The Government of India, in cooperation with the Reserve Bank of India, among others, has been gradually reworking and liberalising the foreign exchange regime in India with the purpose of enhancing the "ease of doing business" and simplifying/liberalizing the investment environment. In light of the aforementioned, the RBI issued the Foreign Exchange Management (Overseas Investment) Regulations, 2022, and Foreign Exchange Management (Overseas Investment) Directions, 2022, and the Government of India issued the Foreign Exchange Management (Overseas Investment) Rules, 2022, via Notification No. G.S.R 646(E), dated August 22, 2022.

Even if it is less than 10%, with or without control, equity investment by resident individuals or companies in an unlisted foreign firm will be regarded as ODI. An individual would have to follow ODI compliances in order to make an ODI investment. These include submitting the recently released Form FC and submitting the Annual Performance Report (APR) on a yearly basis in the Form APR.

Before making the investment, Form FC must be sent to Authorized Dealer Bank (AD Bank). It includes information about the investor, a foreign entity, investments, and so forth. Each year, on or before December 31st, AD Bank must receive Form APR, which provides the financial information of a foreign firm.

Certain key changes introduced by OI Regime:

  • Definition of Foreign Entity: The term "foreign entity" has taken the place of the JV/WoS concept under the former overseas direct investment regime. This term refers to any entity created, registered, or incorporated outside of India, including International Financial Services Centers with limited liability. A foreign entity that focuses on strategic industries including oil, gas, coal, mineral ores, submarine cable systems, start-ups, or any other industry the Central Government deems necessary is exempt from the limited liability rule. The OI Regime has specifically added the criteria of "limited liability" to guarantee that the obligation of the Indian party is clear, identifiable, and limited, even though the notion is identical to the previous definitions of JV/WoS.
  • Overseas Direct Investment and Overseas Portfolio Investment: By including a precise and distinct definition of an overseas portfolio investment, the long-standing ambiguity between a portfolio investment and an ODI by an Indian party has been cleared up. OPI refers to any foreign investment that is not an ODI, except investments in unlisted debt instruments and securities issued by Indian residents who are not located in an IFSC. Only listed businesses were allowed to make portfolio investments under the previous ODI Regime. Unlisted Indian enterprises, local people, mutual funds, alternative investment funds, and venture capital funds are now part of the investor universe.
  • Control: The OI Regime has defined "control" as the ability to select a majority of the directors, to direct management, to make policy decisions, whether acting alone or jointly, directly or indirectly, including by virtue of their ownership or management rights, shareholders' agreements or voting agreements that grant them 10% or more of the voting rights, or in any other way in the entity. Even though just 10% of voting rights will be deemed "control" under the OI Regime, the concept of "control" is consistent with the term's commonly used definition. It is possible that the introduction of 10% threshold has been done with an intent to maintain a clear demarcation between ODI and OPI.
  • Pricing Guidelines: When shares were transferred, swapped, or divested entirely or partially, for example, valuation was required under the previous ODI framework. The idea of price standards, as it applied to foreign direct investment, did not, however, expressly apply to international investments. The OI Regime has now introduced the idea of pricing guidelines, according to which all equity capital issues or transfers of shares of foreign entities from persons residing outside of India, from persons residing inside India to persons residing inside India who are eligible to make such investments, or from persons residing inside India to persons residing outside of India, must be priced on an arm's length basis. This concept is subject to some exceptions. The Authorized Dealer bank is in charge of ensuring compliance with arm's length pricing while taking into account valuations made using any commonly accepted international pricing technique for valuation.
  • Recognition of the flip-structures: One of the OI Regime's most gratifying adjustments is this one. The flip structures were forbidden by way of "FAQs" published by the RBI, even though the previous ODI system did not officially forbid them. As long as there are no more than two layers of subsidiaries in the overall structure, the OI Regime now explicitly allows an Indian firm to invest in a foreign company that has or (intends to) establish a subsidiary in India.
  • Investment in Financial Sector: Only organisations providing financial services were allowed to invest in financial sectors outside of India under the previous ODI framework. All Indian entities are now allowed to participate in international financial sector companies (apart from those involved in insurance and banking) under the OI regime, provided that they have reported net earnings during the previous three fiscal years.
  • ODI in Start-ups: Since the OI Regime allows resident individuals and Indian entities to use their own internal accruals and personal money, respectively, for overseas investments in start-ups, they have been particularly separated from other overseas investment channels. This investment may be made in "startups" that are recognised as such by the host country's or host jurisdiction's legal system, according to the OI Regime. There aren't many countries that have a clear definition of what a "start-up" is, therefore the phrase loses its significance in any country without one. The RBI may need to be more explicit about its stance on this.
  • Investment by Resident Individual: The former ODI Regime did allow RIs to buy shares in foreign companies through channels like LRS, ESOPs, donations, etc., but there were obviously no set procedures or regulations in this area. The OI Regime, which clearly specifies and spells out the procedures and rules connected to overseas investment by RIs, has addressed this. The RI is now allowed to acquire shares through the following methods: (a) OPI; (b) ODI in an operational firm with no subsidiary if the RI has control over such foreign organisation; (c) through inheritance; (d) through ESOPs; (e) through the purchase of sweat equity shares; and (f) through gift. The investment by the RI has to be made in accordance with the OI Regime only and the provisions of liberalized remittance scheme will not apply.
  • Gifting of Foreign Securities: Under the former ODI regime, the gifting of foreign securities was generally permitted. This caused some market confusion regarding the compliance requirements in relation to the gifting of securities by non-residents to resident Indian entities or individuals, particularly in situations where the non-resident was not a relative of the resident Indian. The Foreign Contribution (Regulation) Act of 2010 must be complied with when a gift of foreign securities is made from a person residing outside of India. The OI Regime now permits a RI to acquire shares through inheritance from a person resident in India or through gift from relatives who are residents of India. This imposes a significant restriction on RIs as compliance conditions under FCRA are currently not very clear or identified.


While it is commendable that the laws governing foreign investment have been updated, it should be highlighted that, according to the OI Directions, AD Banks have a lot of discretion about how to comply with these rules. The scope of start-ups, the two-layer rule's applicability to other structures, the KYC requirements for "round-tripping" structures, and the FCRA's applicability to share gifting should all be explained as quickly as possible. Overall, it is impossible to contest the fact that it is now simpler to comply with the relevant criteria. There have been significant relaxations implemented in response to acknowledged practical difficulties brought on by the previous administration.

Meta Title: New Rules for Overseas Investment

Meta Description

Indian investors employ two main sorts of investment avenues to make abroad investments: overseas direct investment (ODI) and overseas portfolio investment (OPI). There was no obvious differentiation between OPI and ODI under the previous regulations or instructions. Additionally, OPI was not defined, and under ODI, it was not made clear what percentage of equity holdings would need to be purchased in order for the transaction to qualify as ODI/OPI. It was challenging for retail investors to determine whether their investments in overseas companies were OPI or ODI that required ODI compliance.

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.