frameworks, judicial activism, and policy initiatives. The Environment Protection Act of 1986 provides the legal backbone for environmental regulation, while landmark Supreme Court judgments have established sustainable development, precautionary principle, polluter pays principle, and public trust doctrine as integral parts of Indian environmental jurisprudence.

The National Action Plan on Climate Change operationalizes these principles through eight missions addressing energy, water, agriculture, forests, and knowledge systems. India’s G20 presidency translated these domestic commitments into international consensus, achieving unprecedented outcomes in renewable energy targets, climate finance, digital infrastructure, and women’s empowerment.

As the world approaches the halfway mark of the 2030 Agenda, only 12 percent of SDG targets remain on track globally. India’s experience demonstrates that sustainable development requires integrated approaches combining legal frameworks, policy instruments, technological innovation, financial mobilization, and inclusive governance. The challenge ahead lies not in conceptualizing sustainable development but in scaling up implementation, ensuring adequate financing, strengthening institutional capacity, and maintaining political commitment across changing administrations.

India’s journey from the Stockholm Conference of 1972 to the G20 presidency of 2023 reflects growing environmental consciousness and institutional capability. As the country pursues its ambition to become a $10 trillion economy by 2030, maintaining balance between economic growth and environmental sustainability will define its success not only in achieving the Sustainable Development Goals but also in contributing to global climate action. The legal and policy frameworks established thus far provide a strong foundation, but their effective implementation will determine whether India’s vision of “One Earth, One Family, One Future” translates from aspiration to reality.

References

[1] Press Information Bureau, Government of India. (2023). Towards a Brighter Tomorrow: India’s G20 Presidency and the Dawn of a New Multilateralism. Available at: https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1980993 

[2] Invest India. (2023). India’s Presidency in G20 in 2023. Available at: https://www.investindia.gov.in/team-india-blogs/indias-presidency-g20-2023 

[3] Central Pollution Control Board. (n.d.). The Environment (Protection) Act, 1986. Available at: https://cpcb.nic.in/env-protection-act/ 

[4] iPleaders. (2022). MC Mehta vs. Union of India (1986): Case Analysis. Available at: https://blog.ipleaders.in/mc-mehta-vs-union-of-india-1986-case-analysis/ 

[5] Indian Kanoon. (1996). M.C. Mehta vs Union Of India & Ors on 11 October, 1996. Available at: https://indiankanoon.org/doc/1084083/ 

[6] Wikipedia. (2025). M. C. Mehta v. Union of India and Others. Available at: https://en.wikipedia.org/wiki/M._C._Mehta_v.Union_of_India%26_Ors. 

[7] Wikipedia. (2025). M. C. Mehta v. Kamal Nath. Available at: https://en.wikipedia.org/wiki/M._C._Mehta_v._Kamal_Nath 

[8] National Center for Biotechnology Information. (2010). India’s National Action Plan on Climate Change. Available at: https://pmc.ncbi.nlm.nih.gov/articles/PMC2822162/ 

[9] G20 India. (2023). G20-2023 New Delhi Update. Available at: https://www.g20.in/content/dam/gtwenty/gtwenty_new/document/G20-2023-New-Delhi-Update.pdf 

Published and Authorized by Rutvik Desai

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