September 2022

Overseas Investment under FEMA - A Comparative Analysis

The Central Government has notified the Foreign Exchange Management (Overseas Investment) Rules and Regulations, 2022 on 22.08.2022 in supersession of FEMA Notification No. 120 i.e. Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015. Some significant changes and relaxations have been brought in for investment by Indian entities and individuals in foreign securities. Key highlights are mentioned below:


Sr. No.


Erstwhile ODI law

New ODI law


Definition of Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI)










  • ODI means:
  1. Investment by contribution to the capital
  2. Subscription to Memorandum of Association
  3. Purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange

but does not include portfolio investment.

(Portfolio investment was not explicitly defined in the regulations).


  • ODI means :
  1. Investment by acquisition of unlisted equity capital of a foreign entity
  2. Subscription as a part of the Memorandum of Association
  3. Investment in 10% or more of paid-up equity capital of a listed foreign entity
  4. Investment with control where investment is less than 10% of paid-up equity capital of a listed foreign entity.
  • OPI means investment, other than ODI, in foreign securities, but not in any unlisted debt instruments or any security issued by a person resident in India who is not in IFSC.


Under the new ODI Rules, any investments in unlisted entity, irrespective of percentage holding, shall be considered as ODI.


Definition of Control

No such concept in old law

  1. Right to appoint majority of the directors
  2. Right to control management or policy decisions exercisable individually or in concert, directly or indirectly
  3. Control by virtue of shareholding, management rights, shareholder rights, voting rights that entitle to 10% or more voting rights or any other manner.


Definition of Bonafide Business Activity




The overseas JV/WOS should be engaged in bonafide business activity. However, the phrase “bonafide business activity” was not defined.

“Bonafide business activity” means business activity permissible under any law in force in India and the host jurisdiction/country.


Definition of Networth

Paid-up Capital plus Free Reserves.


“Net worth” shall have the meaning as per section 2(57) of the Companies Act, 2013.

Net worth of registered partnership firm or LLP shall be the sum of the capital contribution of partners and undistributed profits.


The Net Worth under Companies Act, 2013 consists of

  • Paid up share capital
  • All reserves created out of profits
  • Securities premium account
  • Debit/credit balance of Profit & Loss account
  • But does not cover revaluation reserve


Net worth calculation

For the purpose of reckoning net worth of an Indian party, the net worth of holding company (which holds at least 51% stake in the Indian Party) or subsidiary (in which the Indian party holds at least 51% stake) could be taken into account to the extent not availed independently subject to conditions.

The concept of utilising the net worth of the subsidiary/holding company by the Indian entity has been discontinued henceforth.


Requirement of obtaining a No Objection Certificate (NOC)

In a situation where the Indian party was in defaulter’s list of banks or under investigation, ODI by such entity required RBI approval.

There was no NOC requirement.

The onus is now on the lender bank/ investigating agency/regulator to permit or disallow ODI or disinvestment. Such body is required to issue a NOC before the transaction is undertaken. In case no such certificate is issued within 60 days from the receipt of the application, it will be considered as deemed approval.


Real Estate Exclusion

Real estate business does not include development of townships, construction of residential / commercial premises, roads or bridges.

Real estate activity does not include development of townships, construction of residential / commercial premises, roads or bridges for selling or leasing.


Real estate activity continues to be prohibited under the new ODI Rules as well. However, now leasing is explicitly excluded from the definition of Real Estate activity.


ODI in International Financial Services    Centre (IFSC)

There was no specific provisions for ODI in IFSC and hence general conditions would apply

The new rules provide a separate Schedule V for ODI in IFSC.



As per SEBI AIF Regulation and guidelines in case of AIF in IFSC, the Manager or Sponsor of AIF shall have minimum investment in such AIF of 2.5% (5% in case of Cat 3 AIF) of corpus or USD 750,000 (USD 1.5 million in case of Cat 3 AIF), whichever is lower. AIF in IFSC is considered as foreign entity and accordingly, investment in IFSC by Indian resident is considered as overseas investment. Since AIF is a financial services entity, there were practical issues for investment by Indian Manager/Sponsor under earlier ODI law. In new rules, the issues have been clarified by providing for:

  1. An Indian Entity (i.e. Sponsor/Investment Manager) not engaged in the financial services activity in India can make ODI in such AIF and also, the new condition of profit track record of 3 years  does not apply to such investment.
  2. If Investment by an Indian Entity (i.e. Sponsor/Investment Manager) in the AIF in IFSC requires approval by the financial services regulator, then the same shall be decided within 45 days from the date of application complete in all respects failing which it shall be deemed to be approved. Normally, such approval is required if such Indian Entity is engaged in financial services activity in India.


ODI in start-ups

There was no specific condition for ODI in start-ups i.e. general conditions would apply

Indian entity can make ODI in start-ups recognized under the laws of the host country only from the internal accruals, whether from the Indian entity or group or associate companies in India.

In case of resident individuals, such ODI will be from own funds of such individual.


ODI in financial services activity

Financial service sector was not defined and the regulations pertaining to it were ambiguous leading to interpretation issues.

As a welcome move, an Indian entity not engaged in financial services activity can make ODI in a foreign entity engaged in financial services activity (except in banking or insurance) if the Indian entity has earned net profits during preceding 3 financial years.


A foreign entity shall be considered to be engaged in the business of financial services activity if it undertakes an activity, which if carried out by an entity in India, requires registration with or is regulated by a financial sector regulator in India.


Note: Investments made in erstwhile regulations will be deemed to be made under the new law.

After opening the draft ODI rules for stakeholders’ comments, the much awaited rules were published which were required in the current dynamic times. The new ODI rules in many ways appear to be more progressive in nature than the earlier rules. However, it is to be seen how the rules are implemented in situations where there are interpretational issues. This proactive step is certainly worthy of acknowledging the Government and RBI’s efforts for better policymaking.