The decision usually arrives eighteen months after India entry. The Indian subsidiary is profitable, the group wants a regional hub in Singapore or a sales entity in Dubai, and someone in the finance team says the obvious thing: fund it from India, the cash is sitting there. What nobody checks is that money leaving India to buy equity abroad is governed by an entirely different rulebook from the money that came in — and that rulebook, the Overseas Investment framework of 2022, has its own approval routes, its own filing forms, and its own set of things it flatly prohibits.

Foreign-owned Indian companies get caught here more often than domestic groups do, because the instinct is to treat the Indian entity as a pass-through node in a global structure. Under Indian exchange control it is not. It is a resident entity, and when a resident entity puts capital into a foreign entity, that is Overseas Investment — the mirror image of FDI, and regulated with comparable seriousness.

What the regulation actually says

Inbound and outbound investment sit under two separate limbs of the Foreign Exchange Management Act, 1999. Inbound FDI is governed by Section 6(3)(b) read with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 — the NDI Rules — supplemented by the DPIIT Consolidated FDI Policy and its Press Notes. Outbound investment is governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022, the Overseas Investment Regulations, 2022, and the Overseas Investment Directions, 2022, collectively referred to as the OI framework. These replaced the older ODI/ODI-JV regime notified under FEMA Notification 120 and consolidated nearly two decades of accumulated circulars into a single structure.

The OI framework splits outbound investment into two categories, and the distinction determines almost everything that follows.

Overseas Direct Investment (ODI) means acquiring unlisted equity capital of a foreign entity; subscribing to the memorandum of a foreign entity; or acquiring 10% or more of the paid-up equity capital of a listed foreign entity. It also captures any investment — even below 10% — where the Indian entity acquires control of the foreign entity. Control under the OI Rules means the right to appoint a majority of directors, or to control management or policy decisions, including through shareholding, management rights, shareholders' agreements or voting agreements. A 5% stake with a board seat and a veto over the budget is ODI, not portfolio investment.

Overseas Portfolio Investment (OPI) is everything else — investment in listed foreign securities below 10% without control. Indian companies may make OPI up to 50% of their net worth as on the date of the last audited balance sheet.

The headline number for ODI is the financial commitment limit: 400% of the net worth of the Indian entity as on the date of the last audited balance sheet, under the automatic route. "Financial commitment" is broader than equity — it includes equity capital, debt extended to the foreign entity, guarantees issued on its behalf (100% of the amount for performance guarantees, and the full value for other guarantees), and pledges of shares or assets. A company with ₹10 crore net worth that puts ₹5 crore of equity into a Dubai subsidiary and guarantees a ₹30 crore facility for it has made a ₹35 crore financial commitment, not ₹5 crore. Anything above the 400% ceiling, or outside the automatic route conditions, requires prior RBI approval routed through the AD bank.

Three prohibitions matter more than the rest for foreign-owned groups:

Round-tripping is restricted. The OI Rules permit a structure where the foreign entity has investment back into India, but only to a limit of two layers of subsidiaries below the foreign entity, and only where the resulting structure is not designed to circumvent Indian law. If the Indian subsidiary funds a Singapore holdco which then holds another Indian company, the layering rules and the FDI rules both apply, and the transaction will draw scrutiny from the AD bank. Structures that exist purely to re-route Indian money back into India as "foreign" investment are not permitted.

Real estate and gambling are prohibited outright. No ODI is allowed into a foreign entity engaged in real estate activity — defined as buying and selling real estate or trading in transferable development rights, though development of townships, roads, bridges and construction-development projects are carved out — or into gambling in any form.

The Indian entity must not be on a defaulters list. An entity classified as a wilful defaulter, under investigation by a financial sector regulator, or with an outstanding non-performing account cannot make ODI without a no-objection certificate from the relevant lender, regulator or investigating agency. The NOC is deemed granted if not refused within sixty days.

There is also a bona fide business activity test running through the framework: the foreign entity must be engaged in a genuine business, and where the Indian entity does not have a controlling stake, RBI expects to see commercial rationale rather than treasury placement dressed as strategy.

Practical implications

The most common failure mode is not an outright prohibition — it is a compliance gap discovered years later, when the group tries to do something with the structure.

The Indian entity funds the foreign subsidiary, the money moves through the AD bank, and Form FC is either never filed or filed with wrong particulars. Nothing happens immediately. Then the group wants to restructure, or sell the foreign entity, or repatriate proceeds, and the AD bank asks for the Unique Identification Number allotted at the time of the original ODI. There is no UIN, because there was no filing. The transaction stalls.

The consequences are real. Delayed or non-filing of the annual return attracts a Late Submission Fee, and continued non-compliance is a contravention of FEMA that must be regularised by compounding under Section 15 of FEMA read with the Foreign Exchange (Compounding Proceedings) Rules. Compounding is an administrative settlement, not a criminal proceeding, but it is a disclosed liability, it takes months, and it surfaces in every subsequent diligence exercise.

Contravention of the substantive prohibitions is worse. An ODI into a prohibited sector, or a round-tripping structure that fails the layering test, may require unwinding — and unwinding a foreign subsidiary that has been operating for three years is a commercially painful exercise conducted under regulatory pressure.

There is a tax dimension too. Where the Indian entity funds a foreign subsidiary by way of loan rather than equity, the interest rate must satisfy transfer pricing arm's-length requirements under Section 92 of the Income-tax Act, and the arrangement enters the Form 3CEB reporting perimeter. Where the foreign entity's income is passive and its effective tax rate is low, the Controlled Foreign Company and Place of Effective Management provisions may bring the foreign entity's income into the Indian tax net. Exchange control approval does not confer tax efficiency.

Step-by-step: what to do

Establish the correct net worth figure. Take net worth as on the date of the last audited balance sheet of the Indian entity, computed under Section 2(57) of the Companies Act, 2013. This is the base for the 400% financial commitment ceiling. Do not use management accounts.
Classify the investment as ODI or OPI. Test on two axes: percentage of paid-up equity, and control. Unlisted equity of any size is ODI. Listed equity at 10% or more is ODI. Any acquisition conferring control is ODI regardless of percentage. Everything remaining is OPI, subject to the separate 50%-of-net-worth cap.
Compute total financial commitment. Add proposed equity, proposed loans, guarantees (at the applicable reckoning percentage), and any pledge of Indian or overseas assets. Compare against 400% of net worth. If the total exceeds the ceiling, the transaction is approval-route.
Run the eligibility screen. Confirm the Indian entity is not a wilful defaulter, is not under investigation by a financial sector regulator, and has no NPA account requiring an NOC. Confirm the target foreign entity is not engaged in real estate activity or gambling. Confirm the structure does not exceed two layers of subsidiaries where there is investment back into India.
Obtain a valuation. ODI into an existing foreign entity requires a valuation report from a registered valuer or an investment banker or chartered accountant of appropriate standing, consistent with internationally accepted pricing methodology. Fresh subscription to a newly incorporated entity at face value does not generally require valuation.
File Form FC through the AD bank before remitting. Form FC is the master ODI reporting form filed on the RBI OID application, submitted through your designated AD bank. The AD bank verifies eligibility, obtains the Unique Identification Number (UIN) from RBI, and only then permits the outward remittance. Every subsequent transaction relating to that foreign entity is reported against the same UIN.
Route all remittances through the single designated AD bank. The OI framework requires one designated AD bank per foreign entity. Splitting remittances across banks breaks the reporting chain.
File the Annual Performance Report (APR) by 31 December each year. The APR is filed for each foreign entity where the Indian entity holds control or where ODI has been made, based on the foreign entity's audited financial statements, through the same AD bank against the same UIN. Where local law does not require an audit, the APR may be filed on unaudited accounts certified by the Indian entity's statutory auditor.
Report every subsequent event. Disinvestment, further investment, change in shareholding pattern, restructuring involving write-off, and closure of the foreign entity are each separately reportable — disinvestment within 30 days of receipt of proceeds, with repatriation of the full sale consideration to India within 90 days.
Coordinate with the transfer pricing file. Every intercompany loan, guarantee, service charge and royalty between the Indian entity and the foreign subsidiary is a specified domestic or international transaction requiring arm's-length documentation and Form 3CEB disclosure.

FAQ

Can our Indian subsidiary make ODI if it is itself 100% foreign-owned?

Yes. Eligibility for ODI turns on residency, not ownership. A wholly owned Indian subsidiary of a foreign parent is an Indian resident entity and may make ODI within the 400% net worth ceiling, subject to the same conditions as any other Indian company. The complication is structural: if the foreign entity being funded sits in the same group as the foreign parent, review the layering and round-tripping conditions carefully before committing.

What happens if we already remitted funds without filing Form FC?

The remittance is a FEMA contravention that must be regularised. Approach your AD bank, complete the Form FC filing with correct particulars and obtain the UIN, pay any Late Submission Fee assessed, and where the delay is material, file a compounding application with the relevant RBI regional office. Do not make further remittances to the same entity until the position is regularised — each additional transfer compounds the exposure.

Is a guarantee to an overseas bank on behalf of our foreign subsidiary reportable?

Yes. A guarantee is a financial commitment under the OI Rules, counts against the 400% ceiling at the applicable reckoning percentage, and must be reported through the AD bank at the time it is issued — not when it is invoked. Guarantees issued without reporting are one of the most frequently missed ODI compliances.

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