On August 22, 2022, the Government of India notified two documents that rewrote the rules for Indian money going overseas. Foreign Exchange Management (Overseas Investment) Rules, 2022 replaced the 18-year-old FEMA 120/2004, and Foreign Exchange Management (Overseas Investment) Regulations, 2022 (FEMA 400/2022-RB) provided the regulatory mechanics. The old framework — built for an era when Indian companies invested modest sums in a handful of foreign ventures — could no longer contain a world where Tata Motors owned Jaguar Land Rover, Infosys ran global delivery centres across 50 countries, and thousands of Indian startups had parent entities in Singapore and Delaware.
The Master Direction on Overseas Investment (RBI_MD_12710), updated as recently as November 28, 2025, is the operational rulebook that tells authorised dealer banks exactly how to process these transactions. It replaced the earlier Master Direction on Direct Investment by Residents in JV/WOS Abroad (RBI_MD_10637), which had been updated through June 2021 under the old FEMA 120 regime.
Also in this series:
- Foreign Exchange & FEMA: The Complete Timeline
- How Much Money Can You Send Abroad: The LRS Framework
- FDI Liberalisation: Sector Caps, Routes & Policy Evolution
LRS vs ODI: Two Completely Different Frameworks
The most common confusion in Indian overseas investment regulation is conflating the Liberalised Remittance Scheme (LRS) with Overseas Direct Investment (ODI). They sound related. They both involve money leaving India. But they operate under entirely different frameworks, limits, and logic.
LRS is for individuals. It allows a resident individual to remit up to USD 250,000 per financial year for any permissible current or capital account transaction — education, medical treatment, travel, buying property abroad, investing in foreign stocks, maintaining relatives overseas. The limit is per person, per year, and the transactions are personal.
ODI is for entities. It governs Indian companies, LLPs, and registered partnership firms investing in foreign businesses — setting up subsidiaries, acquiring stakes in foreign companies, extending loans and guarantees to overseas ventures. The limits are tied to the entity's net worth, not an annual dollar cap. An Indian company with a net worth of Rs 10,000 crore can make overseas financial commitments far exceeding USD 250,000.
Resident individuals can make ODI too, but the rules differ from both LRS and corporate ODI. An individual making ODI does so within the LRS limit, but must comply with the ODI reporting requirements — a dual compliance burden that the 2022 framework attempted to clarify.
The Master Direction addresses this explicitly: a resident individual making overseas investment must comply with reporting requirements under both the OI Regulations and LRS provisions. But shares or interest acquired by way of inheritance or gift under Schedule III of the OI Rules are not reckoned towards the LRS limit and do not require LRS reporting.
Why the 2022 Overhaul Happened
The old framework — FEMA 120/2004 — was built for a different India. In 2004, India's total outward FDI stock was USD 6.6 billion. By 2022, it exceeded USD 200 billion. The conceptual architecture of the old rules could not accommodate this transformation, which is why the government undertook a ground-up rewrite rather than another piecemeal amendment. The RBI had flagged this need in its 2021 press release on rationalisation of overseas investment regulations, inviting public comments on draft rules.
Under FEMA 120, the central concept was the "Indian Party" — all Indian investors in a foreign Joint Venture or Wholly Owned Subsidiary were collectively treated as a single party. The 2022 regime replaced this with "Indian entity," where each investor is considered separately. This matters because under the old framework, if three Indian companies jointly invested in a foreign venture, their aggregate financial commitment was calculated collectively. Under the new framework, each entity's commitment is assessed against its own net worth.
The terminology shift from "Joint Venture" and "Wholly Owned Subsidiary" to "foreign entity" was not cosmetic. The old labels implied specific ownership structures. "Foreign entity" is broader — it means any entity formed, registered, or incorporated outside India (including in India's IFSCs) that has limited liability. This accommodates the full range of modern corporate structures: limited liability companies, LLPs, regulated investment funds set up as trusts (provided the trustee is a person resident outside India).
The definition of "Overseas Direct Investment" itself was tightened. ODI means acquisition of unlisted equity capital, subscription as part of a foreign entity's Memorandum of Association, investment in 10% or more of the paid-up equity capital of a listed foreign entity, or investment with control where investment is less than 10%. Once classified as ODI, the investment continues to be treated as ODI even if the stake later falls below 10% or the investor loses control. This one-way classification prevents gaming — an entity cannot convert ODI to OPI (Overseas Portfolio Investment) to escape the stricter ODI compliance requirements.
The Financial Commitment Architecture
The concept of "financial commitment" is the backbone of the ODI framework. It means the aggregate amount of investment by way of ODI, debt (other than OPI), and non-fund based facilities extended by an Indian entity to all its foreign entities.
An Indian entity can lend to or invest in debt instruments of a foreign entity, or extend non-fund based commitments (guarantees, pledges), subject to three conditions: the Indian entity must be eligible to make ODI; must have already made ODI in the foreign entity; and must have acquired control in the foreign entity on or before the date of making the financial commitment. In plain terms, you cannot extend a guarantee to a foreign entity you do not control.
Under Schedule I of the OI Rules, the financial commitment limit for an Indian entity is tied to its net worth. Prior approval from the Reserve Bank is required for financial commitments exceeding USD 1 billion in a financial year, even when the total commitment is within the eligible automatic route limit. This approval threshold is the RBI's mechanism for monitoring large-scale capital outflows — the kind that could affect India's balance of payments.
The Guarantee Framework
Guarantees are the most complex component of the financial commitment architecture. The Master Direction provides detailed rules:
Performance guarantees have their validity period determined by the time specified for contract completion. No prior RBI approval is needed for remitting funds when a performance guarantee is invoked. When a guarantee is invoked, it ceases to be non-fund based and becomes a debt commitment — and must be reported accordingly. Roll-over of guarantees is not treated as fresh financial commitment but must be reported.
A group company of the Indian entity can extend a guarantee if it is itself eligible to make ODI. The guarantee counts towards the group company's own financial commitment limit, not the Indian entity's. For a resident individual promoter, the guarantee counts towards the Indian entity's limit. The concept of using the net worth of a subsidiary or holding company by the Indian entity was discontinued under the new framework.
The Round-Tripping and Layering Controls
The most consequential restrictions in the framework address round-tripping and multi-layered structures — both mechanisms historically used for tax evasion and regulatory arbitrage.
The OI Rules prohibit financial commitment by a person resident in India in a foreign entity that has invested or invests into India, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries. The Master Direction states:
Financial commitment by a person resident in India in a foreign entity that has invested or invests into India, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries is not permitted in accordance with rule 19(3) of the OI Rules. It is provided that no further layer of subsidiary or subsidiaries shall be added to any structure existing with two or more layers of subsidiaries post notification of OI Rules. No further layer of subsidiary can be added to any existing structure that already has two or more layers, even if the structure predates the 2022 rules.
The definition of "subsidiary" for this purpose is broad: an entity in which the foreign entity has "control," which includes a stake of 10% or more. This catches structures that might not qualify as subsidiaries under company law but represent effective economic control.
The restriction addresses a specific abuse pattern: an Indian company invests in a Mauritius entity, which invests in a Singapore entity, which invests back into India — routing Indian money through offshore structures to exploit treaty benefits or disguise the ultimate beneficial owner. The two-layer limit makes such structures either impossible or at least visible.
Additionally, the Master Direction lists prohibited activities for overseas investment. AD banks cannot facilitate any transaction in a foreign entity engaged in activities specified under Rule 19(1) of the OI Rules, or located in countries or jurisdictions as advised by the Central Government. Financial products linked to the Indian Rupee are specifically prohibited — including non-deliverable trades involving foreign currency-INR exchange rates and stock indices linked to the Indian market. This prevents offshore betting on Indian currency movements through overseas investment structures.
Strategic Sectors: Where the Rules Bend
The framework carves out "strategic sectors" — energy and natural resources (oil, gas, coal, mineral ores), submarine cable systems, and startups — with relaxed structural requirements. The mandatory limited liability structure of the foreign entity does not apply in strategic sectors. An Indian entity can make ODI in unincorporated entities in these sectors.
This exemption recognises operational reality. Oil and gas exploration often involves consortia structured as unincorporated joint ventures, not limited liability companies. Submarine cable systems are built and maintained through co-ownership arrangements between international telecom operators. Forcing these into limited liability structures would make Indian participation commercially unviable.
For strategic sector investments, AD banks must verify that the Indian entity has obtained necessary permission from the competent authority — which for oil and gas means the Ministry of Petroleum, for mining means the Ministry of Mines, and so on. The FEMA framework does not replace sectoral regulation; it operates alongside it.
Financial Services: The Special Restriction
Investment in the financial services sector carries additional scrutiny. Under the earlier FEMA 120 framework, Section B.6 of RBI_MD_10637 required that Indian entities investing in overseas financial services entities had to have a track record of profitability and be registered with the appropriate financial sector regulator in India. The concern: an unregulated Indian entity should not be able to set up a foreign banking or insurance operation and potentially expose Indian capital to risks that domestic regulators cannot monitor.
The 2022 framework continues this caution. Financial services investments remain subject to the overall framework but with the additional overlay that the Indian entity must meet the conditions specified in the OI Rules and Regulations for such investments.
Overseas Portfolio Investment: The Non-Control Category
Not all overseas investment involves control. Overseas Portfolio Investment (OPI) covers investments that do not meet the ODI threshold — buying listed shares on foreign stock exchanges, investing in overseas mutual funds, acquiring bonds of foreign corporations. The rules for OPI are simpler but come with their own restrictions.
OPI cannot be made in unlisted debt instruments (too opaque for regulatory monitoring), securities issued by a person resident in India who is not in an IFSC (this would be circular investment, not genuine overseas exposure), derivatives (unless specifically permitted by the Reserve Bank), or commodities including Bullion Depository Receipts.
Listed Indian companies and resident individuals may make OPI. Unlisted Indian entities can make OPI in IFSCs. Investment in units of overseas investment funds regulated by the host jurisdiction's financial sector regulator qualifies as OPI — this is the route through which Indian investors access global mutual funds and ETFs.
The OPI framework intersects with LRS for individuals. A resident individual's OPI counts towards the USD 250,000 LRS limit. But acquisition of foreign securities through ESOPs up to 10% of a foreign entity's paid-up capital qualifies as OPI without control — a specific carve-out for the thousands of Indian employees of multinational companies who receive stock options in their foreign parent entities.
The NPA and Wilful Defaulter Gate
A provision that rarely makes headlines but has significant practical impact: any person resident in India whose account appears as a Non-Performing Asset, or who is classified as a wilful defaulter, or who is under investigation by a financial sector regulator or investigative agency, must obtain a No Objection Certificate (NOC) from the lender bank, regulatory body, or investigative agency before making any financial commitment or undertaking disinvestment.
This gate exists because it prevents entities in financial distress from moving assets offshore. It also prevents those under investigation — for bank fraud, money laundering, FEMA violations — from establishing overseas structures that could shelter assets from enforcement. The provision was present in the old framework and has been strengthened under the 2022 regime.
One practical exception: where an Indian entity has already issued a guarantee before an investigation began or an account was classified as NPA, and is subsequently required to honour that contractual obligation, the remittance for invocation is not treated as fresh financial commitment and does not require an NOC. The framework distinguishes between existing contractual obligations and new capital outflows.
Pricing, Valuation, and the Anti-Abuse Architecture
The pricing guidelines under Rule 16 of OI Rules require AD banks to ensure compliance before facilitating any transaction. Banks must have a board-approved policy that provides for valuation based on an internationally accepted pricing methodology. The policy must cover scenarios where valuation may not be insisted upon — mergers approved by a competent court, or transactions where the price is available on a recognised stock exchange.
The bank's policy must also provide for additional documents — audited financial statements of the foreign entity — that may be taken for ascertaining bona fides in cases involving write-off of investment. This is anti-abuse architecture, built in because when an Indian entity writes off an overseas investment, the AD bank must satisfy itself that the write-off reflects genuine losses, not a disguised transfer of value. Without this safeguard, entities could use overseas write-offs as a channel for siphoning capital out of the Indian financial system.
Reporting and Penalties: The Compliance Infrastructure
The reporting framework is dense but critical. All reporting is done through the designated AD bank using Form FC (for financial commitments), Form ODI Part I (for initial investments), Form ODI Part II (annual performance reports), Form ODI Part III (disinvestments), and Form OPI (for portfolio investments).
The Master Direction specifies a Late Submission Fee (LSF) matrix for delayed reporting. For returns that do not capture flows — APRs, FLA returns — the LSF is Rs 7,500 per return. For returns that capture actual flows — Form FC, Form ODI Part I and III — the LSF is Rs 7,500 plus 0.025% of the amount involved, multiplied by the number of years of delay. The maximum LSF is capped at 100% of the transaction amount.
The LSF option is available for up to 3 years from the due date. Beyond that, the person is liable for penal action under FEMA, 1999 — which means adjudication proceedings under Section 13, with penalties that can reach up to three times the amount involved.
The Master Direction is unambiguous on this point:
AD banks cannot facilitate any outward remittance or further financial commitment by a person whose reporting delays have not been regularised.
This is the enforcement lever: non-compliance with reporting requirements freezes future overseas investment activity. The reason this provision matters is that it transforms reporting from a bureaucratic formality into a prerequisite for doing business abroad.
The Designated Bank System
Not every bank branch can process overseas investment transactions. The Master Direction requires Indian entities to work through "designated AD banks" — specific AD Category I banks assigned to handle their overseas investment reporting. All reporting forms are submitted through the designated bank, which performs due diligence, verifies documentation, and reports to the RBI through the online OID (Overseas Investment Division) application.
The allotment of a Unique Identification Number (UIN) for each foreign entity does not constitute RBI approval for the investment. It signifies only that the investment has been taken on record for the purpose of maintaining the database. This distinction matters — entities sometimes interpret UIN allotment as regulatory blessing, when it is merely an administrative filing.
What Changed from FEMA 120 to FEMA 400
The shift from the old regime to the new can be summarised in five structural changes. First, "Indian Party" became "Indian entity" — each investor stands alone. Second, "JV/WOS" became "foreign entity" — broader coverage. Third, the two-layer subsidiary limit was formally codified to prevent multi-layered round-tripping structures. Fourth, OPI was separated from ODI with its own distinct regime. Fifth, the concept of a group company utilising the net worth of its subsidiary or holding company for computing the financial commitment limit was discontinued — each entity must use its own net worth.
The progressive liberalisation trajectory is visible in earlier notifications like the April 2012 liberalisation circular RBI/2011-12/481, which expanded automatic route limits and simplified procedures for overseas direct investments. These changes reflect a regulatory posture that has evolved from facilitation (the 2004 framework was designed to encourage Indian companies to go global) to calibrated control (the 2022 framework acknowledges that Indian capital going overseas is now large enough to require more granular monitoring, particularly for round-tripping, layering, and flows to sensitive jurisdictions).
The framework is administered jointly by the RBI (which issues the Master Direction and handles approval-route cases through its Foreign Exchange Department, Overseas Investment Division, at Amar Building, Mumbai) and the Central Government (which handles cases involving Pakistan, other specified jurisdictions, and strategic sectors). For the banking system, the AD Category I banks serve as the front-line implementation layer, processing thousands of overseas investment transactions against the detailed procedural requirements of this Master Direction.