Consider a person who worked abroad for several years as a Non-Resident Indian, accumulated salary in a foreign bank account while non-resident, and has now returned to live in India. She wants to use those foreign savings to take up unlisted equity in a private company incorporated overseas, where she will sit as a promoter-director. Two questions immediately arise under India's exchange-control law: is this a direct or a portfolio investment, and can she use money already sitting abroad without eating into her annual remittance limit? The answers turn on the Foreign Exchange Management (Overseas Investment) Rules, 2022, and on a long-standing carve-out in Section 6(4) of FEMA for assets built up while non-resident.
The overseas investment framework since August 2022
The regime that governs this question was overhauled on 22 August 2022. The Foreign Exchange Management (Overseas Investment) Rules, 2022 (notified by the Central Government vide G.S.R. 646(E)) and the corresponding Foreign Exchange Management (Overseas Investment) Regulations, 2022 (FEMA 400/2022-RB) together superseded the earlier FEMA 120/2004-RB regime in its entirety. They are operationalised through the RBI's Overseas Investment Directions, 2022, and the consolidated Master Direction on Overseas Investment (FED Master Direction No. 15/2024-25, 24 July 2024). The stated object of the new framework is a unified, liberalised regime for both Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI), with an emphasis on ease of doing business while retaining compliance discipline.
The practical significance of the change is that resident individuals, who under the old FEMA 120/2004 regime were largely restricted from making ODI and needed RBI approval, may now undertake ODI under the automatic route, subject to conditions.
ODI or OPI? Why unlisted equity is direct investment
The classification is not a matter of degree; it is defined by the instrument acquired. Under the OI Rules, "Overseas Direct Investment" means a financial commitment in a foreign entity by way of, among other things, acquisition of any unlisted equity capital of a foreign entity, or subscription to its Memorandum of Association, or investment of 10% or more of the paid-up equity of a listed foreign entity, or investment with control in a listed foreign entity even where the stake is below 10%. Overseas Portfolio Investment, by contrast, is confined to listed equity (below 10% and without control) and listed debt instruments.
Acquiring unlisted equity in a foreign private company therefore falls squarely within ODI, because it is an acquisition of unlisted equity capital of a foreign entity. The memo underlying this analysis stresses a durability rule: once an investment is classified as ODI, it keeps that classification even if the stake later falls below 10% or control is subsequently lost.
The promoter-director role and "control"
The OI Rules define "control" as the right to appoint a majority of the directors, or to control management or policy decisions, exercisable directly or indirectly, including through shareholding, management rights, shareholders' agreements or voting agreements conferring 10% or more of the voting rights. A person who comes in as a founding or substantial shareholder and sits on the board as promoter-director will ordinarily satisfy this control element, which only reinforces the ODI characterisation.
Conditions for a resident individual's ODI
Schedule III of the OI Rules permits a resident individual to make ODI, but on conditions directed at the nature of the target. The operative language is:
A resident individual may undertake ODI in equity capital of an operating foreign entity not engaged in financial services activity and which does not have subsidiary or step down subsidiary where the resident individual has control in the foreign entity.
Three limbs matter. The foreign company must be an "operating" entity, meaning it is engaged in bona fide business activity — defined as any business activity permissible under the law in force in India and in the host jurisdiction. It must not be engaged in financial services activity (save for limited exceptions). And it must not sit atop a subsidiary or step-down subsidiary structure in which the individual has control. A conventional operating private company overseas, in a non-financial sector and without a subsidiary chain, meets these requirements.
Automatic route, and where approval bites
A resident individual's ODI in such a company proceeds under the automatic route, without RBI approval. There is no separate financial-commitment ceiling on resident individuals under the automatic route, but the investment must sit within the overall Liberalised Remittance Scheme limit where it is funded by remittance from India. Prior RBI approval is reserved for exceptional cases — investment in strategic sectors requiring government approval, investment in jurisdictions notified by the Central Government (Pakistan is given as the example), or ODI in financial services activity outside the permitted exceptions.
Funding the investment: LRS remittance versus pre-existing foreign assets
This is where a returning resident's position diverges sharply from that of an ordinary resident sending money abroad, and it is the pivot of the whole analysis.
The LRS route and its USD 250,000 ceiling
The Liberalised Remittance Scheme lets a resident individual remit up to USD 250,000 per financial year (April to March) for permissible current and capital account transactions without RBI approval. The LRS Master Direction expressly lists ODI and OPI made in accordance with the 2022 overseas-investment framework among the permissible capital account uses, so an ODI funded by fresh remittance from India is eligible — but it consumes the annual USD 250,000 limit, which is an aggregate cap across all LRS transactions in the year. An investment exceeding the annual ceiling can be spread across financial years, remitting up to USD 250,000 each year, or the excess portion taken to RBI for approval.
Using money already held abroad — Section 6(4) of FEMA
The more efficient route, where the funds were earned and banked while the person was non-resident, avoids the LRS limit altogether. Section 6(4) of FEMA provides:
A person resident in India is free to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.
This provision is permissive and requires no RBI approval. It applies automatically to a person who was non-resident when the foreign asset was acquired and is now resident in India. Salary earned through employment abroad while non-resident, and deposited in a foreign bank account opened during that period, is a paradigm case of an eligible asset under Section 6(4).
The RBI's clarificatory circular of 9 January 2014 (A.P. (DIR Series) Circular No. 90) confirms that a person may freely use such eligible assets — and income or sale proceeds from them received after return to India — to make fresh investments abroad without RBI approval, provided the cost of the investment is met exclusively out of the eligible assets and the transaction does not otherwise contravene FEMA. The 2022 Rules carry this forward in Schedule III, which allows overseas investment by a resident individual to be made, among other sources, "in accordance with Section 6(4) of FEMA." Funding an ODI from pre-existing foreign balances by this route does not consume the annual LRS limit.
A note on account conversion
Where the returning individual held funds in a Non-Resident External (NRE) account, that account must, on the change of residential status, be redesignated as a resident rupee account or as a Resident Foreign Currency (RFC) account. Balances in an RFC account may likewise be used directly for ODI without attracting the LRS ceiling. The practical point for the investor is to be clear whether the funds are held in a foreign bank account opened while non-resident (eligible under Section 6(4)) or in an RFC account in India — either supports the investment without consuming LRS headroom.
Reporting under the OI Rules: Form FC, UIN and the APR
The Section 6(4) route grants an exemption from prior approval, not from reporting. The reporting architecture under the 2022 regime is exacting, and much of it is time-bound.
Form FC before the money moves
Form FC is the primary reporting instrument. A resident making ODI must file Form FC with the designated Authorised Dealer (AD) bank before making the investment. The Directions are explicit that the first ODI is not permitted before Form FC is filed and a Unique Identification Number obtained from the RBI, and that the form must be submitted at the time of undertaking the financial commitment or of sending the outward remittance, whichever is earlier. In practice, Form FC must be filed before the remittance is actually made.
Once Form FC is filed, the RBI's Overseas Investment Database system generates a 13-digit Unique Identification Number (UIN) for the foreign entity — assigned to the entity, not the individual investor — which is used for all subsequent reporting on that entity. No remittance should be made before the UIN is received.
Evidence of investment within six months
Within six months from the date of remittance, the investor must submit to the AD bank the share certificate or other instrument evidencing the investment. Failure to do so triggers a Late Submission Fee and can bar further financial commitment to the same foreign entity until regularised.
The Annual Performance Report
After the initial investment, an Annual Performance Report (APR) must be filed, in practice on or before 31 December each year, reporting on the foreign entity's financial performance and the investor's holding. For a resident individual the APR must be certified by a chartered accountant even where the foreign company is not statutorily audited. The APR exemption — available where the resident holds less than 10% without control and has made no other financial commitment — does not assist a promoter-director with control and a substantial holding, for whom the annual APR is mandatory.
The Late Submission Fee mechanism
The 2022 Regulations introduced a Late Submission Fee for delayed OI filings, with higher rates for longer delays and a window for regularising historic delays. Non-payment can result in a prohibition on further financial commitment to the foreign entity and a restriction on transferring existing shares — which is why timeliness of Form FC and APR filings is not a formality.
Repatriation timelines and the reporting the Rules do not require
Dividends and other income from the investment may be retained and reinvested abroad; but if brought to India, they must be received within 90 days of falling due, and sale proceeds on disinvestment must be repatriated within 90 days of the sale. Notably, unlike the old regime, the 2022 Rules do not require separate FEMA reporting of dividends or income to the RBI — that income is instead reported in the income-tax return. Form OPI, it should be noted, is the reporting form for Overseas Portfolio Investment only; the applicable form here is Form FC.
The tax and Black Money Act overlay
Exchange-control compliance is only half the picture. A resident and ordinarily resident individual must separately disclose foreign assets in Schedule FA of the income-tax return.
Schedule FA disclosure
Schedule FA requires disclosure of all foreign assets in which the individual is a beneficial owner, legal owner or beneficiary. It applies to residents who are ordinarily resident; non-residents and residents who are not ordinarily resident are outside its scope. For the fact pattern here, the two disclosures that matter are the foreign bank account holding the funds (Table A1, with peak and closing balances) and the equity shares in the foreign company (Table B, with investment cost, fair value, holding percentage and any dividends). Foreign income — interest and dividends — is reported in Schedule FSI, with foreign tax credit claimed through Form 67 where tax has been paid abroad. The CBDT's guidance stresses that assets reported in Schedule FA may also need to appear in Schedule AL where that schedule applies.
The penalties that make disclosure non-optional
The consequences of non-disclosure are severe. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 taxes undisclosed foreign assets at a flat 30% with no deductions, and adds a penalty of three times the tax (effectively 90% of the asset value). A separate penalty may run to INR 10,00,000 for failure to disclose, and wilful non-disclosure carries rigorous imprisonment of three to ten years. The Black Money Act applies to residents who are ordinarily resident, not to NRIs or the not-ordinarily-resident. The memo notes that the Income-tax Act's general penalty under Section 271(1)(c) may also apply, and that FEMA contraventions attract their own consequences under Sections 11 and 13 of that Act.
Why silence is not an option: CRS and FATCA
Foreign banks and investment platforms report account balances, holdings and income to Indian authorities under the Common Reporting Standard and, for US-connected accounts, FATCA. The CBDT has been issuing automated "nudge" communications to taxpayers whose foreign assets surface through this data but were not disclosed. Where a prior year's return omitted the disclosure, a revised return under Section 139(5) is the memo's suggested corrective — filed using ITR-2 or ITR-3 (which carry Schedule FA), with the foreign account and shares disclosed and foreign tax credit claimed via Form 67.
Practical Takeaways
- Characterise correctly. Unlisted foreign equity taken up as a promoter-director is ODI, not portfolio investment. It travels under the automatic route and requires Form FC and OI Rules compliance, not a Form OPI.
- Fund from the right pocket. Using pre-existing foreign balances accumulated while non-resident, in accordance with Section 6(4), avoids the USD 250,000 LRS ceiling and needs no RBI approval — but only if the cost is met exclusively from eligible assets.
- Keep the Section 6(4) evidence. Contemporaneous proof that the foreign account was opened and funded during non-resident employment — employment contract, visa or residency records, historic bank statements — is what satisfies the AD bank that Section 6(4) applies. Form FC should state that funding is "in accordance with Section 6(4) of FEMA."
- Respect the clock. Form FC and UIN before any remittance; share certificate within six months; APR (CA-certified) by 31 December each year; dividends and sale proceeds within 90 days of becoming due. Delays attract Late Submission Fees and can freeze further investment.
- Run the tax track in parallel. Disclose the foreign account and shares in Schedule FA, report foreign income in Schedule FSI, and claim foreign tax credit through Form 67. The Black Money Act penalties for undisclosed foreign assets are punitive, and CRS/FATCA data-sharing makes concealment self-defeating.
The memo's own caveats bear repeating: Indian FEMA and tax compliance is only one side of the transaction, and the investor must separately satisfy the host jurisdiction's company law and any foreign-investment restrictions. AD banks retain a measure of discretion in assessing "bona fide business activity," and the overseas-investment rules remain subject to periodic amendment.
Key Authorities
- Foreign Exchange Management (Overseas Investment) Rules, 2022, G.S.R. 646(E) (22 August 2022), and Foreign Exchange Management (Overseas Investment) Regulations, 2022 (FEMA 400/2022-RB) — unified ODI/OPI framework; Schedule III governs resident-individual ODI and its sources of funding.
- Foreign Exchange Management (Overseas Investment) Directions, 2022, A.P. (DIR Series) Circular No. 12 (22 August 2022), RBI/2022-2023/110 — Form FC, UIN, reporting timelines and Late Submission Fee. Source
- Master Direction on Overseas Investment, FED Master Direction No. 15/2024-25 (24 July 2024) — consolidated operational guidance on the OI regime. Source
- Foreign Exchange Management Act, 1999, Section 6(4) — a resident may hold and invest foreign assets acquired while non-resident, without RBI approval.
- RBI A.P. (DIR Series) Circular No. 90 (9 January 2014) — clarifies the scope of Section 6(4) and permits use of eligible foreign assets for fresh overseas investment without approval. Source
- Income-tax Act, 1961 — Schedule FA (foreign asset disclosure), Schedule FSI (foreign income), Form 67 (foreign tax credit), Section 139(5) (revised return), Section 271(1)(c).
- Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 — 30% tax plus penalty of three times the tax on undisclosed foreign assets; disclosure penalties and prosecution; applies to residents who are ordinarily resident.
This analysis reflects the law as at May 2026. It is published for general information and does not constitute legal advice.