Overseas Direct Investments by Resident Individuals


  1. About the Author:

CA Dhruv Shah is Partner at Ambavat Jain & Associates LLP. He heads the practice of International Taxation & FEMA.

  1. Opening Note:

With the opening up of the World Economies and the financial borders of the countries getting more and more blurred, we regularly hear within our peers a keen interest on making investments outside India. For some of them it might be a strategic call for expanding their business overseas by incorporating business entities in those countries. For some it might be an investment call to try and invest in interesting businesses or various start-ups overseas. OR for some, it would be just a curiosity call to invest in FANG stocks (Facebook (Meta), Amazon, Netflix & Google).

Looking at this new age requirement, the RBI along with the Central Government brought in the new Overseas Investment (“OI”) regulations in August 2022. These regulations have laid down the permissibility and modus operandi to be followed by Residents who are interested in making investments abroad.

By way of this article, we are trying to simplify these regulations for the readers. The objective here is not to address any controversies or complex situations. Instead, we are focusing on presenting a simple guide for various scenarios in which an individual might want to invest overseas. In each of these scenarios we have presented a Start-to-End guide of what the regulations suggest. To further help fellow professionals cross-link the statements herein with the Rules and Regulations, we have tried to give relevant references wherever possible.

  1. Brief coverage of the OI regulations and rules:


Before we delve deep into what these regulations have to suggest to individuals who wish to invest overseas, let us just broadly understand the coverage of the OI regulations and rules of 2022. This would help you get a brief idea of what other scenarios and situations are also dealt with in these regulations.

In this article when we talk about regulations, we are referring to Foreign Exchange Management (Overseas Investment) Rules, 2022 (“OI Rules”) and Foreign Exchange Management (Overseas Investment) Regulations, 2022. We will refer to both these documents collectively as OI Regulations.

These regulations broadly deal with following topics:

  1. Investment by Body Corporates and Entities in equity, debt-based products and immovable property outside India.
  2. Investment by various parties in an entity formed in International Financial Services Centre eg. the IFC at GIFT City, Gujarat.
  3. Overseas investment by certain registered trusts and societies.
  4. Overseas investments by Indian Mutual Funds, Venture Capital Funds, Alternative Investment Funds, and other financial intermediaries.
  5. Disinvestment and exits from such investments. AND
  6. Investment by Resident Individuals in equity and immovable property outside India.

It would be interesting to note that structures like HUFs, AOPs etc. are not allowed to invest overseas under these regulations.

As part of this article, we are just touching upon the limited part which deals with investments to be made by resident individuals overseas.

  1. Investments by resident individuals outside India:

As discussed in the opening note, there would be various objectives for which individuals would like to invest overseas. These regulations have tried to categorise such objectives and broadly divided them into two main categories:

  1. Overseas Direct Investment (“ODI”); and
  2. Overseas Portfolio Investment (“OPI”).

Let us understand the intricacies of how an investment gets categorised into one of the two categories.


The OI rules have defined ODI to cover the following three categories of transactions[1]:

  1. Investment into unlisted equity capital of a Foreign Entity;
  2. Investment into more than 10% of paid-up equity capital of a listed Foreign Entity;
  3. Investment into less than 10% of listed equity capital of a Foreign Entity but where Control is offered to the investor.


The OI rules have defined OPI[2] to include investments in any foreign securities which are not covered in ODI. There is a specific exclusion for investment in any unlisted debt instruments from the meaning of OPI.

It would be interesting to note here, that both ODI and OPI focus on investment in equity capital only. It does not cover investment by way of debt being offered to the investee company. As an exception, investment in listed debt products is permissible under OPI.

  1. Coverage of this article:

To keep the article brief, we have only discussed about the investments that get classified as ODI. We have mentioned a couple of scenarios below and have discussed what the OI rules have to state about such scenarios.

  1. Scenario 1 – Control-based investment in unlisted foreign entities (ODI with Control):


In this scenario, we are typically talking about a situation in which there is an Individual in India, say for eg. Mr. Engineer. He is a resident of India as per FEMA regulations. Mr. Engineer has his booming Sole Proprietorship business in India pertaining to various engineering related services. He sees a good potential of expanding his Proprietorship business in USA. So, he wishes to set-up a Wholly Owned Company in USA for carrying out USA business.

Another situation that would fit this scenario could be of Mr. Investor. Mr. Investor is again a resident of India as per FEMA regulations. Mr. Investor has idle funds lying with him. He has a friend Mr. Businessman who is a resident of USA. Mr. Businessman is running a successful business in form of a Company in USA. For expansion, Mr. Businessman needs funds. So, Mr. Businessman reaches out to Mr. Investor and offers him a 50% ownership in his business for the funds that Mr. Investor can invest in his USA Company. Mr. Investor is more than happy to accept this partnership and invest his funds. He is also happy that he is receiving control over the company as his stake is 50%.

OI Rules & Regulations:

The OI regulations permit Mr. Engineer as well as Mr. Investor in each of the above cases to carry out the overseas investment. As per the rules, this investment would be categorized as “Overseas Direct Investment”. The detailed conditions and terms for such investments are laid down in Schedule III of OI Rules.

Before we have a look at these conditions, we would like to emphasise on the term “Control” that we have used here. In the new OI rules, there is a typical difference in the ODI investments that are made into Foreign Entities that offer Control and which do not offer Control. In this scenario, we are covering ODI investments which offer control. In the subsequent scenarios we have discussed intricacies of ODI investments which do not offer control as well.


The OI rules have distinctly defined the term control so as to offer more clarity. Control has been defined to include investments through which the investor gets:

  1. Right to appoint majority of directors;
  2. Power to control the management and key policy decisions;
  3. Voting rights and power to the tune of 10% or more;
  4. Etc.

In our above stated two situations of Mr. Engineer and Mr. Investor, they are both getting control in the Foreign Entity.

Having said that, let us understand the conditions and terms that needs to be respected and adhered to while making these investments as per the OI rules:

  1. Permissible Activity –
  1. The overseas entity i.e. Foreign Entity ought to carry out bonafide business.[3]Bonafide business would mean any business activity that is permissible under the laws in force in India and in the host country[4].
  2. Further, the foreign entities need to be operative in nature.[5] In other words, the foreign entities cannot be dormant or inoperative. This is a subjective condition. If say due to Business Mandate there is a reasonable period of time for which no activity is carried out, then it would not be an issue. Here, RBI / Government focuses more on the intent to carry out operational activity. So, if you have the intention to carry out operational activity, then you can meet this condition. The intention needs to be backed by supporting.
  3. The Foreign Entity should not be engaged in Financial Services activity.[6] The rules explain Financial Services activity to include any activity that might require registration with regulators like RBI, SEBI, etc. or any activity that is regulated by such regulators.[7]
  4. The entity should not carry out real estate activity, gambling activity or invest in financial products that are linked to Indian rupee.[8]

  1. Pricing Guidelines –
  1. The investment needs to meet the pricing guidelines. In nutshell, the investment should not happen at a price or value that is over and above the fair value of the investee entity.[9] 

  1. Features of Foreign Entity –
  1. The investee Foreign Entity needs to be a structure that is either Formed or Incorporated under any laws of host country.
  2. Further, such entity should also offer the feature of Limited Liability.
  3. As per the definition of ODI, one can construe that ODI in unincorporated structures by resident individuals is not permissible under the automatic route. Thus, a resident individual cannot establish and invest in a structure like a Sole Proprietorship or unregistered partnership firms outside India.

  1. No subsidiary or step-down subsidiary
  1. As per the OI rules, where an ODI investment has been made into a Foreign Entity and wherein the investor has received Control over the Foreign Entity, it is not permissible for the Foreign Entity to further invest in any subsidiary or step down subsidiary.[10]
  2. Having said that, if the plan for the subsidiary or step-down subsidiary was to operate as an operating entity, then there is nothing to stop the resident individual to DIRECTLY invest in that proposed Foreign Entity. The restriction here is to only not have multiple layers of businesses below the Foreign Entity. But, the individual can definitely invest in multiple operating Foreign Entities directly.
  3. Let's understand this by continuing the example of Mr. Investor. Once, Mr. Investor has invested in the USA Company of Mr. Businessman to the tune of 50%. Now, if USA company wishes to invest in another entity say ABC Inc. Then, as per the OI rules, this is not permissible, as investment by USA company in ABC Inc would be considered as an investment in subsidiary or SDS. Having said that, though USA company cannot invest in ABC Inc, but if Mr. Investor finds the business of ABC Inc promising, then Mr. Investor can make an ODI investment in ABC Inc from India. He will have to meet all the conditions of OI rules.

  1. Whether debt can be given?

The OI regulations do not specifically permit the resident individuals to extend loan or any other debt-based facility as part of Financial Commitment to the Foreign Entity. Thus, one can construe that such debt-based investment is not permissible for resident individual.

  1. Limit of investment 

The resident individual is permitted to make ODI investments upto a limit which is within the overall ceiling of the Liberalised Remittance Scheme (“LRS”) of RBI. Currently, the LRS limit is 2.5 Lakh USD. Thus, an individual is permitted to make ODI upto a limit of 2.5 Lakh USD per year.

For eg. – In the month of September 2023, Mr. Investor has gifted an amount of USD 50,000 to his non-resident son under LRS. Now, in the month of Feb 2024, Mr. Investor wishes to make an ODI investment in a company in USA. The overall limit of LRS permissible to Mr. Investor during FY23-24 was USD 2.5 Lakhs. Out of this, Mr. Investor has already consumed the limit of USD 50,000 in sending gift to his non-resident son. The balance LRS limit available to Mr. Investor is USD 2 Lakhs. Thus, in the month of Feb 2024, the maximum amount that Mr. Investor can invest in the USA company through ODI would be USD 2 Lakhs.

  1. Mode of payment:

The Resident Individual can make the ODI investment through one of the following permissible modes of payment:[11]

  1. By remittance made through banking channels;
  2. From funds held in an account maintained in accordance with the provisions of FEMA;
  3. Other modes as laid down in the regulations.

It is important to note that investment made by any modes other than the above is considered as a violation.

  1. Sources of Funds:

There are no restrictions on the sources of funds to be utilised for making the ODI investment. Thus, a resident individual can even make the ODI investment out of borrowed funds. There is only one exception:

  1. ODI in start-ups recognised under laws of host country can only be done out of the Own Funds of resident individual.

  1. Reporting of investment:
  1. The regulations have prescribed certain procedure and reporting requirements for making ODI investment.
  2. The Resident Individual has to fill-up and submit duly signed Form FC prior to making the investment. This Form has to be submitted with the AD Category Bank through which he plans to make the investment.
  3. Selection of the AD Category Bank is crucial. Once an ODI investment has been made through one AD Category Bank, then all the subsequent filings, investments or any other matters pertaining to this particular Foreign Entity and the ODI in it has to be routed through the same bank only.
  4. The AD Category Bank would allocate a Unique Identification Number (“UIN”) to the Foreign Entity. This UIN has to be used in all the subsequent filings or correspondences pertaining to the Foreign Entity.

  1. Post Investment Activity:
  1. It is the responsibility of the Resident Individual to collect the proof of investment from the Foreign Entity and submit the same to the AD Category Bank within 6 months from the date of investment. The proof of investment may be in form of share certificate, membership agreement etc.
  2. As the Resident Individual has made ODI investment wherein he is also exercising control, so he would be required to file Form APR every year by 31-December. It is mandatory that the Form APR needs to be based on audited financial statements of the Foreign Entity. Where the Foreign Entity is not required to get audit done as per the laws of host country, then Form APR may be submitted based on unaudited accounts which are duly certified by any chartered accountant in India.
  3. Further, the resident individual would also be required to file Form FLA (Foreign Liabilities and Assets) every year. The due date for filing Form FLA is 15-July.
  4. There are important disclosures pertaining to Foreign Assets in the Income Tax Return as well. The Resident Individual should make accurate and complete reporting and disclosures of the assets and income in Schedule FSI, Schedule TR, Schedule FA, etc. of Form ITR, as applicable.

  1. TCS on ODI 

The Income-tax Act has recently introduced provisions of Tax Collected at Source on certain remittances that fall in the purview of LRS. We are not discussing this point at length in this article as the focus of this article is on FEMA. This point has been mentioned here so as to give a holistic view of the topic to the readers. The Resident Individuals may check these provisions while making such investment.

  1. Scenario 2 – Non-Control-based investment in unlisted foreign entities (ODI without Control):

We have already discussed about the meaning of the term Control and the situations in which one can say that Control is being exercised. Here we are covering the ODI investments in which the Resident Individual is not able to exercise Control.

Typically, this would cover situations wherein the resident individual is considering making investment in equity capital of an unlisted company where he would receive shareholding or ownership less than 10%.


Mr. Investor is a resident of India as per the provisions of FEMA. He is a seasoned Entrepreneur and has successfully run a couple of start-ups in India. He has now retired from his own businesses. He now finds time and provides mentorship to budding start-ups worldwide. Through his network, he regularly learns about various start-ups looking out for investments and which are promising in terms of growth. So, out of his savings and wealth, he wishes to invest in such start-ups globally. However, he invests only that much amount which offers him ownership of 5% or less and he does not exercise any control in the Foreign Entities.

OI Rules & Regulations:

Most of the regulations applicable in the scenario in which the resident individual would have received Control are also applicable to the current scenario as well. We are not reiterating the common points here. There are a few places where the regulations differ. We are just highlighting and discussing those areas.

  1. Subsidiary and Step down subsidiary (SDS):
  1. The Foreign Entities that fall under this category are permitted to form subsidiaries and step down subsidiaries under them[12]. Each such subsidiary as well as step down subsidiary needs to be an Operating Entity engaged in bonafide activity.
  2. Only those SDS in which the Foreign Entity has Control fall within the purview of OI regulations. In other words, if the Foreign Entity invests less than 10% in any SDS, then that particular SDS would not be governed or fall within the purview of OI regulations. However, if the Foreign Entity invests into more than 10% capital in a SDS thereby exercising control, then the SDS would have to abide by this regulation.
  3. Further, the structure of such SDS should meet the requirements that have been laid down for Foreign Entity. Eg. It should be an incorporated structure and offer Limited Liability.
  4. For structures that lead to round tripping, there are some conditions. Round tripping basically means that a resident makes an investment in a Foreign Entity and remits money abroad. Then, the Foreign Entity further makes an investment back into any other Indian Entity, so the money that was remitted abroad, indirectly comes back to India. As per the regulations, such round tripping is permitted, but provided that the structure does not lead to more than 2 layers of subsidiaries[13].

  1. Post investment activity – Form APR:
  1. If the resident individual invests under the ODI route in a Foreign Entity in which he / she does not exercise control, then the resident individual is exempted from the requirement of filing Form APR.[14]

Situation of ODI through pooling vehicles:

Let us discuss one unique situation that we have been hearing quite often:

Let's take the situation of Mr. Investor who wishes to invest in various start-ups abroad. He identifies a start-up in USA. Mr. Investor wishes to invest USD 1 lakh in the start-up. However, as per the internal policies of the start-up, the start-up is accepting investment only from an entity that can invest USD 5 million and upwards. Mr. Investor has found an LLC by the name – Pool LLC. Pool LLC is basically getting in touch with various investors who are interested in investing into the start-up, but wish to contribute less than USD 5 million. So, Pool LLC will collect investments from multiple investors and total up its corpus to USD 5 million and then Pool LLC will invest into the start-up as 1 single investor. Mr. Investor has decided to invest his USD 1 lakh into Pool LLC. Let us evaluate whether this investment would be permissible.

  1. Going as per the regulations, Mr. Investor can invest in unlisted equity capital of a Foreign Entity where he does not get control. Here Mr. Investor’s investment would be less than 10% of paid-up capital of Pool LLC and hence he would not get control.
  2. In cases where resident individual does not have control in Foreign Entity, the Foreign Entity is allowed to invest in SDS. Thus, Pool LLC would be permitted to invest in the Start-up.
  3. In this case, Pool LLC’s only nature of activity would be pooling of funds and making further investment. It does not carry on any operations of its own. In other words, Pool LLC would not be an operating entity. Thus, the nature of activity carried out by Pool LLC would not fall within the meaning of permissible activity.
  4. Consequently, Mr. Investor should not invest in Pool LLC under automatic route. It should seek prior approval of RBI before going forward.

  1. Concluding Remarks:

The OI Rules and Regulations have permitted resident individuals to make various investments overseas. Thus, as long as the resident individuals comply with all the conditions of the OI Rules and Regulations, they can go ahead and make the investments. The Resident Individuals may be advised to accurately comply with the disclosure and reporting requirements under the OI regulations and Income-tax provisions. Incorrect or missed reporting or disclosures can lead to heavy penalties. In fact, non-reporting of such investments in Income-tax return can even attract the draconian penalties of Black Money Act.

Thank You


CA Dhruv Shah

Partner | Ambavat Jain & Associates LLP

[1] Rule 2(q)

[2] Rule 2(s)

[3] Rule 9(1)

[4] Explanation to rule 9(1)

[5] Point 1(2)(i) of Schedule III

[6] Point 1(2)(i) of Schedule III

[7] Explanation to point 1 of Schedule III

[8] Rule 19

[9] Rule 16

[10] Point 2(i) of Schedule III

[11] Regulation 8 of the OI Regulations

[12] Point 2(i) of Schedule III of OI Rules

[13] Rule 19(3)

[14] Regulation 10(4) of OI Regulations