Regulatory Compliance for FinTech Businesses in India: What Foreign Investors Should Know

Introduction – FinTech businesses in India

The Rapid Rise of FinTech in India

Over the last decade, India has witnessed an unprecedented surge in fintech business activities, with digital wallets, peer-to-peer lending, neobanking platforms, and insurtech solutions becoming integral to daily commerce. From QR-based retail payments to algorithmic investment apps, the landscape has matured beyond experimentation, attracting billions in domestic and foreign investment towards the Indian fintech sector.

This momentum, however, has also sharpened regulatory focus. Authorities are no longer passive observers; they now expect platforms to be structurally compliant from inception.

Investor Attention and Compliance Risk

For foreign investors, who will be evaluating fintech businesses in India, the scope of regulatory risk is markedly different than the traditional sectors. Investment terms are increasingly shaped not only by commercial performance, but also by the track record of the said business with:

RBI licensing;
Adherence to Foreign Exchange Management Act 1999, Foreign Direct Investment (FDI) regulations, and Securities and Exchange Board of India (SEBI) guidelines;
Data protection compliances, especially post the enactment of the Digital Personal Data Protection Act, 2023 (DPDPA);
Ongoing governance disclosures.

Failure to comply with such disclosures, obligations, and licences not only increases the risk of penalties and regulatory enforcement but can also delay funding rounds, derail acquisition timelines, and diminish enterprise value during exit negotiations.

Why Compliance Isn’t Optional Anymore

Historically, fintech businesses have operated with a certain regulatory ambiguity. However, in the current landscape, the regulators have begun issuing stricter notifications, enforcing heavy penalties, and even blacklisting the unregistered operators. Illustrative of this evolving approach are the caution letters issued by SEBI (Securities and Exchange Board of India) to advisory platforms and the Reserve Bank of India’s (RBI) assertive actions against unlicensed digital lenders.

Regulatory compliance in India is now being viewed not merely as a formality but as a strategic safeguard, especially for foreign investors navigating this exciting opportunity in India.

Key Regulatory Bodies Governing FinTech in India

Unlike other jurisdictions, there is no ‘one single’ regulator that exclusively governs the fintech space in India. Instead, there are different regulators governing different sectors, including financial, corporate, data, and investment regulators. For investors, this means that due diligence goes far beyond reading financial statements. It begins with figuring out, often through back-and-forth consultation, what regulatory permissions the business needs to operate legally.

Reserve Bank of India (RBI)

RBI remains the dominant authority when it comes to core fintech business models such as payments, lending, remittances, and any company offering wallet services or operating as a non-banking financial company (NBFC). If the company is involved in issuing prepaid instruments (PPIs), onboarding merchants, or enabling cross-border remittances, it will likely be governed under RBI’s Master Directions. That said, RBI’s approach is sector-agnostic; its primary focus remains financial stability and consumer protection, regardless of whether the company labels itself a “fintech” or not.

In recent years, RBI’s supervision over digital lending has intensified, especially post the issuance of its digital lending guidelines, which limit third-party balance sheet usage and mandate disclosure protocols between lenders and service providers.

Securities and Exchange Board of India (SEBI)

SEBI comes into the picture when the business model relates to securities, investments, or financial advice. This includes platforms that offer algorithmic trading, mutual fund distribution, investment tracking apps, or robo-advisory services. The moment any business offers “financial advice” in a structured way, SEBI registration as a Research Analyst or Investment Advisor becomes mandatory.

Several businesses have faced enforcement inquiries by SEBI, not necessarily because of bad faith, but because of the features that often overlook SEBI’s circulars and violate them. In early-stage companies, such enquiries happen more often than the investors would prefer.

Ministry of Electronics and Information Technology (MeitY)

Ministry of Electronics and Information Technology (MeitY) is not a financial regulator per se, but given that most of the fintech businesses collect and process personal data of their users, who are based in India, MeitY’s role in personal data compliance can’t be understated. Post the enactment of Digital Personal Data Protection Act, 2023, fintech businesses will need to restructure their model to align with data storage, consent requirements, notice requirements, withdrawal mechanisms and cross-border transfer protocols. The enforcement procedures under the Act are much severe than the erstwhile IT Act and Rules and the Data Protection Board of India (DPBI) has been conferred with regulatory powers including penalties running as high as INR 250 Crores.

Businesses need to rethink their data processing, collection, and storage strategies in order to establish compliance with the DPDPA obligations.

Ministry of Corporate Affairs (MCA)

The Ministry of Corporate Affairs governs critical aspects such as incorporation, board structure, beneficial ownership disclosures, and shareholder filings. A fintech business that hasn’t filed its DIR-3 KYC or filed MGT-7A might not trigger a problem immediately, but such a gap will show up during the due diligence process. Investors, especially venture capitalists with a governance focus, tend to walk away from such businesses that are not compliant with the MCA formalities.

DPIIT (Department for Promotion of Industry and Internal Trade)

For the businesses that raise overseas funds, the Department for Promotion of Industry and Internal Trade (DPIIT) governs their compliance with FDI rules under FEMA, and DPIIT registration is a precondition for certain benefits, including income tax exemptions under Section 80-IAC and fast-tracked IPR filings.

Another important consideration is that of the foreign shareholding thresholds, since certain business models, such as payment aggregators or NBFCs, have specific caps and sectoral entry conditions under the consolidated FDI policy. Such considerations are often neglected by businesses in their early-stage equity documents, especially SAFEs or convertible notes issued from abroad.

Legal Entity Setup and Registration Requirements

Foreign founders, VC firms, and international investors considering entry into India’s fintech framework must get one thing right from the start: the legal entity structure. From compliance obligations under the Companies Act to nuances of FEMA regulations, the choice of structure is not just a business formality; it’s a compliance foundation.

Private Limited Company vs LLP Structure

Businesses and startups evaluating their entity are often drawn to LLPs (Limited Liability Partnerships) because of easier compliance and fewer corporate formalities. However, when FDI is involved, LLPs can be tricky. While 100% FDI is allowed in LLPs under the automatic route in sectors where there are no FDI-linked performance conditions, most fintech operations (especially NBFCs, wallets, lending apps) fall under sectors that require additional approvals or compliance.

By contrast, a private limited company remains the preferred structure for:

Access to institutional funding from foreign VCs or PEs.
Easy equity dilution, ESOP implementation, and convertible instruments.
Better acceptance among regulators for license applications (RBI, SEBI, etc.).

Here’s a comparative summary:

Legal Entity	Foreign Ownership Allowed	Startup India Recognition	Preferred by Investors
Private Limited Company	100% under automatic route in most sectors	Yes	Yes
LLP	Conditional under FDI-linked sectoral norms	Yes (in some cases)	Limited

FEMA Considerations for Foreign Capital Entry

The flow of FDI into Indian entities is governed by the Foreign Exchange Management Act, 1999, and regulated by the Reserve Bank of India. All inward remittances towards equity capital must adhere to:

Sectoral caps and entry conditions under the Consolidated FDI Policy.
Pricing guidelines for share issuance (valuation reports mandatory).
Reporting requirements via the FIRMS portal, such as FC-GPR and FLA forms.

Non-compliance may trigger penalties under FEMA and complicate future investment rounds or exits.

Wholly Owned Subsidiaries (WOS) in India

For overseas fintech groups, a WOS can be set up in India by subscribing to 100% of the share capital via inward remittance. This form is especially common for:

Setting up a product development or tech backend in India.
Operating regulated fintech services locally under Indian licenses.
Using India as a cost-effective base for APAC expansion.

But WOSs come with full compliance under the Companies Act, FEMA, and sectoral laws, which means foreign parent companies need experienced counsel to handle early-stage structuring.

Startup India and DPIIT Recognition

While not mandatory, recognition under the Startup India scheme offers significant advantages such as:

Income tax exemption under Section 80-IAC.
Fast-tracked IPR application processing.
Access to government procurement portals and credit schemes.

DPIIT recognition also acts as a signal of formalization when dealing with financial institutions, especially in early-stage product partnerships.

RBI Licensing Framework for FinTech Businesses

When building a regulated fintech model, wallet, NBFC, payments, or lending, the single most critical approval is often from the Reserve Bank of India. A company’s RBI compliance for fintech not only affects launch timelines but also determines investor confidence. And for foreign capital, regulatory visibility is a deal-maker or breaker.

Prepaid Payment Instruments (PPI) Licensing

If the startup operates a wallet, gift card, or stored-value app, it must be licensed as a PPI issuer under RBI’s Master Direction on PPIs. The application process requires:

Minimum paid-up capital of ₹5 crore.
Net worth threshold of ₹15 crore (to be achieved within 3 years).
Physical presence in India with designated compliance personnel.
A full KYC process and escrow account for user funds.

PPI licensees are required to submit periodic reports and undergo system audits. Cross-border PPIs are subject to additional scrutiny.

NBFC Registration for Lending Startups

For startups engaging in peer-to-peer lending, BNPL, or embedded credit, RBI’s NBFC framework applies. If the company is lending off its balance sheet, it must:

Register as an NBFC under Section 45-IA of the RBI Act.
Maintain minimum net owned funds of ₹2 crore.
Follow prudential norms, such as capital adequacy, provisioning, and asset classification.
Submit periodic returns via COSMOS.

Alternatively, startups may partner with an existing NBFC as a service provider. But even that route now falls under RBI’s Digital Lending Guidelines, which mandate transparency, direct disbursement from lender to borrower, and data protection norms.

Participation in Regulatory Sandboxes

RBI’s Innovation Hub and Regulatory Sandbox offer startups the ability to test products in a live environment without immediate full-scale compliance. For high-tech models, such as programmable wallets, blockchain settlements, or tokenized payments, sandbox access provides:

Controlled launch with a limited user base.
Direct feedback from the RBI and peer regulators.
Ability to validate regulatory models before license application.

The sandbox, however, is not a commercial launchpad. Participants must exit the sandbox and obtain formal approval for full operations post-testing.

Cross-Border Remittance Permissions

Fintech businesses dealing with inward or outward remittances, especially in B2B platforms or overseas payment collections, need to consider the Foreign Exchange Management (Remittance of Assets) Regulations, along with the RBI’s Master Direction on Payment Services. Depending on the model, licenses may be needed under:

Money Transfer Service Scheme (MTSS).
Authorised Dealer Category-II framework.
Online Payment Gateway Service Provider (OPGSP) route.

Compliance with the Liberalized Remittance Scheme (LRS) caps and transaction monitoring is mandatory for every business model.

FEMA and FDI Compliance for Foreign Investors

India’s liberalized foreign investment environment has made it increasingly attractive for overseas funds to back fintech businesses based locally. However, while the FDI policy in India permits capital inflows under the automatic route in many sectors, fintech players, especially those dealing with regulated services like lending, insurance tech, or payments, face a layered regulatory framework. Non-compliance with FEMA regulations can result in serious enforcement issues and block future exits.

Sectoral Cap for FinTech under FEMA

Most technology-based fintech platforms, such as marketplaces, analytics platforms, and SaaS-based solutions, are not subject to FDI-linked performance conditions. In such cases, 100% FDI under the automatic route is permitted.

However, once the business model moves into regulated financial services, the following sectoral limits apply:

Activity	Sectoral Cap	Entry Route
Non-Banking Financial Company (NBFC)	100%	Automatic
Insurance Intermediary	100%	Automatic
Payment Systems (PPI / UPI / Bharat BillPay etc.)	100%	Government route (in some cases)
Core Insurance Business	74%	Automatic (up to 74%)
Credit Information Companies	100%	Government route

It’s worth noting that many fintech businesses use hybrid models, combining software + regulated activities, which triggers layered FDI structuring, especially if there’s a downstream investment into an NBFC.

Automatic vs Government Route

If the foreign investor belongs to countries sharing land borders with India (e.g., China), or if the activity involves sensitive data or payments infrastructure, the investment may require government approval. Such approvals may be required for:

Change in ownership control from Indian to non-resident;
Investment in an Indian company operating critical digital infrastructure;
Repatriation of returns and dividends to foreign countries.

Downstream Investment Rules for Foreign VC/PE Funds

If the Indian entity receiving FDI invests further into another Indian company, especially a regulated NBFC or fintech infrastructure provider, it triggers downstream investment compliances. According to the Press Note 3 and FEMA (Non-Debt Instruments) Rules:

The second-tier investee company is treated as “indirectly foreign-owned”;
It must comply with the same sectoral cap and entry route as the original investor.
Board resolutions, disclosure of ultimate beneficial ownership (UBO), and audit certificates are required.

FC-GPR, FLA Filings, and Shareholding Declarations

Once foreign capital comes in, businesses or startups must comply with mandatory filings under the RBI’s FIRMS portal:

FC-GPR (Foreign Currency-Gross Provisional Return): Must be filed within 30 days of share allotment.
FLA (Foreign Liabilities and Assets): Annual return disclosing foreign liabilities, due by July 15 each year.
Board resolutions approving allotment and CS/CA certification for valuation are required.

Delays in reporting such mandatory filings will attract penalties under FEMA and may be questioned by future investors during diligence stages.

Risks of Non-Compliance for Investor Exits

The compliance burden under FEMA should never be taken lightly. Common risks for businesses include:

Invalid allotment of shares, causing dilution issues during exits.
Regulatory scrutiny at the time of foreign remittance of proceeds;
Invalidation of ESOP pools or CCD terms linked to non-compliant pricing;
Delay in IPO due to retrospective enforcement notices.

Advisory Tip: Always prepare a ‘FEMA Compliance Checklist’ before raising any kind of funds for the businesses. This simple checklist would avoid any legal hurdles or red flags during due diligence rounds.

Data Protection and Cybersecurity Obligations (DPDPA 2023)

With the Digital Personal Data Protection Act, 2023 (“DPDPA”) now enacted, the fintech platforms in India must relook at their data practices. Since most fintech businesses involve the collection of personal and financial data, non-compliance with DPDPA may not only attract severe financial penalties but also can lead to reputational damage along with operational and regulatory liabilities.

Application of DPDPA to FinTech Platforms

Every fintech platform collecting personal data of Indian citizens is considered a Data Fiduciary under the Act. This includes:

Lending apps are collecting PAN, Aadhaar, and bank statements.
Wallets and payment aggregators collecting KYC;
Insurtechs managing health profiles and risk data;
BNPL players are integrating credit scoring.

Foreign fintech players collecting the personal data of Indian residents via a WOS or a branch office, or even if they don’t have any office in India, must also comply, even if their servers are based abroad.

Cross-Border Data Transfer Concerns for Foreign Companies

One of the important areas of concern is the cross-border transfer of personal data. Under DPDPA:

Transfers are allowed to the jurisdictions except those that will be notified by the Central Government.
Sectoral regulators such as the BI, IRDAI, SEBI, Ministry of Health may impose their own localisation rules. Such rules shall prevail independently and may coexist with the obligations under the DPDP Act.
‘Purpose limitation’ and user consent are mandatory before any kind of data transfer.

Tip: Before onboarding any foreign-based analytics or cloud vendor, check if India has notified that jurisdiction as permissible for transfer or not.

Consent, Purpose Limitation, and Grievance Redressal

Under Section 6 of the Act, valid user consent must be obtained, which shall be:

Free, informed, specific, unambiguous, and capable of being withdrawn;
Obtained via clear notice, specifying the reasons and nature of data being collected, Rights of the users, and grievance redressal mechanism;
Logged and auditable for future verification.

Each fintech platform must have a readily available means of grievance redressal for its users and must publish the period under its grievance redressal system for responding to the grievances.

Digital Infrastructure and Cybersecurity Obligations

Every fintech platform must ensure that they have :

End-to-end encryption of sensitive data;
Data retention policies aligned with business needs;
Incident response and breach reporting protocols.

In case of a data breach involving more than 5,000 users, the platform must notify the Data Protection Board and affected individuals.

Classification as Significant Data Fiduciary

Businesses may be designated as Significant Data Fiduciaries (SDFs) by the government based on:

Volume and sensitivity of data processed;
Risk to the rights and freedoms of individuals;
Impact on electoral democracy, sovereignty, or national security;
Use of emerging technologies such as AI/ML for large-scale profiling;
Other factors as the central government, may be considered necessary.

SDFs have higher compliance obligations, like appointing a Data Protection Officer (DPO), periodic impact assessments, and third-party audits.

Taxation, Reporting, and KYC/AML Compliance

The fintech regulatory framework in India expects every business, including an early-stage company, to maintain a high degree of fiscal transparency and governance. Non-compliance with tax, reporting, or KYC requirements often comes with penalties and regulatory hurdles, which would derail investor confidence and increase legal hurdles for operating in India.

GST, TDS, and Income Tax Obligations

For the businesses operating their services in India, including but not limited to SaaS, subscription-based models, or digital financial services, the following apply:

GST registration is mandatory if turnover crosses ₹20 lakh (₹10 lakh in special category states). For inter-state transactions or online services, registration is required irrespective of turnover.
Fintechs providing intermediary services (e.g., payment facilitation, wallet top-up) must charge 18% GST on commissions or platform fees.
TDS under Section 194-O may apply if the platform facilitates payments to vendors or third parties.
Income tax under the presumptive or regular scheme, and advance tax payments are applicable once profits arise.

Missing these would lead to GST notices, reversal of ITC, or denial of vendor reimbursements.

KYC Norms under RBI Master Directions

For regulated fintechs in India, KYC norms are mandated under RBI’s (Know Your Customer) Directions issued in 2016 (updated frequently). Key requirements include:

Customer onboarding via Aadhaar, PAN, or Passport-based identification;
Periodic KYC updates for long-term customers;
Central KYC Registry (CKYC) uploads for financial product users;
Maintenance of audit trail and secure digital storage of KYC.

Anti-Money Laundering Compliance and Reporting Under PMLA

The Prevention of Money Laundering Act (PMLA), 2002, applies to regulated entities, including but not limited to:

NBFCs
Payment aggregators (e.g., Razorpay, PayU)
Prepaid wallet issuers
Credit bureaus

Such entities must implement an Anti-Money Laundering (AML) framework, which includes:

Appointment of Principal Officer;
Suspicious Transaction Reports (STR) filing with the Financial Intelligence Unit-India (FIU-IND);
Maintaining transaction records for 5 years.
Screening of customers against sanctions lists (UNSC, SEBI, RBI).

Startups or businesses collaborating with these regulated entities may also receive a contractual flow-down of AML obligations.

Compliance Area	Requirement	Applicability
GST	Registration, Invoicing, ITC Matching	SaaS, Platform Models, Lending Apps
TDS	Section 194-O on Commission/Marketplace Payments	Payment Aggregators, Wallets
KYC	Aadhaar/PAN Identification, CKYC Uploads	Lending/Investment/Insurance Startups
AML	STR Reporting, Principal Officer, Screening Tools	NBFCs, PPI Issuers, Wallets

Failure to establish clear compliance roles (e.g., finance vs legal vs operations) causes procedural delays, especially during diligence or investor audits.

Exit Strategies, IP, and Investor Protection

The long-term success and exit potential of a fintech entity are significantly influenced by the strength of its legal and regulatory compliance framework. For such ventures, particularly those attracting foreign investment, exit planning requires meticulous attention to due diligence processes, robust intellectual property protection, and alignment with investor rights and expectations.

How Compliance Shapes Exit Value

The valuation and likelihood of a closure significantly depend on how well the startup has complied with:

RBI and FEMA filings (e.g., FC-GPR, FLA, downstream investment);
Data privacy and DPDPA readiness;
Legal contracts (ESOPs, vendor lock-ins, indemnity clauses); and
Financial audits and past tax assessments.

During exit diligence, even a single inconsistency may lead to a value haircut.

IP Protection: Assignment and Transfer Mechanisms

A common concern for most investors is the lack of a proper IP transfer from founders or tech contractors. The businesses should note that:

Merely developing a codebase doesn’t transfer IP; a well-drafted IP Assignment Deed is necessary.
In cases of employee-developed IP, the employment agreement must explicitly mention IP vesting.
Businesses should use “work-for-hire” clauses with freelancers or development agencies.
Founders must execute backdated deeds if creation happened before incorporation.

Failing these, an IP right may legally belong to individuals, not the business. This might trigger investor pushback or warranty claims in the share purchase agreement (SPA) or share subscription agreements (SSA).

Enforceability of Shareholder Rights in India

Another area of concern for foreign funds investing in Indian fintechs is whether contractual rights are enforceable. The following are generally valid under Indian law:

Tag-along / drag-along clauses (if structured properly);
Reserved matters requiring investor consent;
Affirmative voting rights;
Pre-emptive rights on new issuance.

However, courts may not enforce clauses that resemble ‘put options’ or ‘assured returns’, unless they are specifically compliant with RBI/FEMA guidelines. Diligence teams routinely scan the clauses to filter out potential enforcement risk.

Due Diligence as the Final Filter

From the investor’s perspective, due diligence is often the final step that shapes:

Whether to proceed with the investment.
Whether price adjustments are needed.
Whether indemnity and escrow clauses should be added.

Hence, the startups or businesses must maintain:

A Cap table hygiene and ESOP register;
Board meeting records and ROC filings;
Legal dockets of executed agreements (vendor, IP, founder, investor);
Copies of filings with regulators (RBI, SEBI, GST).

A strong compliance culture here doesn’t just reduce diligence timelines, it makes the business more trustworthy in international corridors.

Red Flags for International Investors to Watch Out For

Investing in the fintech environment in India requires not just optimism about growth, but also a deliberate reading of risk signals. International investors, especially first-time entrants to the Indian market, must develop a checklist for certain legal and compliance blind spots that can derail valuation, delay exit, or expose them to regulatory investigation.

Regulatory Arbitrage and “Grey Zone” Business Models

Many emerging fintechs operate in what’s commonly called “regulatory whitespace”, zones where no clear license exists, or where such businesses assume that indirect partnerships offer enough insulation. But from a compliance standpoint, these practices are vulnerable and risky. Examples of such practices include:

Lending without an NBFC license via FLDG (first-loss default guarantee) partnerships with NBFCs, which are heavily scrutinized by the RBI.
Investment advisory platforms operating without SEBI RIA/RA registration, while collecting platform fees, often face penalties and inquiries from SEBI.
Insurance comparison platforms collecting premiums but lacking an IRDAI broker license again face risks and penalties, including suspension by IRDAI.

While these models may appear easy to scale, the business risk, becoming liable if regulators hold the fund complicit in the facilitation of such services.

Unlicensed Lending and Embedded Credit Models

Businesses and startups offering BNPL (Buy Now Pay Later), credit lines, or EMI-based products often hide their real role under “aggregator” models. But RBI circulars (2022 and 2023) have cracked down on:

Prepaid wallets loading via credit card;
Lending apps with no NBFC partner but issuing credit via UPI;
White-labeled NBFC partnerships without disclosed service level agreements.

Investors should ask for:

NBFC registration or official tie-ups;
RBI correspondence confirming model acceptability;
Underwriting/credit risk assumption structure.

This is especially critical where the business claims a “co-lending” or FLDG model, since the RBI has clarified that FLDGs are now restricted.

Incomplete DPDPA or FEMA Compliance

With the Digital Personal Data Protection Act, 2023 (DPDPA) implemented, and FEMA (Foreign Exchange Management Act) being the backbone of India’s FDI policy, any lapses or violations here can be fatal. Some of the lapses which the businesses might make include:

Many businesses are yet to classify user data into personal, sensitive, or exempt categories as per DPDPA.
Consent capture mechanisms may not be “purpose-specific” or “free”, especially when bundled with offers.
FEMA filings such as FC-GPR (post allotment to foreign investor), FLA annual filings, or downstream investment intimation are often missed.

Foreign investors must confirm these filings are in place. Otherwise, regulatory actions or compounding penalties could hit both the business and the investor.

MCA Defaults, Pending Compounding or Non-Compliance

Even a minor default with the Ministry of Corporate Affairs (MCA) obligations can transform into a legal red flag. Common examples include:

Non-filing of MGT-7 (annual return) or AOC-4 (financials).
Incomplete share transfer records or delay in SH-4 filings.
Pending compounding applications for past FEMA or Companies Act breaches.

Foreign investors should insist on:

Condonation/Compounding orders (if any) are being made available.
Updated MCA filings from the last 3 financial years;
Board resolutions authorizing FDI receipt, if not previously passed.

Red Flag Category	Investor Risk if Unchecked	Recommended Document for Verification
Regulatory Grey Zone	Potential regulatory action, shutdown	Licensing letters, SLA copies, model notes
Unlicensed Lending	RBI penal action, product ban	NBFC tie-up agreement, RBI communications
DPDPA Non-Compliance	Fines under DPDPA, class action	Privacy Policy, Consent Flow screenshots
FEMA Filing Miss	Compounding, FDI violation	FC-GPR, FLA, Board Resolutions
MCA Defaults	Share transfer issues, disqualification of directors	MGT-7, AOC-4, Compounding Orders

Sample FinTech businesses in India Checklist for Investors

When evaluating a fintech business in India, especially one seeking international capital, investors would be well advised not to treat compliance as a back-office function that can be handled once the funding is made. In reality, much of the business’s long-term viability, credibility with regulators, and exit potential rests on how well its statutory obligations have been understood and executed. This section outlines a baseline checklist that institutional and foreign investors typically should look for, especially in sectors governed by the RBI, SEBI, IRDAI, and now increasingly under India’s data protection and FEMA regimes.

Licensing Status and Regulatory Alignment

Before any investment discussion progresses beyond a term sheet, most investors should ask for proof that the business is either:

Already licensed for the activity it claims to conduct (e.g., NBFC registration if lending is involved), or
Not required to hold a license due to its current model (e.g., acting as a technology platform with licensed partners).

After getting clarity on the above-mentioned points, the investors should document the evidence. The following documents should be generally requested:

Copies of RBI/SEBI/IRDAI licenses, wherever applicable;
Board resolution authorizing the application or receipt of the license;
SLAs with regulated partners (in case of aggregator models);
Email confirmations or letters of acknowledgment from regulators (where direct licenses are not issued).

Tax Discipline and Financial Track Record

While early-stage businesses may not be profitable, they are expected to follow basic tax discipline. A business that might have never filed GST returns or has unpaid TDS dues will send up red flags.

Investors should usually check for such compliance:

Are monthly GST filings up to date and accurate?
Have TDS filings (26Q, 24Q) been submitted on time?
Is there a statutory auditor in place, and are audited financials available for at least the last two years?
Are there pending income tax assessments or notices?

Data Privacy and Information Security Posture

After the DPDP Act was passed in India, the data protection regime has moved from being an IT issue to a mandatory compliance requirement. The Investors should often ask for the following:

Does the company have a written and publicly disclosed privacy policy, and is it specific to the actual data being collected?
Has user consent been collected in a form that satisfies lawful processing standards?
Is there any record of past data breaches or data subject complaints?
Have any cybersecurity audits or penetration tests been conducted?

Many businesses copy-paste privacy policies from templates, but any investor willing to invest their time and capital in the business will scrutinize such policies and consider it a red flag. If the privacy document does not match the actual business logic, another point of concern would be raised.

Foreign Investment (FEMA) Readiness

Where the investor is not based in India, or where previous rounds involved offshore capital, the regulatory compliance around foreign investments becomes pivotal.

In most cases, the investors should ask for:

Copies of FC-GPR acknowledgements for every foreign allotment;
Proof of FLA filings for each financial year after receipt of foreign investment;
Copy of the Shareholders’ Agreement and Articles showing FDI-compliant rights;
Any RBI clarifications or compounding orders, if delays or errors occurred.

Failure to file FC-GPR within 30 days of share allotment is an operational breach that many businesses miss in their early operation period, only to realize it after such a violation is taken up during due diligence.

Ongoing or Historical Litigation

Even if the business is compliant with every regulatory obligation, any pending litigation or regulatory investigation can be flagged while conducting due diligence. It is important to maintain an internal litigation tracker, irrespective of the matter of the case.

The Investors should request such details:

List of all ongoing legal disputes, including but not limited to: civil, criminal, commercial, regulatory, employment, Intellectual Property, Taxation, etc.
Copies of notices or summons received;
Details of any cybercrime, consumer court, or data breach-related actions;
Internal risk assessments of probable financial impact, if any.

The businesses should proactively disclose litigation matters, even if minor, as late discovery might cause a loss of trust.

Summary: FinTech businesses in India

Category	Typical Documents Requested
Licensing	RBI/SEBI/IRDAI certificates, Board Resolutions, SLAs
Tax Filings	GST returns, TDS filings, Statutory Audit Reports
Data Protection	Privacy Policy, Consent Screens, DPDPA compliance notes
FEMA/FDI	FC-GPR filings, FLA returns, SHA extracts, RBI letters
Litigation Disclosure	Case summaries, Legal notices, Risk memos

Conclusion – FinTech businesses in India

For the foreign investors, it is tempting to view the Indian fintech industry as a land of first-mover advantage, but that advantage only converts when the legal, regulatory, and operational foundation is right. These investors no longer look at pitch decks, burn rates, and revenue multiples; instead, what matters as much, if not more, is whether the business has pre-emptively addressed the regulatory and legal terrain.

Aligning Investment Strategy With Compliance Culture

Investors should engage early with the business’s compliance and legal team or external counsel. Key touchpoints should include:

Regulatory roadmaps: Has the business mapped all applicable licenses and approvals?
Document hygiene: Whether all the applicable documents, such as ESOPs, IP assignments, and data policies are documented and enforceable?
Tax and financial discipline: Whether the taxation and financial filings, such as GST, TDS, and ROC are updated?

Importance of Structuring From Day Zero

A few practices that will help the investors mitigate exposure from early on include:

Insisting on a board seat or observer rights to monitor compliance:
Making regulatory approvals a CP (condition precedent) to investment:
Demanding indemnity for past non-compliances and escrow for serious unresolved risks:
Pushing for periodic legal audits and the sharing of updated compliance trackers:

Such steps would not only protect the investor legally, but would also help to mature the business’s internal discipline.

Recommendations for Investor Legal Teams

For legal teams representing foreign investors, the following steps are advisable:

Prepare a fintech-specific diligence checklist with RBI, FEMA, DPDPA, and MCA items.
Review all past compounding or notices (including GST, TDS, RBI show-cause);
Obtain founder warranties on IP, data, compliance, regulatory, as well as litigation matters;

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Corrida Legal is a boutique corporate & employment law firm serving as a strategic partner to businesses by helping them navigate transactions, fundraising-investor readiness, operational contracts, workforce management, data privacy, and disputes. The firm provides specialized and end-to-end corporate & employment law solutions, thereby eliminating the need for multiple law firm engagements. We are actively working on transactional drafting & advisory, operational & employment-related contracts, POSH, HR & data privacy-related compliances and audits, India-entry strategy & incorporation, statutory and labour law-related licenses, and registrations, and we defend our clients before all Indian courts to ensure seamless operations.

We keep our client’s future-ready by ensuring compliance with the upcoming Indian Labour codes on Wages, Industrial Relations, Social Security, Occupational Safety, Health, and Working Conditions – and the Digital Personal Data Protection Act, 2023. With offices across India including Gurgaon, Mumbai and Delhi coupled with global partnerships with international law firms in Dubai, Singapore, the United Kingdom, and the USA, we are the preferred law firm for India entry and international business setups. Reach out to us on LinkedIn or contact us at contact@corridalegal.com/+91-9211410147 in case you require any legal assistance. Visit our publications page for detailed articles on contemporary legal issues and updates.