After almost two decades, the Central Government has pressed reset on the overseas investment framework. In August 2022, the Foreign Exchange Management (Overseas Investment) Rules 2022 and the corresponding Regulations were notified. Collectively called the ODI Regulations 2022, these mark the first major revamp in 18 years.
The purpose is clear: make overseas investment simpler, broader, and less dependent on prior approvals. With India’s corporate sector expanding globally, the earlier framework had become outdated and restrictive. The new rules cut down compliance costs, widen the scope of permissible activities, and introduce long-needed clarity in key definitions.
Some of the notable changes include clearer differentiation between Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI), recognition of financial sector investments abroad, rules for deferred payments, provisions for write-offs during disinvestment, a late submission fee mechanism, and streamlined reporting formats.
It is also worth noting that investments already made under the older regime are now deemed to have been made under the new one—avoiding unnecessary duplication or regularization.
Key Highlights of the Amendments
2.1 Difference between ODI, OPI, and Financial Commitment
The new framework has at last put precise definitions on the table:
- ODI refers to investments such as acquiring unlisted equity in a foreign entity, subscribing to its memorandum of association, or taking up at least 10% equity in a listed entity. Even holding below 10% can qualify as ODI if the Indian investor has control—defined broadly to include management rights, director appointments, or voting power beyond 10%.
- OPI serves as the residual category—foreign securities that do not fall under ODI. But it excludes unlisted debt and certain securities tied to Indian entities outside an IFSC.
- Financial commitment is wider, covering ODI, debt (except OPI) given to the foreign entity, and non-fund based facilities like guarantees.
A small but important takeaway is that portfolio investments by individuals—say less than 10% equity without control—are now neatly slotted as OPI, easing reporting norms.
2.2 Overseas Investment in Debt Instruments
Debt investments get a tighter ring-fence now. Indian entities can extend debt only if they already hold control in the foreign entity through ODI. The loan must be documented with an agreement, and interest charged at arm’s length.
Resident individuals, however, remain barred from directly investing in overseas debt instruments.
In effect, this means debt is no longer a standalone path—it is tied to equity control. This is stricter than the older rules, where debt was allowed alongside any equity investment without control thresholds.
2.3 Investment in Financial Services Sector
A foreign entity counts as engaging in financial services if the same activity in India would require regulation. The new regime allows Indian entities that are not themselves financial service providers to invest in such entities abroad (excluding banking and insurance) provided they have earned profits for the past three years.
Interestingly, this is a big departure. Previously, only regulated Indian entities could set up financial service arms overseas. Now, profitable companies outside the sector can participate too—though banking and insurance remain out of bounds.
One grey area is whether pure “investing activity” qualifies as financial services. For instance, unregistered core investment companies may still be left uncertain.
2.4 Round Tripping Structures
Round-tripping has always been a sensitive subject. Under the new rules, Indian entities cannot make financial commitments in a foreign entity that reinvests back into India, if this creates more than two layers of subsidiaries.
This restriction does not apply to banks, NBFCs, insurers, or government-owned companies.
Earlier, such structures required specific approvals. Now, they are generally allowed so long as the “two-layer rule” is respected. But ambiguity remains on whether to count these layers from the Indian or foreign company’s perspective. Practitioners will likely await clarifications.
2.5 Overseas Investments by Resident Individuals
Resident individuals are given more room, with some caveats. They can invest directly in operating foreign entities (outside financial services), provided the entity does not have further subsidiaries where control is exercised.
The exceptions are inheritance, ESOPs, sweat equity, or minimum qualification shares—these do not face the subsidiary restriction.
Gifts are permitted too, though with conditions: no limit on gifts from relatives in India, but gifts from non-residents must comply with FCRA rules.
Employees can also acquire shares under ESOPs or sweat equity without limits, as long as the scheme is uniform globally and the overseas entity is linked to the Indian employer.
2.6 Requirement of Carrying on Bona Fide Business Activity
The rules now demand that overseas investments must be in a bona fide business activity—i.e., something legally permissible both in India and the host country.
This requirement extends through all levels of the structure, including step-down subsidiaries and SPVs. Essentially, the regulator wants to ensure investments abroad are for genuine business and not roundabout financial engineering.
2.7 Amendment in Net-Worth Conditions
A notable clean-up has been done on net worth definitions. It now aligns with Section 2(57) of the Companies Act, 2013. For partnerships and LLPs, it is calculated as partner contributions plus retained earnings, minus losses and deferred expenses.
This clears the confusion on whether securities premium was part of net worth (it is now included). At the same time, Indian entities can no longer piggyback on the net worth of holding or subsidiary companies to justify their overseas commitments.
2.8 Other Key Changes
Several procedural relaxations also find place:
- Late submission fees can now regularize delayed ODI filings, but only within three years, and future commitments are barred until filings are cleared.
- RBI approvals for write-offs on disinvestment are no longer required.
- Where companies are under investigation or loan default, RBI approval has been swapped for an NOC from relevant agencies or banks.
- Balance sheet restructuring involving large write-offs now only needs a valuation report (beyond USD 10 million).
- Equity transfers must follow arm’s-length pricing, though certification requirements are still unclear.
- Listed company investments are capped at 50% of net worth. Unlisted entities can invest in listed companies only through specific modes like rights or mergers.
- Deferred payment mechanisms are recognized, with upfront transfer of securities but staggered consideration.
- Overseas start-up investments are permitted but cannot be funded through borrowing. AD banks must verify compliance.
Our Comments
There is no doubt the ODI Regulations 2022 mark a sweeping liberalization. The burden of approvals is much lighter, and clarity on definitions should help practitioners. That said, grey zones remain, particularly on round-tripping and financial service categorizations.
Companies with existing or proposed overseas structures will need to revisit them carefully to ensure compliance under the new framework.
Final Thoughts
The overhaul of the ODI regime is not just a regulatory update—it is a signal of India’s confidence in its businesses expanding abroad. By shifting from a permission-heavy system to a disclosure-and-compliance model, the government has handed companies greater freedom, but also greater responsibility.
While certain issues—like subsidiary layering rules or treatment of investment companies—may take time to settle, the larger direction is clear. Indian firms now have a stronger, more flexible platform to globalize. For professionals, this is the right moment to re-evaluate overseas structures, spot risks, and make the most of new opportunities.
