Overseas Direct Investment refers to an Indian party’s investment in a foreign entity through equity capital, loans, or other financial commitments, either directly or indirectly. These investments are governed by the Foreign Exchange Management Act (FEMA), and their regulations have evolved to facilitate ease of doing business while ensuring transparency, accountability, and prudence in managing capital outflows.
The Reserve Bank of India and the Central Government jointly notified the new framework for overseas investment in 2022, replacing the older regulations. The updated framework includes new rules, regulations, and directions that clearly define the permissible investments, eligible entities, sectoral restrictions, reporting requirements, pricing guidelines, and penalties for non-compliance.
Recent ODI Statistics and Destination Trends
Between April 2023 and December 2023, Indian entities have made substantial investments in a variety of countries. The data indicates a continued preference for investing in financial hubs and stable economies. During this period, the top five destinations for ODI were Singapore, the Netherlands, the United Arab Emirates, the United States of America, and the United Kingdom.
Singapore accounted for the highest ODI inflow from India, with a total investment of USD 3,191.06 million, which is 20.72 percent of the total. The Netherlands followed with USD 2,632.09 million, representing 17.09 percent, while the UAE attracted USD 2,339.41 million, accounting for 15.19 percent. The USA received USD 2,223.82 million (14.44 percent), and the UK attracted USD 1,520.51 million (9.87 percent). Other countries like Switzerland, Mauritius, the Cayman Islands, and South Africa received smaller but still notable investments.
When compared to the period from April 2020 to July 2022, there has been a clear shift in preference, with investments increasing in the Netherlands and UAE while declining in Mauritius. Singapore remained the top destination in both periods. This change suggests a reassessment of risk and returns in various jurisdictions and greater alignment with regulatory clarity and tax treaties.
Sectoral Preferences by Destination
The sectors attracting ODI vary depending on the country of investment. Indian investors tend to focus on finance, technology, real estate development (excluding speculative transactions), infrastructure, and pharmaceuticals. There has also been a significant rise in the acquisition of immovable properties abroad, particularly in destinations like the UAE and the United States. The data suggests a strategic diversification by Indian investors into assets offering stable yields and capital appreciation.
Liberalization and New Legal Framework
To streamline and promote foreign investments, the Government of India introduced a revised framework in August 2022. The core documents governing ODI now include:
The RBI Master Direction on Overseas Investment dated July 24, 2024
Foreign Exchange Management (Overseas Investment) Rules, 2022, issued via Notification No. G.S.R. 646(E) dated August 22, 2022
Foreign Exchange Management (Overseas Investment) Regulations, 2022, notified by the Reserve Bank under Notification No. FEMA 400/2022-RB dated August 22, 2022
These guidelines aim to simplify procedures, reduce unnecessary regulatory burdens, and align India’s investment regime with global best practices. It introduces a distinction between Overseas Direct Investment and Overseas Portfolio Investment and provides clarity on eligible entities, limits, reporting, and approvals.
Eligible Investors for Overseas Direct Investment
A wide range of Indian entities and individuals are now eligible to make investments abroad. These include companies incorporated in India, bodies established by an act of Parliament, registered partnership firms, limited liability partnerships, registered trusts and societies (subject to conditions and prior approval from the RBI), and resident individuals.
Eligibility criteria are determined not only by the investor’s legal form but also by compliance history and sectoral restrictions. Resident individuals may invest under the Liberalized Remittance Scheme, subject to prescribed limits and permitted capital account transactions.
Financial Commitment Limits for Indian Entities
The revised framework places limits on the amount of financial commitment an Indian entity can make in a foreign entity. Financial commitment includes equity, debt, and non-fund-based guarantees such as performance guarantees, pledges, or charges.
The financial commitment by an Indian entity in a foreign entity must not exceed 400 percent of its net worth as per the latest audited balance sheet. This limit ensures that domestic capital is not excessively exposed to foreign ventures and that investments are made prudently.
In addition to this limit, if a person resident in India has made a financial commitment in a foreign entity, no further financial commitment is permitted—either fund-based or non-fund-based—until any delay in reporting such investment is regularized. This condition strengthens compliance and prevents regulatory evasion.
Permissible Methods of Making Overseas Investment
Indian entities can make overseas investments through various mechanisms. For Overseas Direct Investment, the modes include acquiring unlisted equity capital of a foreign entity, subscribing to the Memorandum of Association of a foreign entity, or acquiring more than 10 percent of equity or control in a listed foreign entity. Debt instruments, loans, and non-fund-based financial commitments like guarantees and pledges are also permitted.
In contrast, Overseas Portfolio Investment involves purchasing foreign securities that do not amount to control or significant influence. OPI does not include investment in unlisted debt instruments or any securities issued by Indian residents (unless based in an International Financial Services Centre).
The distinction between ODI and OPI is critical, as they are subject to different limits, reporting formats, and conditions. The framework also covers deemed OPI, such as cases where a listed entity is delisted after investment.
Restrictions and Prohibitions for ODI
While the framework is liberalized, it imposes certain sectoral restrictions and prohibitions to safeguard national interest and financial stability. Overseas investments in real estate activity are generally restricted. This includes the trading of real estate or transferable development rights, but excludes the development of infrastructure like roads, bridges, and residential or commercial complexes.
Investments in gambling activities, including casinos, are strictly prohibited. Dealing in financial products linked to the Indian rupee requires prior approval. Furthermore, financial commitment in jurisdictions such as Pakistan or any region notified by the Central Government must be routed through the approval process.
Structures resulting in more than two layers of subsidiaries between the Indian entity and the final foreign entity are disallowed to prevent tax evasion and regulatory opacity.
Classification of Debt and Non-debt Instruments
The 2022 rules introduce a clear classification between debt and non-debt instruments, a distinction not previously emphasized. This alignment with the broader foreign direct investment regime offers consistency in treatment and regulatory oversight.
Debt instruments include redeemable debentures, preference shares (both redeemable and optionally convertible), government bonds, corporate bonds, and securitization tranches that are not equity. Borrowings by firms and depository receipts backed by debt securities also fall under this category.
Non-debt instruments include investments in equity securities, mutual funds, and exchange-traded funds that invest mainly in equity, contributions to trusts, REITs, Ts, and InVITs, equity tranches of securitization structures, and equity participation in LLPs. Investments in units of Alternative Investment Funds also fall into the non-debt category.
Understanding these categories is essential for accurate classification, reporting, and compliance under the RBI framework.
Overview of Resident Individual Investment Under LRS
Resident individuals are allowed to make investments abroad under the Liberalized Remittance Scheme. They can invest up to USD 250,000 per financial year in various capital account transactions, including purchasing immovable property, acquiring equity in foreign entities, extending loans, and subscribing to foreign securities.
The LRS scheme is available to all resident individuals, including minors. The limit of USD 250,000 also includes permissible current account transactions like private visits, gifts, employment-related travel, emigration, maintenance of relatives abroad, and educational or medical expenses.
This framework simplifies and consolidates the regulatory landscape for individual investors while retaining oversight through reporting and valuation checks.
General Permission and Investment Limits
For resident individuals, general permission is available for making both ODI and OPI within the prescribed limit under LRS. The net worth definition applicable to Indian entities under ODI and OPI is also relevant for resident individuals. It includes paid-up capital and reserves (for companies) and capital plus undistributed profits (for LLPs or partnerships), minus accumulated losses or deferred expenditures.
Investment exceeding USD 1 billion in a financial year requires prior approval, even if within the 400 percent of net worth ceiling. This applies to both Indian entities and resident individuals and provides a safeguard for unusually large outbound investments.
The distinction in treatment also ensures that control-based investments (ODI) receive closer scrutiny than passive or portfolio investments (OPI), reflecting their higher potential for exposure and regulatory risk.
Pricing Guidelines for Overseas Investment
The new ODI framework mandates adherence to pricing norms to ensure fairness and prevent capital flight or misvaluation. When an Indian resident issues or transfers equity capital of a foreign entity to or from another Indian resident or to a non-resident, the transaction must be priced at an arm’s length basis.
The Authorised Dealer bank facilitating such a transaction is responsible for ensuring that the valuation adheres to internationally accepted pricing methodologies. Valuation reports may be required to be submitted by professionals such as chartered accountants or certified public accountants, depending on the jurisdiction and nature of the transaction.
Reporting Requirements Under the ODI Framework
Reporting is a critical compliance function under the overseas investment regime. The rules require timely and accurate disclosures through specified forms and reports.
Form FC must be filed at the time of making a financial commitment or at the time of sending outward remittance, whichever is earlier. The Unique Identification Number from the Reserve Bank must be obtained before proceeding with the investment. This number acts as a tracking mechanism for each unique overseas investment.
Form ODI must be submitted to report disinvestment, restructuring, or additional commitments. The submission includes detailed information about the nature of the investment, financial data of the foreign entity, and the valuation basis. Form OPI is introduced for reporting overseas portfolio investments by Indian entities and is to be filed on a half-yearly basis.
A significant addition to the regime is the widened scope of the statutory auditor’s certificate. The auditor must now confirm the accuracy of the figures reported and ensure compliance with applicable accounting and valuation norms.
Annual Performance Report and Its Requirements
The Annual Performance Report is an essential document that tracks the performance of the foreign entity in which an Indian party has invested. It must be filed by December 31 each year and requires the submission of the latest audited financial statements of the foreign entity.
APR filing is mandatory except in the following cases. If the Indian resident holds less than 10 percent of equity in the foreign entity without control and no other financial commitment exists, or if the foreign entity is under liquidation, APR may be exempted. Where statutory audit is not applicable in the host jurisdiction, the report must be certified by a chartered accountant or CPA.
For employees holding shares through ESOPs under ODI, an APR filing is required if such holding qualifies as ODI. The APR ensures that the Reserve Bank and Government are informed of the ongoing status of Indian investments abroad.
Reporting Timeframes and Compliance Deadlines
Strict timelines have been introduced for various reporting obligations under the overseas investment regime. Evidence of investment, such as share certificates, must be submitted within six months of making the investment. If the documentation is not submitted, the remitted amount must be repatriated to India within the same timeframe.
Dividends, royalties, technical fees, and other receivables must be repatriated within 90 days of becoming due. Similarly, the proceeds from the transfer or disinvestment of a foreign asset must be brought back to India within 90 days of receipt.
These timelines promote accountability and reduce instances of funds being left idle in foreign accounts or misused. All financial commitments and any restructuring must be reported within 30 days using the appropriate forms. Failure to comply with these deadlines may attract penalties and disqualify the investor from making future investments.
Overview of Late Submission Fees
The framework provides a detailed matrix for late submission fees to regularize delays in reporting. There are two broad categories of reporting delays. The first includes returns that do not capture financial flows, such as Form ODI Part-II, APR, Form OPI, and others. The late fee for such delays is a fixed INR 7,500.
The second category involves reports that capture flows or involve transactional data, such as Form ODI Part-I, Form FC, and others. For these cases, the late fee is calculated using the formula 7,500 plus 0.025 percent multiplied by the amount involved and the number of years of delay. The number of years is rounded up to the nearest month and expressed to two decimal places.
The maximum penalty is capped at 100 percent of the amount involved. Payment must be made within 30 days from the issuance of the notice. This provision allows for correction without extreme punitive measures while still maintaining regulatory discipline.
Conditions for Further Investment in Case of Delay
If there is a delay in reporting an existing investment or financial commitment, the person resident in India is barred from making any further investment in that foreign entity until the delay is rectified. This restriction applies to both fund-based and non-fund-based commitments and serves as a compliance control mechanism.
Delays in reporting that occurred before the publication of the current regulations on August 22, 2022, can be regularized by paying the late submission fees within three years of that date. For delays occurring after the publication date, the fee must be paid within three years of the original due date.
This time-bound mechanism ensures that investors act quickly to correct past non-compliance and avoid further regulatory action.
Disinvestment and Exit Conditions
Disinvestment from a foreign entity can take multiple forms. These include the sale or transfer of shares, liquidation of the foreign entity, or mergers and amalgamations involving the foreign subsidiary.
Certain conditions must be met for disinvestment to be permitted under the automatic route. The Indian investor must not have any outstanding dues from the foreign entity, such as dividends, fees, or loan repayments. The investor must also have held the investment for at least one year.
Shares of the foreign entity must be sold at a price not lower than the valuation certified by a chartered accountant or CPA based on the most recent audited balance sheet. If the foreign entity is listed, disinvestment may be carried out through the stock exchange. Otherwise, valuation norms apply to ensure fairness and prevent underreporting of sale proceeds.
Any disinvestment must be reported to the Authorised Dealer bank within 30 days of the transaction. Failure to do so may result in penalties or suspension of investment privileges.
Specific Provisions for Resident Individuals
Resident individuals making overseas investments must ensure that the foreign entity is a non-financial sector, operating company. They must not hold control if the foreign entity has subsidiaries or step-down subsidiaries. These rules aim to avoid complex structures and ensure that the investments are not routed back into India or misused for money laundering.
The investment by a resident individual must also adhere to the overall Liberalized Remittance Scheme ceiling of USD 250,000 per financial year. If the investment qualifies as ODI, the individual must file the required forms and comply with pricing and reporting guidelines.
Existing investments made before the new rules came into effect must be brought into compliance, including reporting under the new forms and providing documentation such as valuation certificates and evidence of ownership.
Example Case Study on Immovable Property
Consider a case where Mr. X, a person resident in India, wishes to purchase immovable property in Dubai under the Liberalized Remittance Scheme. The total consideration is USD 1,500,000, payable in installments over six years.
As per the ODI rules and LRS guidelines, investment in immovable property abroad is permitted within the annual ceiling of USD 250,000. However, since the total cost exceeds the permitted limit, Mr. X would only be able to remit up to USD 250,000 in a single financial year. He must ensure that subsequent payments also comply with the annual ceiling.
If he proceeds with the purchase by committing to installments exceeding the LRS limit, he would be violating FEMA provisions unless he spreads the remittance over multiple years within the allowable limit. Moreover, if the transaction qualifies as ODI, he must report it to the RBI through Form FC and obtain a Unique Identification Number before proceeding.
If Mr. X had already entered into such a transaction before the new rules came into force and failed to report the commitment or obtain approval, he must now regularize the delay by paying the applicable late submission fee. He must also submit the relevant documentation, such as the purchase agreement, valuation certificate, and remittance proofs, to the Authorised Dealer bank.
Importance of Compliance and Monitoring
Compliance under the ODI regime is not merely procedural. It plays a vital role in safeguarding India’s foreign exchange reserves, ensuring proper utilization of capital, and maintaining transparency in cross-border financial transactions.
The Reserve Bank of India regularly monitors outward investments and may request additional documentation or conduct audits in specific cases. Entities and individuals must maintain proper records of all remittances, investment agreements, and financial statements of the foreign entity.
In case of a violation, apart from penalties and late fees, the RBI may restrict the investor from making future investments or initiate enforcement action under FEMA. In severe cases, this may also involve reporting to other financial intelligence agencies or prosecution under relevant laws.
Modes and Instruments of Overseas Direct Investment
Indian entities can invest overseas through several recognized modes. Equity shares are the most common route for equity participation. Instruments such as compulsorily convertible preference shares and other debt instruments may also be permitted depending on the regulatory framework and the nature of the investment. Investments can be made directly by remitting funds or indirectly through share swaps and capitalization of exports, royalties, or other entitlements. Indian parties are also allowed to make investments through Special Purpose Vehicles (SPVs) or directly in the host country.
ODI by Proprietorship Concerns and Individuals
Proprietorship concerns and unregistered partnerships can make ODI under the approval route, subject to prescribed conditions such as track record, profit history, and certification from a Chartered Accountant. Individual residents are permitted to invest in equity and debt instruments of foreign companies under the Liberalized Remittance Scheme (LRS), subject to prescribed limits and procedures. However, such investments must not violate FEMA provisions, including restrictions on leveraged transactions.
Financial Commitments under ODI
Financial commitment includes equity contribution, loans, guarantees, and creation of charges on assets in favor of overseas entities. The total financial commitment must not exceed the ceiling prescribed under FEMA regulations, typically 400% of the net worth of the Indian party. Any guarantee, whether corporate or performance-based, also forms part of the financial commitment and must be reported accordingly.
Valuation and Reporting Requirements
ODI transactions involving the acquisition of an existing overseas entity or capital infusion into a foreign entity require valuation by a Category I Merchant Banker registered with SEBI or an investment banker/chartered accountant in the host country, depending on the transaction size. Valuation reports must be submitted along with Form ODI to the designated Authorized Dealer (AD) bank. Further, all remittances and investments must be reported through the online Overseas Investment Declaration (OID) system. Annual Performance Reports (APRs) must be filed by the Indian party to reflect financial performance and the status of the overseas entity.
Restrictions and Prohibited Sectors
ODI in sectors such as real estate (other than for development of townships or infrastructure projects) and banking is either restricted or allowed only under the approval route. Indian entities are prohibited from investing in foreign entities engaged in activities that are not in line with the sectoral guidelines prescribed by the Reserve Bank of India (RBI). Additionally, transactions in contravention of anti-money laundering or counter-terrorism financing regulations are not permitted.
ODI through Special Purpose Vehicles (SPVs)
An SPV is often used as an intermediate entity incorporated in a foreign jurisdiction for further investment. This structure is common in sectors such as energy, infrastructure, and mining, where multiple layers of ownership and jurisdictional tax advantages are involved. Investment through SPVs is subject to detailed scrutiny, and transparency regarding the ultimate beneficial owner is essential. The use of tax havens or jurisdictions not complying with global transparency standards is also discouraged under Indian law.
ODI by Trusts and Societies
Trusts and Societies are generally not permitted to make ODI. However, exceptions exist for not-for-profit organizations and educational institutions subject to prior approval by the RBI and fulfillment of prescribed conditions. These include documentation related to governance, financials, and compliance with relevant Acts governing their domestic operations.
Disinvestment and Exit
Disinvestment from an overseas joint venture or wholly owned subsidiary can occur through the sale of shares, liquidation, or transfer to another eligible Indian or foreign entity. Such disinvestments must comply with valuation norms, and proceeds must be repatriated within the prescribed timeline. Reporting of disinvestment transactions must be done through Form ODI and supported by necessary documentation, including valuation reports and regulatory approvals, if any.
Penalties for Non-Compliance
Violation of ODI regulations under FEMA may attract penalties, which can include monetary fines, compounding, or criminal prosecution in severe cases. The Enforcement Directorate (ED) and the RBI have powers to investigate and take enforcement action in case of defaults. Entities must maintain full compliance in terms of financial limits, reporting requirements, and investment structure to avoid regulatory issues.
Sectoral Analysis of Indian ODI
India’s overseas direct investments are diversified across multiple sectors. Historically, sectors such as oil and gas, financial services, manufacturing, and information technology have attracted the largest share of ODI from Indian firms. Recent years have seen growing investment in renewable energy, fintech, pharmaceuticals, and agribusiness, aligned with India’s global aspirations and sustainability goals. Investments in natural resources and mining continue to remain significant, particularly in Africa, Latin America, and Australia, where Indian companies secure long-term access to essential commodities.
Country-Wise ODI Trends
The top recipient countries of Indian ODIs have been Singapore, Mauritius, the United States, the United Kingdom, the Netherlands, and the United Arab Emirates. Singapore and Mauritius continue to be preferred due to favorable tax treaties and ease of doing business. Indian companies also look toward emerging markets in Africa and Southeast Asia for expansion, where they face less competition and can play a major role in infrastructure development, manufacturing, and retail. Developed markets like the U.S. and U.K. are targeted for technology acquisition, brand building, and R&D investments.
Taxation Aspects of ODI
Taxation plays a crucial role in structuring ODI. While India allows for foreign tax credit to avoid double taxation, complexities arise when multiple jurisdictions are involved. Indian companies must assess transfer pricing, base erosion and profit shifting (BEPS) risks, and other international tax norms. Dividends, capital gains, and interest earned from ODI are generally taxable in India, subject to the Double Taxation Avoidance Agreements (DTAAs). Special care must be taken when routing investments through jurisdictions that may be flagged by Indian authorities for lack of transparency.
ODI vs. FDI: A Strategic Comparison
Whereas Foreign Direct Investment (FDI) is about capital inflows into India, ODI represents capital outflows. FDI is regulated to protect domestic sectors from excessive foreign control, while ODI is regulated to preserve foreign exchange reserves and ensure legitimate overseas expansion. Both are critical for India’s economic health, but serve opposite objectives. The government balances these movements to ensure macroeconomic stability. Companies must consider comparative advantages, including labor costs, market access, innovation potential, and regulatory environment, when deciding between inbound and outbound investment.
Role of the Reserve Bank of India and Other Regulators
The Reserve Bank of India is the key regulator overseeing ODI transactions under the Foreign Exchange Management Act. It issues circulars, FAQs, and guidance notes to clarify ODI procedures. Authorized Dealer (AD) banks are designated to handle ODI documentation, verification, and remittances. The Ministry of Finance, SEBI, and Income Tax Department may also be involved, especially when ODI relates to listed companies, financial institutions, or taxation matters. Coordination between these agencies ensures policy coherence and investment discipline.
Strategic Benefits of ODI for Indian Businesses
ODI enables Indian companies to access global markets, diversify risks, build international brands, and acquire new technologies. It also allows businesses to hedge against domestic market saturation or regulatory constraints. With the rise of global value chains, ODI offers opportunities for vertical and horizontal integration. Furthermore, successful overseas operations contribute to foreign exchange earnings, employment generation abroad, and improved competitiveness at home. The rise of digital businesses and e-commerce platforms has further made overseas expansion more accessible for mid-sized and even smaller Indian enterprises.
Risks and Challenges in ODI
Despite its benefits, ODI is fraught with risks, including political instability in the host country, currency fluctuations, legal hurdles, and cultural differences. Regulatory risks may arise due to non-compliance with home or host country laws. Tax-related complexities, repatriation issues, and disputes in joint ventures can affect performance. Due diligence, legal advisory, and risk management are vital to mitigate these challenges. Additionally, entities must keep track of changes in Indian law, such as revised limits, updated filing systems, or revised definitions, which may impact their existing investments.
Trends Shaping the Future of ODI
Emerging trends suggest a shift toward knowledge-intensive investments in sectors such as artificial intelligence, biotechnology, clean energy, and digital infrastructure. Indian startups are increasingly looking to acquire foreign firms for IP, talent, or market entry. Multilateral trade pacts and global minimum tax standards may also reshape ODI strategies in the coming years. Furthermore, ESG (Environmental, Social, and Governance) compliance is becoming a key requirement in host markets, pushing Indian companies to adopt sustainable practices in their overseas ventures.
Government Initiatives Supporting ODI
The Indian government, through initiatives like the Production Linked Incentive (PLI) scheme, export promotion councils, and bilateral trade agreements, indirectly supports ODI by improving domestic competitiveness and reducing the cost of capital. Additionally, trade facilitation measures, diplomatic support, and Indian missions abroad aid investors in identifying opportunities, resolving disputes, and networking with local stakeholders. Digital platforms such as the RBI’s Overseas Investment Declaration portal also aim to enhance transparency and ease of doing business.
Conclusion
Overseas Direct Investment represents a powerful tool for Indian businesses to achieve global relevance, technological upgradation, and economic scale. While regulatory frameworks provide structure and security, the success of ODI ultimately depends on strategic planning, compliance, and execution. As India continues its journey toward becoming a global economic powerhouse, outward investment will play an increasingly important role in shaping the nation’s corporate landscape and foreign policy orientation.