A Bengaluru SaaS company incorporates a Delaware C-Corp to hold its US customer contracts. The founder wires USD 50,000 from the company's current account to capitalise the new entity, tells the bank it is a "business payment," and asks the CA to "file Form ODI Part I when you get a chance." Eleven months later the authorised dealer bank flags the remittance during an annual review. There is no Unique Identification Number for the foreign entity, no Annual Performance Report on file, and Form ODI Part I stopped existing in August 2022.
This is the single most common Overseas Direct Investment failure among Indian startups: treating an outbound investment as a payment rather than a reportable capital account transaction, and working from a form name that was superseded four years ago.
What the law actually requires
Outbound investment by an Indian company is governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022 and the Foreign Exchange Management (Overseas Investment) Regulations, 2022, both notified on 22 August 2022 under Sections 6 and 47 of FEMA, 1999. These replaced the older FEMA Notification 120/2004-RB regime entirely. RBI's Master Direction on Overseas Investment operationalises them.
Three definitional points decide almost every ODI question a founder will face.
First, ODI versus OPI. Under Rule 2(q) of the OI Rules, Overseas Direct Investment means investment by acquiring unlisted equity capital of a foreign entity, subscribing to its memorandum, or acquiring 10% or more of the paid-up equity capital of a listed foreign entity — or any investment, of any size, that gives control. Anything below 10% in a listed foreign entity without control is Overseas Portfolio Investment under Rule 2(r), and is reported differently. If you are setting up a wholly owned subsidiary abroad, it is unlisted, and it is ODI by definition. There is no de minimis threshold that lets you skip reporting.
Second, financial commitment. Rule 2(f) defines financial commitment far more broadly than the cash you wired. It includes equity capital, debt (loans extended to the foreign entity), 100% of the amount of any performance guarantee or corporate guarantee issued on the foreign entity's behalf, 50% of the amount of a performance guarantee, and the amount of any charge created on Indian assets. Founders routinely count only the equity subscription and are surprised when a parent-company guarantee to the subsidiary's US landlord or lender is added to the limit.
Third, the limit. Regulation 6 of the OI Regulations caps total financial commitment under the automatic route at 400% of the Indian entity's net worth as per its last audited balance sheet, subject to the overall RBI ceiling. Note what this means practically: a newly incorporated company with ₹1 lakh paid-up capital and no audited balance sheet has almost no automatic-route headroom. You cannot invest abroad on the strength of a valuation or a term sheet. You need audited net worth.
Where the automatic route does not apply, RBI prior approval is mandatory. The main triggers are: financial commitment exceeding the 400% ceiling; investment by an Indian entity under investigation by a regulatory or investigative agency; investment in a foreign entity engaged in real estate activity, gambling in any form, or dealing in financial products linked to the Indian rupee without RBI approval (Rule 19 read with Rule 2(w)); and structures that create more than two layers of subsidiaries below the Indian entity, which Rule 19(3) prohibits precisely to curb round-tripping.
On round-tripping, the 2022 regime is more permissive than the old one but not unlimited: a foreign entity may invest back into India, but only up to two layers of subsidiaries in the structure, and the arrangement must not be designed to disguise Indian funds returning as foreign investment.
The form. Form ODI Part I does not exist under the current regime. Outbound investment is reported in Form FC (Foreign Currency), filed through the authorised dealer bank on RBI's OID portal. Form FC covers the initial financial commitment, subsequent commitments, disinvestment, and restructuring — the functions previously split across ODI Parts I, II and III. Portfolio investment goes in Form OPI. The Annual Performance Report survives, filed in the same portal by 31 December each year for every foreign entity where the Indian entity holds control.
Practical implications
No UIN, no further remittance. The AD bank allots a Unique Identification Number to the foreign entity only after Form FC is accepted. Without a UIN, no subsequent capital infusion, loan, or guarantee can legally be routed. Founders who skip the first filing find their second-round funding to the subsidiary blocked, usually at the worst possible moment.
Late Submission Fee. Delay in filing Form FC or the APR attracts an LSF under RBI's framework — calculated as ₹7,500 plus 0.025% of the amount involved per year of delay, and applicable only where the delay is up to three years from the due date. Beyond three years, LSF is not available and the only route is compounding under Section 15 of FEMA, where penalties are discretionary and can reach up to three times the sum involved under Section 13.
APR default freezes the group. Rule 20 read with the Master Direction: if an APR is outstanding for any foreign entity, the Indian entity cannot make any further financial commitment to that entity or any other foreign entity, and cannot disinvest, until the default is cured. One missed APR for a dormant Delaware shell can block a live acquisition elsewhere.
Disinvestment has its own clock. On sale or closure of the foreign entity, Form FC must be filed reporting the disinvestment within 30 days of receipt of proceeds, and all dues (dividend, royalty, technical fees, loan repayment) must be repatriated to India within 90 days of the sale.
MCA21 v3 cross-checks. This is where FEMA non-compliance becomes a Companies Act problem. The foreign subsidiary must be disclosed in Form AOC-1 attached to the consolidated financial statements under Section 129(3) of the Companies Act, 2013, and the investment appears in the Board's Report and in Form MGT-7. MCA21 v3 flags inconsistencies between the AOC-4 XBRL investment schedule and the declared subsidiary list. An overseas investment disclosed to MCA but never reported to RBI is a visible, dated, self-created audit trail of a FEMA contravention.
The statutory auditor will qualify. Under CARO 2020 and the reporting obligations on compliance with laws, an unreported outbound investment typically produces an audit observation. That observation surfaces in every subsequent due diligence.
Step-by-step: what to do
- Establish audited net worth first. Pull the last audited balance sheet. Net worth = paid-up share capital + free reserves − accumulated losses − deferred revenue expenditure − miscellaneous expenditure not written off. Multiply by four. That is your automatic-route ceiling, inclusive of guarantees.
- Classify the investment. Unlisted foreign entity, or 10%+ of a listed one, or any stake with control → ODI, Form FC. Below 10% in a listed entity without control → OPI, Form OPI. Get this wrong and you file the wrong form and start an LSF clock.
- Check the prohibited and approval list. Real estate as a business (not development of your own office), gambling, rupee-linked financial products, more than two subsidiary layers, or any pending investigation → stop and apply for RBI prior approval through the AD bank before remitting a rupee.
- Pass the board resolution before the remittance. The resolution must specify the foreign entity, jurisdiction, amount, instrument, and confirm the financial commitment is within 400% of audited net worth. Backdated resolutions are the first thing a diligence team catches.
- File Form FC through your AD bank before or at the time of remittance. The AD bank issues the UIN. Retain the AD bank's acknowledgment — it is the only proof the remittance was a compliant capital account transaction rather than an unauthorised outflow.
- Obtain a valuation where required. For acquisition of an existing foreign entity above the prescribed threshold, a valuation certificate from a registered valuer or an investment banker in the host country is required and must be submitted with Form FC.
- Calendar the APR at 31 December. Every year, for every foreign entity where you hold control, certified based on the foreign entity's audited accounts. Where audit is not statutorily required in that jurisdiction, an unaudited APR certified by the Indian entity's authorised official is permitted.
- Mirror it in your Companies Act filings. AOC-1 for the subsidiary, consolidated financials under Section 129(3), disclosure in the Board's Report, and consistent numbers in AOC-4 and MGT-7. FEMA and MCA records must tell the same story.
- If you are already late, quantify before you confess. Under three years from the due date, apply LSF through the AD bank and close it. Over three years, prepare a compounding application to the RBI Regional Office under Section 15 with a full chronology — voluntary disclosure materially improves the outcome.
FAQ
Can a company incorporated three months ago set up a subsidiary in Singapore?
Not under the automatic route in any meaningful amount. The 400% ceiling is computed on the last audited balance sheet. With no audited accounts, there is effectively no headroom, and the alternative is RBI prior approval.
Does a corporate guarantee to my subsidiary's foreign bank count against the limit?
Yes. A corporate guarantee counts at 100% of its amount as financial commitment under Rule 2(f). A performance guarantee counts at 50%. Both must be reported in Form FC.
We invested two years ago and never filed anything. What now?
File Form FC with a Late Submission Fee through your AD bank. The LSF is ₹7,500 plus 0.025% of the amount per year of delay, available because you are within the three-year window. Do it before the AD bank or an auditor raises it — voluntary regularisation is materially cheaper than compounding.
Can our foreign subsidiary invest back into an Indian company?
Yes, subject to the two-layer cap under Rule 19(3). The structure cannot have more than two layers of subsidiaries below the Indian entity, and the arrangement must not exist to route Indian funds back as foreign investment. Take advice before building any holding structure with an Indian entity at both ends.
For a compliance audit of your company, visit pvtltd.co
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See Also
- "We'll file it with the annual return": the FC-TRS 60-day window founders keep missing
- "The money's in the bank, so we're compliant": what FDI into your Pvt Ltd actually requires
- "Our books show the stock, so we're fine": what an inventory audit actually verifies — and why your bank won't lend without one
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