Overseas Investment by Residents: ODI Rules in Brief

Indian startups going global — setting up a subsidiary in Delaware, incorporating a holding company in Singapore, or entering a joint venture with a foreign partner — are making overseas investments under FEMA, whether they realise it or not. The 2022 overhaul of India’s overseas investment framework introduced clearer rules, but the compliance obligations are real and ongoing. This post on overseas direct investment India covers the essentials.

Quick answer

The Foreign Exchange Management (Overseas Investment) Rules 2022 and Regulations 2022 — together referred to as the OI framework — govern all overseas investments by Indian residents, whether by companies, LLPs, or individuals. Investment for control (10% or more equity, or board rights) is classified as Overseas Direct Investment (ODI). Investment in listed foreign securities below 10% is Overseas Portfolio Investment (OPI). Most ODI by Indian companies goes through the automatic route with post-facto reporting on the FIRMS portal.

Before making an overseas investment, check:

1. Whether the investment is ODI (control) or OPI (portfolio below 10%) — the route and limits differ.
2. Whether your Indian entity is eligible for the automatic route — entities on the RBI caution list or under investigation are not.
3. That total financial commitment abroad stays within 400% of the Indian entity’s net worth — beyond that, prior RBI approval is needed rather than the automatic route.
4. That you have a plan for the Annual Performance Report (APR), which must be filed by 31 December each year for every active foreign entity.

The 2022 OI framework: ODI versus OPI

Prior to August 2022, overseas investments were primarily governed by FEMA 120. The new Foreign Exchange Management (Overseas Investment) Rules 2022 replaced that with a more structured framework built around three concepts:

Overseas Direct Investment (ODI): Any investment in a foreign entity where the Indian resident acquires 10% or more of the paid-up equity capital, or has the right to appoint a majority of the directors, or exercises control. ODI covers wholly owned subsidiaries (WOS) and joint ventures. This is the route relevant to founders setting up foreign subsidiaries, holding companies, or entering controlling JV arrangements.

Overseas Portfolio Investment (OPI): Investment in listed foreign securities (equity or debt) below the 10% threshold — essentially a minority, non-controlling stake in a publicly listed entity. Individuals can make OPI through the Liberalised Remittance Scheme (LRS) up to USD 250,000 per financial year. Indian companies can make OPI in listed foreign securities subject to conditions.

Overseas Investment (OI): The overarching term under the 2022 framework that covers both ODI and OPI, plus any other financial commitment (guarantees, pledges, deferred payment arrangements) made by an Indian entity in favour of a foreign entity.

The distinction matters because ODI and OPI have different reporting forms, different limits, and different ongoing compliance obligations.

Who can make ODI and under what limits

Indian companies and LLPs: Can make ODI in foreign entities under the automatic route, subject to the following conditions. The aggregate financial commitment abroad — which includes equity, loans, guarantees, and pledges, not equity alone — must stay within 400% of the Indian entity’s net worth as per the last audited balance sheet.

Commitment beyond 400% is not barred outright but requires prior RBI approval rather than the automatic route. The Indian entity must not be on the RBI’s caution list, must not be under investigation by any enforcement authority, and must not have overdue APRs or statutory filings for existing foreign investments.

A separate condition applies to ODI in the financial services sector: an Indian entity regulated by a financial services regulator (SEBI, RBI, IRDAI) can make ODI in a foreign financial services entity only if it is registered or regulated in that country, and subject to additional RBI conditions.

Individuals: Indian residents can make ODI under the automatic route, but the rules are more restrictive than for companies. Individual-level ODI typically requires the individual to be involved in the management of the foreign entity and is subject to LRS limits for remittance of funds. Most cross-border structures used by founders — where the individual’s Indian company makes the investment, not the individual personally — fall under the corporate ODI rules rather than the individual rules.

For OPI, individuals route the investment through LRS (up to USD 250,000 per year) and can buy listed shares, ETFs, or mutual fund units in foreign markets without a separate ODI approval.

Automatic route versus RBI prior approval

Automatic route: No RBI approval is needed before making the investment. The Indian entity or individual remits the funds through an authorised dealer (AD) bank and files the prescribed ODI reporting form in the FIRMS portal’s OID (Overseas Investment) module within 30 days of the investment.

(Under the 2022 Rules the reporting sits in the FIRMS OID module; confirm the current form label with your AD bank, as the nomenclature changed from the pre-2022 “Form ODI.”) This covers the vast majority of ODI by Indian companies — setting up a WOS, investing in a JV, or acquiring a foreign company’s shares for control.

Prior RBI approval route: Required when: the Indian entity is in a sector where RBI has specifically mandated prior approval (financial services, entities involved in real estate activities abroad, entities that are themselves foreign-owned above certain thresholds); or the Indian entity is on the caution list; or the investment involves special structures that the RBI has flagged for prior review.

When in doubt, file through the AD bank and ask the bank to confirm the applicable route before remitting. The bank is the AD (authorised dealer) for the transaction and has its own responsibility to verify FEMA compliance.

The “flip” structure and round-tripping risk

A common pattern for Indian startups raising venture capital is the “flip” — transferring the business to a foreign holding company (typically in Cayman Islands, Delaware, or Singapore) so that the parent entity is foreign and the Indian operations become a subsidiary. The foreign holding company then raises from foreign VC funds.

Under the OI framework, a flip involves the Indian founders making an ODI (investing in the foreign holding company) and receiving shares in return. This is permitted under the automatic route, but:

The Indian entity (original Indian company) must be carefully restructured so that the flip does not create a round-tripping issue. Round-tripping — Indian money going abroad and then returning to India as FDI — is prohibited under FEMA. The structure must have genuine commercial substance in the foreign jurisdiction, not be a shell used merely to route funds back into India.

The swap of shares (Indian founders transferring their Indian company shares to the foreign holding company in exchange for foreign holding company shares) must be priced at fair market value and reported through the appropriate FEMA mechanisms. This involves both the FDI angle (foreign holding company receiving Indian company shares = inbound FDI) and the ODI angle (Indian founders receiving foreign company shares = outbound investment).

Founders contemplating a flip should obtain a comprehensive FEMA opinion before executing the restructuring. Improperly structured flips are difficult and expensive to unwind.

Flowchart: ODI or OPI — which route applies?

Both routes — ODI and OPI — require reporting. The difference is that ODI involves a Form ODI on the FIRMS portal and an ongoing APR, while OPI through LRS is reported through the A2 form at the AD bank with no separate annual return.

Annual Performance Report: the ongoing obligation

The Annual Performance Report (APR) is the most commonly missed ODI compliance requirement. Every Indian entity that holds an overseas investment through ODI must file an APR for each foreign entity by 31 December of each year.

The APR covers: the activities of the foreign entity during the financial year, audited or management accounts of the foreign entity, any dividends or profits repatriated to India during the year, any additional investment or disinvestment during the year, and confirmation that the foreign entity is not engaged in prohibited activities.

The APR is filed through the AD bank on the FIRMS portal. The AD bank then submits the consolidated data to the RBI. Non-filing of the APR makes the Indian entity ineligible to make further overseas investments or to remit funds for the foreign entity’s expenses until the overdue APRs are filed.

For Indian startups with foreign subsidiaries, this means that every December, the team or their CA must compile the overseas entity’s accounts — even if the entity has had no activity — and file the APR through the bank. Setting a calendar reminder at entity formation, rather than discovering the requirement years later with multiple overdue APRs, is the practical approach.

Income from overseas investments and Schedule FA

Dividends from foreign subsidiaries: Taxable in India in the hands of the Indian company as income from other sources, at the company’s normal applicable rate. (The earlier concessional 15% rate on certain foreign dividends under Section 115BBD was withdrawn from AY 2023-24, so founders should not rely on older guidance quoting the 15% figure.)

Where the foreign subsidiary has already paid corporate tax in its country, the Indian company can claim a Foreign Tax Credit (FTC) through Form 67, available under Section 90 or 91 of the Income Tax Act 1961 depending on whether a DTAA exists with that country. (Form 67 can be filed up to the end of the relevant assessment year, following the 2022 relaxation of the earlier deadline.)

Capital gains on sale of overseas investment: When an Indian company or individual sells their stake in a foreign entity, the gain is a capital gain taxable in India. LTCG (held more than 24 months for unlisted overseas shares) or STCG rules apply. FTC is available for any capital gains tax paid in the foreign country.

Schedule FA disclosure: Any individual resident holding foreign assets — including shares in a foreign subsidiary acquired through ODI — must disclose those assets in Schedule FA of their ITR. This applies to the Indian individual founder who holds shares in the foreign holding company directly. Failure to disclose is a violation of the Income Tax Act and can attract penalties; serious non-disclosure can attract the Black Money Act.

Under the Income Tax Act 1961: The FTC mechanism (Section 90 / 91 and Rule 128), the Schedule FA reporting requirement, and the capital gains provisions all apply to overseas investment income. These fall within the mandatory dual-Act clusters: foreign asset disclosure (Schedule FA and Black Money Act interaction) and capital gains reinvestment treatment both require position statements under both Acts.

Under the Income Tax Act 2025: The income tax treatment of overseas investment income — dividends, capital gains, FTC entitlement — is carried forward from the 1961 Act. The Schedule FA disclosure obligation and its Black Money Act linkage continue. Section numbers in the 2025 Act are renumbered; verify exact provision references against the current 2025 Act text before applying them to any transaction.

Common mistakes

Setting up a foreign entity and not reporting it. Many founders incorporate a Delaware or Cayman entity with a registered agent service and never notify their AD bank or file Form ODI. The investment is an FEMA violation from day one, and subsequent fundraising due diligence invariably surfaces the gap.

Missing the APR deadline every year. December 31 is not a negotiable deadline. Overdue APRs can block the company from remitting fees, salaries, or further investments to the foreign entity until filings are cleared — causing operational disruption at the worst possible time.

Assuming the 400% net worth cap is easy to breach.For early-stage companies with minimal net worth, even a modest overseas commitment can reach the limit. A startup with ₹50 lakh net worth has automatic-route headroom of about ₹2 crore in aggregate financial commitment; beyond that, prior RBI approval is needed rather than the automatic route. Founders planning aggressive overseas structuring should capitalise the Indian entity adequately first, so the automatic route remains available.

Round-tripping without substance. Creating a foreign holding company purely to route money back into India as FDI, without genuine business activity in the foreign jurisdiction, is prohibited. RBI and ED (Enforcement Directorate) scrutinise structures that appear to be round-tripping arrangements.

Not filing Schedule FA after the flip. Once an Indian founder holds shares in a foreign holding company, those shares must be declared in Schedule FA every year, as long as the founder is a resident of India. Many founders mistakenly assume Schedule FA applies only to bank accounts, not to equity stakes.

ODI compliance checklist

📋 Before and after each overseas investment:

• Determine whether the investment is ODI (10%+ equity/control) or OPI (listed, below 10%)
• For ODI: confirm Indian entity is not on RBI caution list and has no overdue APRs
• Calculate total financial commitment (equity, loans, guarantees) against the 400% net worth automatic-route threshold; plan for RBI approval if you will exceed it
• Remit funds through the AD bank; file Form ODI on FIRMS portal within 30 days
• For OPI/LRS: use A2 form at bank; keep within USD 250,000 annual limit
• Set a recurring December 31 deadline for APR filing for each foreign entity
• Collect audited or management accounts of the foreign entity each year for APR
• Declare foreign entity shares in Schedule FA of personal ITR if you are a resident
• File Form 67 in India when claiming FTC on dividends or gains taxed abroad
• For flip structures: obtain a FEMA opinion before executing; ensure genuine commercial substance in the foreign jurisdiction

Final takeaway

The 2022 OI framework cleaned up the rules for overseas investment by Indian residents, but it did not reduce the compliance obligations — in some ways it clarified and formalised them further. For founders going global, the compliance chain is: report when you invest, file an APR every December for every entity you hold abroad, disclose in Schedule FA every year, and claim FTC when foreign taxes are paid. None of these steps is onerous once they are embedded in the annual calendar. The risk lies in setting up a foreign entity and assuming FEMA compliance can be sorted later — it cannot, and the cost of regularisation later typically exceeds the cost of doing it right from the start.

Planning a foreign subsidiary, a flip structure, or an overseas JV? eTaxMate can assess your ODI eligibility, handle the FIRMS portal reporting, set up APR filings, and coordinate the income tax disclosures — so the overseas structure does not create a compliance backlog at home.

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This blog post is for general information only and does not constitute professional advice. FEMA rules and income tax provisions are subject to amendment; their application depends on the specific facts of each transaction. The ITA 2025 references should be verified against the current text of the Act. Readers should consult a qualified professional before making any overseas investment. eTaxMate accepts no liability for any action taken based on this content.

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