ODI Compliance Framework: Navigating the FEM (Overseas Investment) Rules, 2022

The Foreign Exchange Management (Overseas Investment) Rules, 2022 and Regulations, 2022 (collectively, the OI Framework) replaced the earlier ODI regulations effective August 22, 2022. The framework consolidated multiple notifications and circulars into a single, structured regime.

Two principal routes

Outbound investments by Indian residents are categorised into:

• Overseas Direct Investment (ODI) — strategic investments in foreign entities, including investments in Joint Ventures (JV), Wholly-Owned Subsidiaries (WOS) and Step-Down Subsidiaries (SDS).
• Overseas Portfolio Investment (OPI) — investments not classified as ODI; primarily passive investments in listed securities.

ODI — eligibility and limits

An Indian resident may make ODI subject to:

• Total Financial Commitment (which includes equity, loan and guarantees) not exceeding 400% of the net worth of the Indian entity, as on the last audited balance sheet.
• The investment being in a bona fide business activity permitted under the foreign country's regulations.
• The Indian entity not being on the RBI's defaulter list and being compliant with KYC and statutory reporting.

The Approval Route

Where the proposed investment exceeds the Automatic Route limits, or where the investment is in a sector requiring approval, prior RBI approval is required. Approval Route requirements include:

• Investments in financial services activities by entities not engaged in financial services in India
• Investments in entities engaged in real estate or gambling
• Investments funded through external commercial borrowings beyond prescribed limits

Reporting requirements

The reporting framework under the OI Rules requires:

• Form FC at the time of remittance — for both ODI and OPI
• Annual Performance Report (APR) for ODI in JV/WOS — within 6 months of the foreign entity's accounting year end
• Sale or transfer reporting — at the time of disinvestment
• Default reporting — for any default by the foreign entity on financial commitments

OPI by resident individuals

Resident individuals may make OPI under the Liberalised Remittance Scheme (LRS), subject to the annual LRS limit (currently USD 250,000 per financial year). LRS-based investments cover overseas listed securities, mutual funds and non-equity instruments, subject to specific carve-outs.

Round-tripping

The OI Framework now formally addresses round-tripping — where overseas investment ultimately results in re-investment back into India. Round-tripping structures (more than two layers of subsidiaries with the eventual investor being a person resident in India) require RBI approval.

Late submission of APR

Late filing of the Annual Performance Report attracts a compounding fee under section 13 of FEMA. The compounding application process requires disclosure of the contravention and remedy, and compounding orders are now published online by the RBI.

Practical considerations for Indian groups

Common issues encountered in implementation include:

• Tracking step-down subsidiaries — the framework's coverage extends to indirect investments through SDS, which is often missed in operational reporting
• Annual APR coordination — requires foreign entity audited financials, which may be delayed where the foreign jurisdiction has different reporting calendars
• Pricing for share transfers — required to be based on internationally accepted valuation methods, with valuation reports retained for record

Engagements typically include initial structuring advisory at the time of investment, and an ongoing compliance calendar for APRs and event-based reporting.