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Foreign investments, overseas investments made by Indian entities and individuals have clarity now with GoI and RBI coming together in notifying (i) the Foreign Exchange Management (Overseas Investment) Rules, 2022 (the “Overseas Investments Rules“) issued by the Ministry of Finance, Government of India; (ii) the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (the “Overseas Investments Regulations“) and (iii) the Foreign Exchange Management (Overseas Investment) Directions, 2022 (“Overseas Investments Directions“) issued by the RBI. (collectively “New Regime”).


Overseas investment is broadly divided under –

  1. Overseas Portfolio Investment (OPI)
  2. Financial commitment by way of Overseas Direct Investment (ODI)
  3. Financial commitment by way of Debt – other than OPI, where ODI is made

OPI is investments other than ODI and excludes unlisted debt instruments. In contrast,
ODI includes investment by Indian entities and individuals in the unlisted equity capital of a foreign entity, Subscription to MoA, Investment in 10% or more of a listed foreign entity, and Investment with control (if less than 10% stake) of a listed foreign entity.


Round-tripping is referred to as a series of transactions involving the transfer of money across jurisdictions, eventually resulting in a return of the funds to the original jurisdiction. Such transactions are not bonafide transactions and are structured with the intent to receive tax benefits or for money laundering. 

Keeping compliance a priority, RBI, under the FAQs on Overseas Direct Investments (updated as on September 19, 2019), had clarified the provisions of Notification No. FEMA 120/RB-2004 dated July 7, 2004, (which was amended often) dealing with the transfer and issue of any foreign security to Residents does not permit an Indian Party (IP) to set up an Indian subsidiary(ies) through its foreign WOS or JV nor do the provisions permit an IP to acquire a WOS or invest in JV that already has direct/indirect investment in India under the automatic route. However, for such cases, IPs could approach the RBI for prior approval through AD. Approvals were granted on a case-to-case basis. 

In August 2021, RBI published Foreign Exchange Management (Non-debt Instruments – Overseas Investment) Rules, 2021 (Draft Rules) prohibiting person resident in India from investing in a foreign entity that has invested or invests in India, either directly or indirectly, as a tool for tax evasion/tax avoidance by such investor.

However, Overseas Investments Rules permit such investments in foreign entity that has invested or invests in India, limiting the investment structure to up to 2 layers of subsidiaries only.


1. Definition of OPI – clarification for what constitutes OPI and what doesn’t.

2. Indian investors are required to hold ODI for one year prior to any divestment

3. Exclusion of requirement of target foreign entity to have had operations for one year prior to the divestment

4. Definition of “control” includes – 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.

In the Companies Act, 2013, and SEBI (SAST) Regulations, 2011, a company is considered a subsidiary of another company if it holds more than 50% of total voting rights or has the right to appoint majority directors or control management or policy decisions.

5. Pricing guidelines have been introduced in respect of the issue or transfer of equity capital.

6. Certain categories of investors are required to obtain NOC from RBI before making any financial commitment or undertaking disinvestment, from the lender bank or regulatory body or investigative agency by making an application in writing to such bank or regulatory body or investigative agency concerned.

The concerned authority may furnish the certificate within sixty days from the date of receipt of such application, on the failure of which it may be presumed that there was no objection to the proposed transaction.

7. The New Regime allows the issuance of corporate guarantees to (or on behalf of) second or subsequent level step-down subsidiaries (SDS). 


To simplify foreign investments and support the startup ecosystem, SEBI has removed the clause that an investee company needs to have an Indian connection. Now, AIFs can invest in securities of companies incorporated outside India, as VCs can conditionally invest in off-shore venture capital companies.

Also, deferred payments are permitted for overseas direct investments, subject to certain conditions. The New Regime further provides flexibility for investment in overseas direct investments by way of swapping securities.

Indian businesses can invest up to 400% of their net worth overseas. The New Regime takes away this, in case of investments in overseas startups, by allowing this investment in overseas startup to be made from internal accruals.

While additional clarifications may be on its way from the RBI, businesses have started to accept and prepare for implementation of the New Regime. With the risk of round-tripping eliminated, easy investment regime could be on cards for accelerated growth.

This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.


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