In keeping with the spirit of liberalisation and to promote ease of doing business, the Central Government and the Reserve Bank of India have been progressively simplifying the procedures and rationalising the rules and regulations under the Foreign Exchange Management Act, 1999.1

Consequently, the Government of India, Ministry of Finance (Department of Economic Affairs) on 22nd August 2022 notified the Foreign Exchange Management (Overseas Investment) Rules, 2022 ("OI Rules 2022"), the Foreign Exchange Management (Overseas Investment) Regulations, 2022 ("OI Regulations 2022") and the Foreign Exchange Management (Overseas Investment) Directions, 2022 ("OI Directions 2022". The OI Rules, OI Regulations and the OI Directions are together referred as "New OI Regime"). The New OI Regime supersedes the earlier framework in relation to overseas investments and acquisition of immovable property governed by the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations 2015 ("Erstwhile OI Regime").


Some of the key changes brought about under the New OI Regime are:

1. Definition of Foreign entity and Strategic Sector

The OI Rules 2022 replaces the term 'Joint Venture' ("JV") and a 'Wholly Owned Subsidiary' ("WOS") provided in the Erstwhile OI Regime with the concept of 'Foreign Entity2.

"Foreign Entity" is defined as an entity formed or registered or incorporated outside India, including in International Financial Services Centre ("IFSC") in India, that has limited liability. However, the OI Rules 2022 provides that the restriction on limited liability entity would not be applicable to entities with core activity in any strategic sector3.

"Strategic Sector" is defined to includes energy and natural resources sectors (such as oil, gas, coal, mineral ores, submarine cable system and start-ups and any other sector or sub-sector as deemed necessary by the Central Government4.

Comments: A "Foreign Entity" is an entity formed or registered or incorporated outside India and includes those entities incorporated in an IFSC. The restrictions of limited liability structure of Foreign Entity are not mandatory for entities in strategic sector and overseas investment in such sectors can therefore be made in unincorporated entities as well.

2. Components of Overseas Investments

"Overseas Investment" or "OI" has been defined to include both Overseas Direct Investment ("ODI") and Overseas Portfolio Investment ("OPI").5

The OI Rules defines "Overseas Direct Investment" or "ODI"6 to mean (a) acquisition of any unlisted equity capital or subscription as a part of the memorandum of association of a foreign entity, or (b) investment in 10% or more of the paid-up equity capital of a listed foreign entity, or (c) investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity, the investment shall continue to be treated as ODI even if such investment falls below 10% of the paid-up equity capital or the investor loses control in the foreign entity.

Overseas Portfolio Investment or "OPI" is defined to mean any overseas investment which is not ODI, other than investment in any unlisted debt instruments (such as Government bonds, corporate bonds, all tranches of securitization structure which are not equity tranche) or any security issued by a person resident in India who is not in an IFSC. However, OPI shall not be made in (i) any unlisted debt instruments; (ii) any securities issued by a person resident in India who is not in an IFSC; (iii) any derivatives unless otherwise permitted by Reserve Bank; or (iv) commodities including Bullion Depository Receipts (BDRs)7.

A listed Indian company may make OPI, including by way of reinvestment, in accordance with Schedule II of the OI Rules 2022. An unlisted Indian entity may make OPI in accordance with Schedule II of the OI Rules 2022. Resident individuals may make OPI within the overall limit for Liberalised Remittance Scheme (LRS) in terms of Schedule III of the OI Rules 20228.

The total financial commitment of an Indian entity under ODI is capped at 400% of such Indian entity's net worth as on the date of the last audited balance sheet. An Indian entity may make investment by way of not exceeding 50% of its net worth as on the date of its last audited balance sheet.

The OI Rules streamlines the distinction between ODI and OPI. Now a listed Indian company can invest in listed debt instrument.

3. Definition of Control

The OI Rules defines "control" to mean the right to appoint majority of the directors or to control management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders' agreements or voting agreements that entitle them to 10% or more of voting rights or in any other manner in the entity.

Comments: The definition provides that in addition to the right to appoint majority of the directors to control management or policy decisions where the shareholding is less than 10%, even a mere 10% shareholding will amount to control under the New OI Regime.

4. Pricing Guidelines

Under the New OI Regime and pricing guidelines have now been introduced. The issue or transfer of equity capital of a foreign entity (i) from a person resident outside India or a person resident in India to a person resident in India who is eligible to make such investment or (ii) from a person resident in India to a person resident outside India is now required to be made at a price arrived on an arm's length basis after taking into consideration the valuation as per any internationally accepted pricing methodology for valuation9. Such pricing guidelines did not exist under the previous regime.

7. ODI in Start-ups

ODI in start-ups can only be made from internal accruals from the Indian entity or group or associate companies in India and in case of resident individuals, from own funds of such an individual10. Before facilitating a transaction, the AD Bank is required to obtain a certificate in this regard from the statutory auditors/chartered accountant of the Indian entity/investor11.

8. Round Tripping Structure

The New ODI Regime provides that a person resident in India is now permitted to invest in a foreign entity that has invested or invests into India, directly or indirectly, up to 2 layers of subsidiaries. The layer restriction does not apply to banks, systemically important NBFCs, insurance companies and government companies12. Accordingly, RBI approval would not be required for as long as such structures or companies do not have more than 2 layers of subsidiaries.

9. ODI in financial services

The New OI Rules 2022, provides that an Indian entity engaged in financial services activity in India may make ODI in a foreign entity, which is directly or indirectly engaged in financial services activity, subject to the conditions that: (i) the Indian entity has posted net profits during the preceding three financial years; (ii) the Indian entity is registered with or regulated by a "financial services regulator" in India, (iii) the Indian entity has obtained approval as may be required from the regulators of such financial services activity, both in India and the host country or host jurisdiction, as the case may be, for engaging in such financial services13. The position for ODI by an Indian entity in the financial services activity has not changed and remains the same as per the Erstwhile OI Regime. However, the New OI Regime clarifies the definition of "financial service regulator" to include the Securities Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority, Pension Fund Regulatory and Development Authority.

9. Acquisition of immovable property outside India

An Indian resident may acquire immovable property outside India from a person resident outside the country (i) by way of inheritance, (ii) purchase out of foreign exchange held in RFC account; (iii) purchase out of the remittances sent under the Liberalised Remittance Scheme instituted by RBI; (iv) jointly with a relative; (v) out of the income or sale proceeds of the assets, other than ODI14. In addition, An Indian entity having an overseas office may acquire immovable property outside India for the business and residential purposes of its staff15. This is a liberalized provision as now there is no restriction on outflow of funds from India.


The New ODI Regime brings in host of changes that would impact merger and acquisition decisions of Indian residents, corporate entities and start-ups and enabled easier expansion of their business in other countries. The streamlining and positive changes of the existing framework for overseas investment will enhance ease of doing business and encourage overseas investment opportunities for Indian entities and individuals.


1 OI Directions 2022, page 1.

2 OI Directions 2022, page 4.

3 Rule 2(h)

4 Rule 2(z)

5 Rule 2 (r)

6 Rule 2(q)

7 OI Direction 2022, Page 5

8 OI Direction 2022, Page 6

9 Rule 16

10 Rule 19(2)

11 Direction 9, of the OI Directions 2022

12 Rule 19(3)

13 Schedule 1 Rule 2 (1)

14 Rule 21(2) (ii)

15 Rule 21(2) (iii)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.