For Indian businesses planning to expand overseas, understanding Overseas Direct Investment (ODI) rules is no longer optional. It is the foundation that ensures global expansion remains compliant, sustainable, and risk-free. In 2022, India replaced its nearly two-decade-old overseas investment framework with the Foreign Exchange Management (Overseas Investment) Rules, Regulations, and Directions. This modern regime continues to guide outbound investments in 2026, offering greater flexibility while demanding stricter reporting discipline.
The new framework aims to make overseas expansion easier for genuine businesses, while closing gaps that earlier led to misuse, delayed reporting, and regulatory uncertainty.
Key takeaways
- ODI vs OPI: ODI involves unlisted equity, control, or ≥10% in listed entities, while OPI is limited to listed securities below 10% with no control.
- Investment Limit: Overseas investment is allowed up to 400% of net worth under the Automatic Route; higher exposure needs RBI approval.
- Reporting Risk: Delays attract Late Submission Fees starting at ₹7,500, with transaction-based penalties applying in some cases.
- Individuals: Resident individuals investing under LRS (USD 250,000) can invest only in operating entities and not in financial services.
- Structure Rule: Investments leading to more than two layers of foreign subsidiaries are not permitted.
What is the Current Regulatory Framework for ODI?
India’s overseas investment regime operates through a unified three-part structure. Together, these instruments govern every stage of an overseas investment, from planning and execution to annual reporting and exit.
- Foreign Exchange Management (Overseas Investment) Rules, 2022
Issued by the Central Government, these rules lay down the basic legal framework.
- Foreign Exchange Management (Overseas Investment) Regulations, 2022
Issued by the Reserve Bank of India (RBI), these regulations provide operational clarity and compliance requirements.
- Foreign Exchange Management (Overseas Investment) Directions, 2022
These are instructions to Authorised Dealer (AD) banks on how transactions and reporting must be handled.
These FEMA rules 2022 superseded the FEMA 120/2004 notification and the 2015 property regulations entirely. The framework replaced the narrow ‘Joint Venture/Wholly Owned Subsidiary’ terminology with the broader ‘Foreign Entity’ concept, expanding investment flexibility.
ODI vs. OPI: How are They Classified?
| Parameter | Overseas Direct Investment (ODI) | Overseas Portfolio Investment (OPI) |
| Nature of Security | Unlisted equity (any %), Listed equity (≥10%) | Listed securities only (<10%) |
| Control Rights | Investment with control, regardless of percentage | No control rights permitted |
| Eligible Securities | Equity, loans, guarantees, other financial commitments | Listed equity/debt, units of AIFs/VCFs |
| Reporting Requirements | Comprehensive (Form FC, APR, etc.) | Simplified reporting obligations |
| Investment Routes | Automatic/Approval based on limits | Generally under Automatic Route |
What Qualifies as ODI?
The overseas direct investment regulations encompass four specific scenarios:
- Acquisition of any unlisted equity capital of a foreign entity
- Subscription to the Memorandum of Association (MoA) of a foreign entity
- Investment of 10% or more of the paid-up equity capital of a listed foreign entity
- Investment with control, even if holding is less than 10% in a listed entity
What Qualifies as OPI?
OPI operates under narrower parameters:
- Investment in foreign securities that does not fall under ODI
- Strictly for listed securities; unlisted debt or equity generally does not qualify as OPI
- OPI limits are distinct from ODI financial commitment limits
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Who Is Eligible to Invest Overseas?
Different entity types face distinct regulatory requirements, with corporate entities enjoying broader permissions than individuals.
Indian Entities (Companies, LLPs, Partnerships)
Corporate structures have the widest investment latitude:
- Eligible entities: Companies incorporated in India, Limited Liability Partnerships (LLP), and registered partnership firms
- Must have been in operation for at least 3 years (for FS sector investment exemptions) or meet general bona fide activity norms
Resident Individuals (LRS Route)
Individual investors face specific constraints:
- Individuals invest under the Liberalised Remittance Scheme (LRS)
- Investment limit: Up to USD 250,000 per financial year
- Restriction: Can only invest in an operating entity (no step-down subsidiaries allowed if the individual has control)
Registered Trusts and Societies
Specialised entities operate under niche regulations:
- Eligible if engaged in educational, hospital, or religious activities
- Investment must be in the same sector (e.g., a school trust investing in a school abroad)
- Often requires prior approval or specific governing body clearance
What Are the Routes for ODI Approval?
The RBI offers two distinct routes, with most compliant investments qualifying for the streamlined Automatic Route.
Pro Tip: Calculate your net worth percentage before initiating any ODI transaction. This single calculation determines whether you need RBI approval, potentially saving months of processing time.
The Automatic Route
This expedited pathway covers most standard investments:
- Does not require prior RBI permission
- Applicable for investments within the financial commitment limit (400% of net worth)
- Applicable for permissible sectors and bona fide business activities
The Approval Route
Specific scenarios trigger mandatory RBI oversight:
- Required for investments exceeding the 400% net worth limit
- Required for investments in strategic sectors (energy, natural resources) if the government notifies
- Required if the Indian entity is under investigation (NOC required from agencies)
How Is the Financial Commitment (FC) Limit Calculated?
The approval route determination hinges on precise financial commitment calculations. Understanding this 400% rule prevents accidental breaches that trigger costly regularisation processes.
The 400% Net Worth Rule
The mathematical framework governs all ODI decisions:
- Maximum FC = 400% of the Indian entity’s net worth
- Net worth is based on the last audited balance sheet (date not exceeding 18 months)
- Utilisation of subsidiary/holding company net worth is no longer permitted (a key change in 2022)
Components of Financial Commitment
Every element counts toward your regulatory ceiling:
- 100% of the amount of Equity investment
- 100% of the amount of the loan/Debt extended
- 100% of the amount of Corporate Guarantees issued
- 100% of the amount of Pledges/Charges created on assets
Did You Know?
A SaaS exporter with ₹1 crore net worth can commit up to ₹4 crores overseas (equity + loans + guarantees combined) under the Automatic Route.
Key Restrictions and Prohibited Sectors
Sectoral restrictions and structural limitations create additional boundaries that every investor must navigate carefully.
Prohibited Activities
Absolute bans apply regardless of investment size:
- Real Estate Business: Buying/selling land or property (development of townships is permitted)
- Gambling and Betting: Strictly prohibited in any form
- Financial Products: Dealing in financial products linked to the Indian Rupee (without RBI approval)
Financial Services and Startups
Conditional permissions create opportunities for qualified entities:
- Financial Services: Non-FS Indian entities can now invest in FS foreign entities if they have a 3-year profit track record
- Startups: ODI in foreign startups is allowed only from internal accruals (no borrowed funds)
The ‘Two-Layer’ Subsidiary Restriction
As per Rule 19(3), Indian entities cannot create overseas structures that result in more than two layers of subsidiaries. This rule is designed to prevent complex ownership chains and the round-tripping of funds. Certain wholly owned structures may be excluded, but only after careful legal review.
Funding, Pricing, and Valuation Rules
The 2022 regulations introduced flexibility in payment structures while maintaining strict oversight of pricing.
Pricing Guidelines
- Transactions must be at an ‘Arm’s Length Price’ (ALP)[
- Valuation must be done using internationally accepted pricing methodologies
- Authorised Dealer (AD) Banks are responsible for ensuring compliance with ALP
Deferred Payments and Funding Modes
Payment flexibility supports complex deals:
- Deferred Payment: Now permitted under the Automatic Route (previously required approval)
- Funding Sources: Drawal of foreign exchange, capitalisation of exports, swap of shares, or ECB (External Commercial Borrowings) proceeds
- Share Swaps: A popular non-cash funding mode for strategic mergers
Reporting Requirements and Compliance
Pricing compliance transitions into ongoing reporting obligations. The RBI’s May 2025 directive emphasised that entities with historic ODI reporting lapses must regularise them immediately or face restrictions on new investments.
| Report Type | Form Name | Due Date | Penalty for Delay |
| Initial Investment | Form FC | Within 30 days of transaction | ₹7,500 + (0.025% × Amount × Years) |
| Annual Status | APR | By December 31st each year | Flat ₹7,500 per return |
| Disinvestment | Form FC | Within 30 days of sale | Formula-based calculation |
| Restructuring | Form FC | Within 30 days of change | Varies by transaction size |
Form FC and UIN
Initial compliance starts with proper documentation:
- Form FC: Filed for making a financial commitment, restructuring, or disinvestment
- Timeline: Within 30 days of the transaction
- UIN (Unique Identification Number): Must be generated by the AD Bank before the first remittance
Annual Performance Report (APR)
Ongoing obligations continue throughout the investment lifecycle:
- Mandatory annual filing for every Joint Venture (JV) or Wholly Owned Subsidiary (WOS)
- Due Date: By December 31st each year
- Based on the audited financial statements of the foreign entity
Late Submission Fees (LSF)
The regularisation framework provides a controlled way to correct reporting delays without triggering full adjudication. A Late Submission Fee (LSF) applies, starting at ₹7,500 and increasing based on the transaction value and length of delay. The total fee is capped at the amount due, and the facility can be used only within 3 years of the original due date.
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Conclusion
The 2022 FEMA ODI regulations transformed India’s overseas investment landscape, offering unprecedented flexibility within a structured compliance framework. Success requires mastering the 400% net worth limit, navigating the two-layer restriction, and maintaining meticulous reporting discipline.
Businesses planning global expansion should engage their AD banks early, ensure past reporting lapses are regularised before new commitments, and leverage professional guidance for sector-specific nuances. The liberalised regime rewards compliant entities with streamlined approvals and broader investment opportunities.
FAQs
1. What is the difference between ODI and OPI under FEMA 2022 rules?
ODI (Overseas Direct Investment) refers to investments in unlisted equity or in listed equity with a 10% or more stake and control. OPI (Overseas Portfolio Investment) is strictly for investments in listed securities (less than 10%) without control rights.
2. How is the Late Submission Fee (LSF) calculated for delayed ODI reporting?
For transactional delays (like Form FC), the LSF is ₹7,500 + (0.025% × Amount × Years of Delay). For periodic reporting delays (like APR), the fee is a flat ₹7,500 per return.
3. Can resident individuals invest in foreign subsidiaries?
Yes, under the LRS route (up to USD 250,000/year), but the foreign entity must be engaged in bona fide operating activities and cannot be in the financial services sector.
4. Is RBI approval required for all overseas investments?
No, investments up to 400% of the Indian entity’s net worth generally fall under the Automatic Route, provided they are in permissible sectors and meet bona fide activity norms.
5. What is the ‘Two-Layer’ restriction in overseas investment?
The rule prohibits Indian entities from making a financial commitment to a foreign entity if it results in a structure with more than two layers of subsidiaries, primarily to curb round-tripping.
6. Can an Indian entity utilise its subsidiary’s net worth for the 400% limit?
No, the 2022 regulations discontinued the practice of utilising the net worth of subsidiary or holding companies; the limit is calculated solely on the investing entity’s net worth.
7. When must Form FC be filed for overseas investments?
Form FC must be submitted to the Authorised Dealer (AD) Bank within 30 days of making the financial commitment.
