Key Changes to India’s Overseas Investment Regime – Financial Services


In line with the spirit of liberalization and to promote the ease of doing business, the central government and the Reserve Bank of India have gradually simplified the procedures and streamlined the rules and regulations under the Management Act 1999 changes.1

Accordingly, on 22nd August 2022, the Ministry of Finance (Department of Economic Affairs), Government of India notified the Foreign Exchange Management (Overseas Investments) Rules 2022 (“IO Rules 2022”), the Regulations on Foreign Exchange Management (Overseas Investments), 2022 (“OI Rules 2022”) and the Foreign Exchange Management (Overseas Investments) Instructions, 2022 (“OI Instructions 2022”. OI and OI Instructions are together referred to as “New OI Regime”). The new OI Regime replaces the previous framework relating to overseas investment and the acquisition of immovable property governed by the Foreign Exchange Management (Transfer or Issue of any Foreign Securities) Regulations 2004 and the Foreign Exchange Management (Acquisition and Transfer of Real Estate Outside India) Regulations 2015 (“former regime of the OI”).


Some of the major changes under the new Medicare plan are:

1. Definition of foreign entity and strategic sector

The 2022 OI Rules replace the term “joint venture” (“JV”) and a “wholly owned subsidiary” (“WOS”) provided in the old OI regime with the concept of “Foreign entity2.

Foreign entity“is defined as an entity formed or registered or incorporated outside India, including at the International Financial Services Center (“IFSC”) in India, which has limited liability. However, OI 2022 rules provide that the restriction on the limited liability entity would not be applicable to entities having a principal activity in any strategic sector3.

The “strategic sector” is defined as comprising the energy and natural resource sectors (such as oil, gas, coal, minerals, submarine cable system and start-ups and any other sector or sub-sector deemed necessary by the central government4.

comments: A “foreign entity” is an entity formed or registered or incorporated outside India and includes entities incorporated in an IFSC. Foreign entity limited liability structure restrictions are not mandatory for entities in the strategic sector and therefore overseas investments in these sectors can also be made in unincorporated entities.

2. Components of outward investment

“Foreign investment” or “IO” has been defined to include both foreign direct investment (“ODI“) and Foreign Portfolio Investment (“OPI“).5

The OI Rules define “Foreign Direct Investment” or “ODI6 means (a) the acquisition of any unlisted share capital or subscription under the articles of incorporation of a foreign entity, or (b) an investment in 10% or more of the paid-up share capital of a listed foreign entity , or (c) controlling investment where the investment is less than 10% of the paid-up share capital of a listed foreign entity, the investment continues to be treated as ODI even if such investment falls below 10% of the share capital released or the investor loses control of the foreign entity.

Overseas Portfolio Investment or “OPI” is defined as meaning any overseas investment which is not ODI, other than investment in any unlisted debt securities (such as government bonds, corporate bonds, all tranches of the securitization structure which are not equity tranches) or any security issued by a person resident in India who is not part of an IFSC. However, IPO should not be performed on (i) unlisted debt securities; (ii) any security issued by a person resident in India who is not part of an IFSC; (iii) any derivatives, unless otherwise authorized by the Reserve Bank; or (iv) commodities, including Bullion Depository Receipts (BDR)seven.

A listed Indian company can conduct IPOs including through reinvestment as per Schedule II of the OI 2022 Rules. An unlisted Indian entity can conduct IPOs as per Schedule II of the OI 2022 Rules. Individuals residents can make IPOs within the overall limit for the Liberalized Remittance System (LRS) in accordance with Annex III of the OI Rules 20228.

An Indian entity’s total financial commitment under the ODI is capped at 400% of the net worth of that Indian entity as of the last audited balance sheet date. An Indian entity may make investments not exceeding 50% of its net worth as of its last audited balance sheet date.

The OI Rules rationalize the distinction between ODI and OPI. Now, a listed Indian company can invest in a listed debt security.

3. Definition of control

The IO Rules define “control” as the right to appoint the majority of directors or to control management or policy decisions that may be exercised by one or more persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements entitling them to 10% or more of the voting rights or in any other way in the entity.

Comments: The definition provides that in addition to the right to appoint the majority of directors to control management or policy decisions where ownership is less than 10%, even a mere 10% ownership will amount to control under the new IO regime.

4. Pricing Guidelines

As part of the new OI regime and pricing guidelines have now been introduced. The issue or transfer of share capital of a foreign entity (i) from a person resident outside India or from a person resident in India to a person resident in India who is eligible to make such investment or (ii) from a person residing in India to a person residing outside India shall now be paid at an arm’s length price established after consideration of valuation in accordance with any internationally accepted pricing methodology for evaluation9. Such pricing guidelines did not exist under the previous regime.

7. ODI in startups

ODI in start-ups can only be realized from the internal accruals of the Indian entity or group or associated companies in India and, in the case of resident individuals, from equity of such a personten. Prior to facilitating a transaction, AD Bank is required to obtain a clearance thereto from the Indian entity’s/investor’s auditors/accountant11.

8. Round trip trigger structure

The new ODI regime provides that a person residing in India is now allowed to invest in a foreign entity that has invested or is investing in India, directly or indirectly, up to 2 layers of subsidiaries. Layer restriction does not apply to banks, systemically important NBFCs, insurance companies and public enterprises12. Accordingly, RBI approval would not be required as long as such structures or companies do not have more than 2 layers of subsidiaries.

9. ODI in Financial Services

The new OI 2022 rules provide that an Indian entity carrying on a financial services business in India may perform ODIs in a foreign entity, which is directly or indirectly engaged in a financial services business, subject to the following conditions: (i) the Indian entity has recorded net profits over the past three years; (ii) the Indian entity is registered or regulated by a “financial services regulator” in India, (iii) the Indian entity has obtained the required approval from the regulators of such financial services activity, at the both in India and in the host country or host jurisdiction, as the case may be, to engage in such financial services13. The position of ODI by an Indian entity in the financial services business has not changed and remains the same as that of the old OI regime. However, the new IO regime clarifies the definition of “financial services regulatorto include Securities Exchange Board of India (SEBI), Insurance Regulatory and Development Authority, Pension Fund Regulatory and Development Authority.

9. Acquisition of real estate outside India

An Indian resident can acquire real estate outside India from a person residing outside the country (i) by way of inheritance, (ii) by purchase of foreign currency held in an RFC account; (iii) purchase of remittances sent under the liberalized remittance program instituted by RBI; (iv) jointly with a parent; (v) on income or proceeds from the sale of assets, other than ODI14. Further, an Indian entity having an overseas office may acquire real estate outside India for the business and residential purposes of its personnel.15. This is a liberalized provision as there are now no restrictions on the outflow of funds from India.


The new ODI regime brings a host of changes that would impact the merger and acquisition decisions of Indian residents, corporate bodies and start-ups and have made it easier to expand their business into other countries. Streamlining and positive changes to the existing framework for overseas investment will improve the ease of doing business and encourage overseas investment opportunities for Indian entities and individuals.


1 OI Guidelines 2022, page 1.

2 OI Instructions 2022, page 4.

3 Rule 2(h)

4 Rule 2(z)

5 Rule 2(r)

6 Rule 2(q)

7 OI Directive 2022, Page 5

8 OI Directive 2022, Page 6

9 Rule 16

10 Rule 19(2)

11 Direction 9, Directions OI 2022

12 Rule 19(3)

13 Schedule 1 Rule 2 (1)

14 Rule 21(2) (ii)

15 Rule 21(2)(iii)

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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