"We'll just wire money to our Dubai entity": What ODI rules actually require before an Indian company invests abroad

A founder in Bengaluru sets up a Dubai FZCO to hold the company's Middle East contracts. The Indian Pvt Ltd wires USD 200,000 to capitalise it. The AD bank processes the remittance under "business services." Eighteen months later, during a Series B due diligence, the investor's FEMA counsel asks for the Form FC (ODI) acknowledgement and the Unique Identification Number for the foreign entity. There is none. What the founder thought was a simple outbound transfer was an Overseas Direct Investment — a regulated capital account transaction with mandatory reporting, an annual filing obligation, and a Late Submission Fee clock that has been running since day one.

Outbound investment is the compliance area where Indian founders are most confidently wrong. The rules changed comprehensively in August 2022, and a great deal of advice still circulating online describes the pre-2022 regime. Here is what actually applies.

What the law actually requires

Overseas investment by an Indian resident is governed by three instruments notified on 22 August 2022, issued under Sections 6 and 47 of the Foreign Exchange Management Act, 1999:

• Foreign Exchange Management (Overseas Investment) Rules, 2022 — notified by the Central Government
• Foreign Exchange Management (Overseas Investment) Regulations, 2022 — notified by RBI
• Foreign Exchange Management (Overseas Investment) Directions, 2022 — RBI's operational directions to AD banks

These replaced the FEMA Notification No. 120/2004-RB regime entirely. If your adviser refers to "Form ODI Part I, II and III" or "JV/WOS," they are using superseded terminology.

The core distinction: ODI vs OPI. Rule 2(q) of the OI Rules defines Overseas Direct Investment as acquisition of any unlisted equity capital of a foreign entity, or subscription to 10% or more of the paid-up equity capital of a listed foreign entity, or any investment with control regardless of percentage. Overseas Portfolio Investment (Rule 2(t)) is everything else — under 10% of a listed foreign entity, without control.

This matters because founders routinely assume that a small stake is portfolio investment. It is not. Under Rule 2(q), any stake in an unlisted foreign company — even 1% — is ODI. Your Dubai FZCO, your Delaware LLC, your Singapore Pte Ltd: all unlisted, therefore all ODI, at any percentage.

"Control" is defined in Rule 2(f) as the right to appoint a majority of directors, or to control management or policy decisions, including by virtue of shareholding, management rights, shareholders' agreements or voting agreements. A 5% stake with a board seat and veto rights is ODI, not OPI.

The financial commitment limit. Regulation 3 of the OI Regulations caps total financial commitment by an Indian entity under the automatic route at 400% of its net worth as per the last audited balance sheet, subject to an overall ceiling of USD 1 billion per financial year. Two traps here:

• The audited balance sheet must not be older than 18 months from the date of the transaction. A company relying on a March 2024 balance sheet in November 2026 has no valid net worth base and cannot transact under the automatic route.
• Since 2022, an Indian entity cannot use the net worth of its holding company or subsidiary to compute its own limit. The pre-2022 practice of borrowing a parent's net worth headroom is gone.

"Financial commitment" is broader than the equity cheque. Under Rule 2(k) it includes equity capital, debt (loans to the foreign entity), 100% of the amount of any guarantee issued on behalf of the foreign entity, and 100% of the value of any pledge or charge created over Indian assets. A founder who issues a corporate guarantee to a Dubai bank on behalf of the FZCO has made a financial commitment that consumes the 400% headroom, even though no money left India.

What is prohibited outright. Rule 19(1) of the OI Rules bars ODI into a foreign entity engaged in:

• Real estate activity — defined in Rule 2(x) as buying and selling of real estate or trading in transferable development rights. Development of townships, roads, bridges and construction of residential or commercial premises are expressly excluded from the prohibition, as is earning rent from property held by the foreign entity.
• Gambling in any form, including casinos and betting.
• Dealing in financial products linked to Indian rupee without specific RBI approval.

Rule 19(2) further prohibits ODI in a foreign entity located in a country or jurisdiction identified by FATF as high-risk or non-cooperative.

Financial services abroad. Rule 6 and Regulation 5 permit an Indian entity engaged in financial services in India to make ODI into a foreign entity engaged in financial services, subject to conditions: net profit in the preceding three financial years, registration with the relevant Indian financial sector regulator, and approval from that regulator. An Indian entity not engaged in financial services may invest in a foreign financial services entity — other than banking or insurance — provided it has posted net profit in the preceding three financial years. This is a 2022 liberalisation; older guidance stating a blanket bar is wrong.

The round-tripping question. Rule 19(3) permits an Indian resident to make ODI in a foreign entity that has invested or invests into India, provided the resulting structure does not exceed two layers of subsidiaries. This replaced the earlier position under which round-tripping required specific RBI approval. It is now permitted within the layer limit — but the layer count is strictly applied, and Section 2(87) of the Companies Act 2013 read with the Companies (Restriction on Number of Layers) Rules 2017 imposes a parallel restriction on the Indian side.

Reporting. Regulation 10 and Part V of the OI Directions set out the filing obligations:

Every foreign entity is allotted a Unique Identification Number (UIN) by RBI on first Form FC submission. All subsequent filings reference that UIN. If your company has remitted funds to a foreign entity and has no UIN, you have an unreported ODI.

Filings are made through the AD bank on the RBI FIRMS portal (Foreign Investment Reporting and Management System), which now hosts the OID module alongside the FDI module used for FC-GPR and FC-TRS.

Practical implications

Late Submission Fee. RBI's LSF regime under the OI Directions applies to delayed Form FC and Form APR filings. The formula is:

LSF = ₹7,500 + (0.025% × A × n)

where A is the amount involved in the delayed reporting and n is the number of years of delay (rounded to the nearest month and expressed in years, so a 9-month delay is n = 0.75). The LSF must be paid within 30 days of RBI raising the demand, and — critically — LSF can only be availed within three years of the due date. Beyond three years, the only route is compounding under Section 15 of FEMA, which is a formal adjudication, not a fee.

For the Bengaluru founder above: USD 200,000 at roughly ₹88/USD is about ₹1.76 crore. At 18 months' delay, LSF = ₹7,500 + (0.00025 × 1,76,00,000 × 1.5) = ₹7,500 + ₹6,600 = ₹14,100. Cheap — if caught inside three years. Miss the window and the same default becomes a compounding application, where penalties under Section 13(1) of FEMA can extend to three times the sum involved where the amount is quantifiable.

The APR trap is worse than the Form FC trap. Form FC is a one-time event that founders eventually discover during due diligence. APR is annual and recurring. A company with a foreign subsidiary incorporated in 2022 that has never filed an APR has four separate defaults by December 2026, each attracting its own LSF, each with its own three-year clock. RBI's system flags non-filing of APR against the UIN, and AD banks are directed under Part V of the OI Directions to refuse further remittances to a foreign entity whose APR is overdue. The practical consequence is that your next funding round into the subsidiary gets blocked at the bank counter.

Interaction with MCA21 v3. The Indian holding company must disclose its foreign subsidiary in Form AOC-1 (statement containing salient features of the financial statement of subsidiaries, under Section 129(3) read with Rule 5 of the Companies (Accounts) Rules 2014) attached to AOC-4, and must consolidate under Section 129(3) unless exempt. MCA21 v3's straight-through processing cross-references the subsidiary disclosure in AOC-4 against the company's declared structure. A foreign subsidiary that appears in AOC-1 but has no corresponding UIN on the RBI side is exactly the kind of inconsistency that surfaces when either regulator runs a data-matching exercise.

Directors' liability. Under Section 42 of FEMA, where a contravention is committed by a company, every person who at the time was in charge of and responsible to the company for the conduct of its business is deemed guilty — unless they prove the contravention took place without their knowledge or that they exercised all due diligence. "I didn't know it was ODI" is not a defence when the remittance was authorised by the board.

Step-by-step: what to do

• Classify the transaction before the money moves. Ask: is the foreign entity listed? If unlisted, it is ODI at any percentage. If listed, is the stake ≥ 10%, or is there control? If yes, ODI. Otherwise OPI. Document this analysis in a board note.
• Check the net worth headroom. Pull the last audited balance sheet, confirm it is dated within 18 months, compute net worth per Section 2(57) of the Companies Act 2013, multiply by four. Subtract all existing financial commitments — including guarantees and pledges at 100% of value. The residual is your automatic-route capacity.
• Screen the target for prohibitions. Confirm the foreign entity is not in real estate trading, gambling, or rupee-linked financial products, and that its jurisdiction is not on the FATF high-risk or increased-monitoring list. If the target is in financial services, confirm the three-year net profit test and, if you are a regulated entity, obtain your regulator's approval first.
• Pass a board resolution authorising the specific financial commitment, naming the foreign entity, the amount, the instrument (equity / loan / guarantee), and the funding source. Where the commitment exceeds thresholds in your Articles or requires shareholder sanction under Section 186 of the Companies Act, obtain a special resolution.
• Obtain a valuation where required. Regulation 9 of the OI Regulations requires a valuation certificate from a Registered Valuer (or an equivalent professional in the host country) where the investment is by way of acquiring existing shares from a third party, or where the amount exceeds USD 5 million.
• File Form FC through your AD bank before or at the time of the remittance. The AD bank will submit through the OID module of the FIRMS portal. Collect and file the RBI acknowledgement carrying the UIN. Nothing about this transaction is complete until you hold that acknowledgement.
• Diarise 31 December every year for the APR. Obtain the foreign entity's audited financial statements, have the APR certified as required, and file through the AD bank. If the foreign entity's accounting year differs, the APR is still due on 31 December based on the latest audited accounts.
• File Form FC within 30 days of any change — additional infusion, disinvestment, change in shareholding, restructuring, or write-off. Do not wait for the annual cycle.
• If you are already in default, act inside the three-year window. Compute the LSF, approach your AD bank with the delayed filing, and pay. A ₹14,100 fee today is materially better than a compounding order in two years.

FAQ

Does a founder personally buying shares in a US startup count as ODI?
Resident individuals invest under Schedule III of the OI Rules, subject to the Liberalised Remittance Scheme limit of USD 250,000 per financial year. An individual may make ODI into an operating foreign entity that is not engaged in financial services and does not have a subsidiary or step-down subsidiary where the individual has control. Investment in listed foreign shares below 10% is OPI and is simpler. Either way, the LRS limit binds.

We only issued a corporate guarantee, we didn't send money. Do we report?
Yes. A guarantee is a financial commitment under Rule 2(k) and must be reported in Form FC, counted at 100% of its value against your 400% net worth ceiling. Non-fund-based exposure is still exposure.

Our foreign subsidiary has never been audited. Can we skip the APR?
No. Where the host country does not mandate audit, the OI Directions permit the APR to be based on unaudited accounts certified by the Indian entity's statutory auditor, provided the foreign entity is a wholly owned subsidiary and the method is disclosed. There is no exemption for simply not having accounts prepared.

Can we invest in a foreign entity that will hold real estate?
Trading in real estate is prohibited under Rule 19(1). But a foreign entity that develops townships or constructs premises, or that owns property and earns rent from it, is outside the prohibition. The distinction is between dealing in property as stock-in-trade and holding it as a business asset — get a written opinion before relying on it, because the line is fact-specific and AD banks are conservative.

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For a compliance audit of your company, visit pvtltd.co

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See Also

• "We'll just file Form ODI Part I": what FEMA actually requires when your Indian company invests abroad
• "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