The 2022 Overhaul: What Changed
In August 2022, the Government of India and the Reserve Bank of India jointly notified a revised overseas investment framework that replaced the decades-old FEMA (Transfer or Issue of Any Foreign Security) Regulations and the Overseas Direct Investment Regulations. The new framework — the Foreign Exchange Management (Overseas Investment) Rules, 2022 and corresponding RBI Regulations — introduced several significant changes.
The key structural change was the introduction of the concept of an "Overseas Investment" umbrella, under which all outbound investments — whether ODI (Overseas Direct Investment) or OPI (Overseas Portfolio Investment) — are now governed by a single consolidated framework. ODI specifically refers to investments in unlisted foreign companies where the Indian entity acquires 10% or more equity, or otherwise has control.
Who Can Make ODI?
Under the current framework, the following entities are permitted to make ODI:
- Resident Indian individuals: Under the Liberalised Remittance Scheme (LRS), individuals can remit up to USD 250,000 per financial year for ODI purposes.
- Indian companies: Can make ODI in a "bonafide business activity" subject to the financial commitment limits and other conditions described below.
- Regulated financial entities: Banks, NBFCs, and other RBI-regulated entities have specific separate guidelines.
One significant restriction retained from the old framework: Indian companies in certain restricted sectors (real estate business, gambling, dealing in financial products not permitted in India) cannot make ODI in the same or similar sector abroad.
Financial Commitment Limit
The total financial commitment an Indian entity can make in all its overseas investments (ODI + guarantees + loans) is capped at 400% of its net worth as per the last audited balance sheet. This is the single most important financial constraint in the ODI framework.
For fast-growing startups, this limit can become binding relatively quickly — particularly when the Indian entity is providing guarantees to support its overseas subsidiary's borrowings in addition to direct equity investment. Careful monitoring of the headroom against this limit is essential.
The 400% limit applies to the consolidated financial commitment of the Indian entity and all its subsidiaries/JVs that are Indian residents. Cross-company structures need to be carefully mapped to ensure the aggregate stays within limits.
Structure: Step-Down Subsidiaries and Round-Tripping
A common structure for Indian companies expanding globally is the Delaware Holding Company model — an Indian parent sets up a US holding company, which then establishes operating subsidiaries in target markets. This is often chosen for investor relations, optionality for future US IPO, and ease of attracting global talent with US-standard equity.
Under the 2022 framework, step-down subsidiaries (i.e., subsidiaries of overseas subsidiaries) are permitted, but the Indian entity must ensure that:
- The overseas entity is a "bonafide business" with genuine operations
- The structure is not designed to route capital back into India (the anti-round-tripping rule)
- Annual Performance Reports (APRs) are filed for each overseas entity
Round-tripping — where Indian capital goes abroad and returns to India as FDI — remains prohibited. This means an Indian company cannot invest in an overseas entity that then invests back into the same or a related Indian company, unless specific conditions are met.
Reporting Requirements
ODI reporting is conducted through the FIRMS portal (similar to FDI reporting). Key filings include:
| Filing | Timing | Details |
|---|---|---|
| Form ODI Part I | Before remittance | Initial notification to AD Bank; details of the foreign entity and investment amount |
| Form ODI Part II | Within 30 days of transaction | Confirmation of remittance / investment made |
| Annual Performance Report (APR) | 31st December annually | Financial details of each overseas entity; must be certified by the overseas entity's statutory auditor |
The APR requirement is one of the most frequently missed obligations. Every Indian entity that has made ODI must file APRs for each overseas entity, each year, regardless of whether any additional investment was made that year. Non-filing attracts penalties and can also block future ODI approvals.
Common Pitfalls
- Missing APR filings: As noted above, this is by far the most common violation. Build a December deadline into your annual compliance calendar.
- Exceeding the 400% limit: Particularly when guarantees are included in the calculation. Monitor the headroom regularly.
- Investing in restricted sectors: Real estate and certain financial activities remain restricted. Sector analysis is essential before the first investment.
- Round-trip structures: These are increasingly scrutinised by the RBI, particularly in complex group structures.
- Not reporting step-down subsidiaries: All entities in the overseas chain must be captured in the ODI reporting, not just the immediate subsidiary.
Practical Takeaways
For Indian companies planning global expansion, the ODI framework is workable and permissive in most cases. The key is to plan the structure before the first investment, not after. Choosing between a direct subsidiary, a step-down holding structure, or a JV has regulatory, tax, and operational implications that are far easier to address at the design stage.
If you have existing ODI structures with compliance gaps — missing APRs, unreported step-down subsidiaries, or potential round-tripping issues — the compounding mechanism is available, and proactive regularisation is almost always better than waiting for the issue to surface.
This article is for informational purposes only and does not constitute legal, tax, or financial advice. Please consult with a qualified professional for advice specific to your situation. Maroon Advisors would be delighted to assist — get in touch.