1.

Background
Section 6(3) of FEMA empowers RBI to prohibit, restrict or regulate various transactions
relating to capital account transactions, by making Regulations. These include investment by
Indian Entity in Foreign Entity outside India.

Broadly, these transactions relating to investment by Indian entity were of two types upto 22-
8-2022 – (a) Investment in foreign entity (mostly in JV/WOS outside India) and (b)
Immovable Property out of India.

Direct Investment by Indian Resident in JV/WOS outside India – Direct investments by

residents in Joint Venture (JV) and Wholly Owned Subsidiary (WOS) abroad were being
allowed, in terms of section 6(3)(a) of FEMA. RBI had issued FEM (Transfer or Issue of any
Foreign Security) Regulations, 2004. Direct investments by residents in Joint Venture (JV)
and Wholly Owned Subsidiary (WOS) abroad were allowed, in terms of these regulations
upto 22-8-2022.

Acquisition and transfer of immovable property by Indian resident outside India –

Acquisition and transfer of immovable property by Indian residents outside India and Non-
residents in India was regulated as per section 6(3), 6(4) and 6(5) of FEMA. FEM
(Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015 were
issued for this purpose, valid upto 22-8-2022.

1.1 Liberalisation of policy in respect of Investment by Indian Entitites

outside India

Indian economy is growing at fast rate and is now significant part of global economy.. Hence,
Government and RBI thought it fit to liberalise the policy of Indian investment outside India.
The revised policy has been announced on 22-8-2022. Philosophy behind the new policy has
been aptly explained in RBI FEM (Overseas Investment) Directions, 2022 as follows –

Quote – Overseas investments by persons resident in India enhance the scale and scope of
business operations of Indian entrepreneurs by providing global opportunities for growth.
Such ventures through easier access to technology, research and development, a wider global
market and reduced cost of capital along with other benefits increase the competitiveness of
Indian entities and boost their brand value. These overseas investments are also important
drivers of foreign trade and technology transfer thus boosting domestic employment,
investment and growth through such interlink ages.

In keeping with the spirit of liberalisation and to promote ease of doing business, the Central
Government and the Reserve Bank of India have been progressively simplifying the
procedures and rationalising the rules and regulations under the Foreign Exchange
Management Act, 1999. In this direction, a significant step has been taken with
operationalisation of a new Overseas Investment regime. The new regime simplifies the
existing framework for overseas investment by persons resident in India to cover wider
economic activity and significantly reduces the need for seeking specific approvals. This will
reduce the compliance burden and associated compliance costs – Unquote.
 1.2 Legal framework of new Overseas Investment Policy

FEM (Transfer or Issue of any Foreign Security) Regulations, 2004 and FEM (Acquisition
and Transfer of Immovable Property outside India) Regulations, 2015 have been superseded
by FEM (Overseas Investment) Rules, 2022 Legal framework of new Overseas Investment
consists of Rules, Regulations and Directions as follows:

FEM (Overseas Investment) Rules, 2022 – FEM(Overseas Investment) Rules, 2022 issued
by Central Government vide Notification No. G.S.R. 646(E) dated August 22, 2022.

RBI Regulations, 2022 – RBI has issued Foreign Exchange Management (Overseas
Investment) Regulations, 2022 in synchronisation with FEM (Overseas Investment) Rules,
2022 issued by Central Government.

RBI Directions, 2022 – RBI has issued FEM (Overseas Investment) Directions, 2022 vide
AP(DIR) circular No. 12 dated 22-8-2022 in synchronisation with FEM(Overseas
Investment) Rules, 2022 issued by Central Government and Foreign Exchange Management
(Overseas Investment) Regulations, 2022 issued by RBI. These directions mainly cover
procedural aspects of the Overseas Investment and directions to AD (Bank).

1.3 Highlights of 2022 Rules, Regulations and Directions

The highlights of 2022 Rules, Regulations and Directions in respect of Overseas Investment
(OI) can be summarized as follows –

 General permission shall be available for acquisition or transfer of any investment outside India made as
per rule 4 of the OI Rules. In other cases, RBI approval is required. In certain cases, Central Government
approval is also required.
 “Equity capital” means equity shares or perpetual capital or instruments that are irredeemable.
Accordingly, any instrument which is redeemable or non-convertible or optionally convertible shall be
treated as debt for the purpose of OI Rules/Regulations/Directions.
 Introduction of the concept of “strategic sector” which include energy and natural resources sectors such as
Oil, Gas, Coal, Mineral Ores, submarine cable system and start-ups etc.
 Dispensing with the requirement of approval for – (a) deferred payment of consideration (b)
investment/disinvestment by persons resident in India under investigation by any investigative
agency/regulatory body (c) issuance of corporate guarantees to or on behalf of second or subsequent level
step down subsidiary (SDS) (d) write-off on account of disinvestment.
 Introduction of “Late Submission Fee (LSF)” for reporting delays.
 Concept of JV and WOS is substituted with term ‘foreign entity’ which has limited liability. Thus,
investment cannot be made in foreign entity with unlimited liability, except in strategic sector.
 Concept of ‘Indian party’ has been substituted with ‘Indian entity’. Thus, each investor entity shall be
separately considered.
 ‘Indian Entity’ includes Company, body corporate, LLP and registered partnership firm.
 Specific provisions made for OI in IFSCA [International Financial Services Centre Authority].
 Total financial commitment shall not exceed 400% of net worth of Indian entity.
 Financial Commitment does not include Overseas Portfolio Investment (OPI).
 ‘Financial Services Activity’ has been clearly defined.
 Round tripping i.e. investment back in India with more than two layers is prohibited [rule 19(3)]
 Any investment in unlisted entity will be ODI.

1.4 Administration of FEM (Overseas Investment) Rules, 2022

The FEM (Overseas Investment) Rules, 2022 shall be administered by RBI. The RBI may
issue such directions, circulars, instructions and clarifications as it may deem necessary for
the effective implementation of the provisions of FEM (Overseas Investment) Rules, 2022 –
Rule 3 of FEM (Overseas Investment) Rules, 2022.

1.5 Automatic Route for OI i.e. Non-applicability of Overseas Investment (OI)

rules and regulations relating in certain cases

In certain cases, there is automatic route for overseas investment as stated in rule 4 of FEM
(Overseas Investment) Rules, 2022 as follows –

Nothing in FEM (Overseas Investment) Rules, 2022 or the FEM (Overseas Investment)
Regulations, 2022 shall apply to–

(a) any investment made outside India by a financial institution (within meaning of IFSCA
Act) in an IFSC. For the purposes of rule 4, the expression “financial institution” shall have
the same meaning as assigned to it in the International Financial Services Centres Authority
Act, 2019.

(b) acquisition or transfer of any investment outside India made – (i) out of Resident Foreign
Currency Account; or (ii) out of foreign currency resources held outside India by a person
who is employed in India for a specific duration irrespective of length thereof or for a specific
job or assignment, duration of which does not exceed three years; or (iii) in accordance with
section 6(4) of FEMA. – “Resident Foreign Currency Account” or “RFC Account” shall have
the same meaning as assigned to it in the Foreign Exchange Management (Foreign Currency
Accounts by a Person Resident in India) Regulations, 2015 – Rule 2(1)(v) of FEM (Overseas
Investment) Rules, 2022.

In aforesaid cases, no approval of Central Government or RBI is required.

1.6 Overriding powers of RBI to restrict overseas financial commitment

RBI, if it considers necessary may, in consultation with the Central Government,–(i) stipulate
the ceiling for the aggregate outflows during a financial year on account of financial
commitment or Overseas Portfolio Investment (ii) stipulate the ceiling beyond which the
amount of financial commitment by a person resident in India in a financial year shall require
its prior approval – Rule 9(3) of FEM (Overseas Investment) Rules, 2022.

1.7 Overriding powers of Central Government and RBI to allow investment

above limits
Notwithstanding anything contained in FEM (Overseas Investment) Rules, 2022 or Foreign
Exchange Management (Overseas Investment) Regulations 2022 –(i) the Central Government
may, on an application made to it through the RBI, permit financial commitment in strategic
sectors or geographies, above the limits laid down in FEM (Overseas Investment) Rules,
2022 and subject to such terms and conditions as it considers necessary(ii) the RBI may, on
an application made to it through the designated AD bank and for sufficient reasons, permit a
person resident in India to make or transfer any investment or financial commitment outside
India subject to such conditions as may be laid down by it – Rule 9(2) of FEM (Overseas
Investment) Rules, 2022.

1.8 Central Government can prohibit OI in specified countries

Overseas Investment (OI) by a person resident in India shall not be made in a foreign entity
located in a country or jurisdiction as may be decided by the Central Government from time
to time – Rule 9(2) of FEM (Overseas Investment) Rules, 2022.

1.9 Continuity of investments or financial commitments made upto 22-8-2022

Any investment or financial commitment outside India made in accordance with FEMA or
the rules or regulations made thereunder and held as on 22-8-2022, shall be deemed to have
been made under FEM (Overseas Investment) Rules, 2022 and the FEM (Overseas
Investment) Regulations, 2022 – Rule 6 of FEM (Overseas Investment) Rules, 2022.

1.10 Prohibition on investment or financial commitment outside India, except

as provided in FEM Act and Rules

Save as otherwise provided in FEMA or Rules or the regulations made or directions issued
under FEMA, no person resident in India shall make or transfer any investment or financial
commitment outside India – Rule 8 of FEM (Overseas Investment) Rules, 2022.

2. Overseas Investment
“Overseas Investment” or “OI” means financial commitment and Overseas Portfolio
Investment by aperson resident in India – Rule 2(1)(r) of FEM (Overseas Investment) Rules,
2022.

Overseas Investment shall be only in bona fide business activity and subject to restrictions.

Meaning of ‘Financial Commitment’ – “Financial commitment” means the aggregate

amount of investment made by a person resident in India by way of Overseas Direct
Investment, debt other than Overseas Portfolio Investment in a foreign entity or entities in
which the Overseas Direct Investment is made and shall include the non-fund-based facilities
extended by such person to or on behalf of such foreign entity or entities – Rule 2(1)(f) of
FEM (Overseas Investment) Rules, 2022.

An Indian entity may lend or invest in any debt instruments issued by a foreign entity or
extend non-fund based commitment to or on behalf of a foreign entity, including overseas
SDSs of such Indian entity, subject to the following conditions – (a) the Indian entity is
eligible to make ODI (b) the Indian entity has made ODI in the foreign entity (c) the Indian
entity has acquired control in the foreign entity on or before the date of making such financial
commitment – RBI Direction No. 1(viii) of FEM (Overseas Investment) Directions, 2022.

2.1 Foreign Entity

“Foreign entity” means an entity formed or registered or incorporated outside India, including
International Financial Services Centre that has limited liability. – – The restriction of limited
liability shall not apply to an entity with core activity in a strategic sector – Rule 2(1)(h) of
FEM (Overseas Investment) Rules, 2022.

Meaning of ‘Limited Liability’ – ‘Limited liability’ would mean a structure such as a

limited liability company, limited liability partnership, etc. where the liability of the person
resident in India is clear and limited. In case of a foreign entity being an investment fund or
vehicle, duly regulated by the regulator for the financial sector in the host jurisdiction and set
up as a trust outside India, the liability of the person resident in India shall be clear and
limited not exceeding the interest or contribution in the fund in any manner. Further, the
trustee of such fund shall be a person resident outside India – RBI Direction No.1(i) of FEM
(Overseas Investment) Directions, 2022.

2.2 Strategic Sector

“Strategic sector” shall include energy and natural resources sectors such as oil, gas, coal,
mineralores, submarine cable system and start-ups and any other sector or sub-sector as
deemed necessary by the Central Government – Rule 2(1)(z) of FEM (Overseas Investment)
Rules, 2022.

RBI instructions in respect of strategic sector – The restriction of limited liability structure
of foreign entity shall not be mandatory for entities with core activity in any strategic sector.
Accordingly, Overseas Direct Investment (ODI) can be made in such sectors in
unincorporated entities as well. An Indian entity is also permitted to participate in a
consortium with other international operators to construct and maintain submarine cable
systems on co-ownership basis. AD banks may allow remittances for ODI in strategic sector
after ensuring that Indian entity has obtained necessary permission from the competent
authority, wherever applicable – RBI Direction No.1(ii) of FEM (Overseas Investment)
Directions, 2022.

2.3 Investment only in foreign entity engaged in bona fide business activity

Save as otherwise provided in FEM (Overseas Investment) Rules, 2022 or the FEM
(Overseas Investment) Regulations, 2022, any investment made outside India by a person
resident in India shall be made in a foreign entity engaged in a bona fide business activity,
directly or through step down subsidiary (SDS) or the special-purpose vehicle, subject to the
limits and the conditions laid down in FEM (Overseas Investment) Rules, 2022 and the said
regulations. – – The structure of such subsidiary or step down subsidiary (SDS) of the foreign
entity shall comply with the structural requirements of a foreign entity. – – Overseas
Investment or transfer of such investment including swap of securities in a foreign entity
formed, registered or incorporated in Pakistan or in any other jurisdiction as may be advised
by the Central Government from time to time shall require prior approval of the Central
Government – Rule 9(1) of FEM (Overseas Investment) Rules, 2022.

Meaning of ‘bona fide business activity’ – For the purposes of rule 9(1), “bona
fide business activity” shall mean any business activity permissible under any law in force in
India and the host country or host jurisdiction, as the case may be – Explanation to Rule 9(1)
of FEM (Overseas Investment) Rules, 2022.

Subsidiary – “Subsidiary” or “step down subsidiary” (SDS) of a foreign entity means an

entity in which the foreign entity has control – Rule 2(1)(y) of FEM (Overseas Investment)
Rules, 2022.

The structure of such subsidiary/SDS shall comply with the structural requirements of a
foreign entity, i.e., such subsidiary/SDS shall also have limited liability where the foreign
entity’s core activity is not in strategic sector. The investee entities of the foreign entity where
such foreign entity does not have control (as defined above) shall not be treated as SDSs and
therefore need not be reported henceforth – RBI Direction No.1(v) of FEM (Overseas
Investment) Directions, 2022.

Host Country or Host Jurisdiction – “Host country” or “host jurisdiction” means the
country or jurisdiction, including the International Financial Services Centre, in which the
foreign entity is formed, registered or incorporated, as the case may be – Rule 2(1)(i) of FEM
(Overseas Investment) Rules, 2022.

Strategic sector – “Strategic sector” shall include energy and natural resources sectors such
as oil, gas, coal, mineralores, submarine cable system and start-ups and any other sector or
sub-sector as deemed necessary by the Central Government – Rule 2(1)(z) of FEM (Overseas
Investment) Rules, 2022.

3. Meaning of ‘Financial Commitment’

“Financial commitment” means the aggregate amount of investment made by a person
resident in India by way of Overseas Direct Investment, debt other than Overseas Portfolio
Investment in a foreign entity or entities in which the Overseas Direct Investment is made
and shall include the non-fund-based facilities extended by such person to or on behalf of
such foreign entity or entities – Rule 2(1)(f) of FEM (Overseas Investment) Rules, 2022.

3.1 Financial commitment by Indian entity by modes other than equity capital

The Indian entity may lend or invest in any debt instrument issued by a foreign entity or
extend non-fund based commitment to or on behalf of a foreign entity including overseas step
down subsidiaries of such Indian entity subject to the following conditions within the
financial commitment limit as prescribed in FEM (Overseas Investment) Rules, 2022 – (a)
the Indian entity is eligible to make Overseas Direct Investment (ODI) (b) the Indian entity
has made ODI in the foreign entity (c) the Indian entity has acquired control in such foreign
entity at the time of making such financial commitment – Regulation 3(1) of FEM (Overseas
Investment) Regulations, 2022, issued by RBI.

The financial commitments under regulations 4, 5, 6 and 7 shall be reckoned towards the
financial commitment limit referred to in regulation 3(1) – Regulation 3(2) of FEM (Overseas
Investment) Regulations, 2022 , issued by RBI.

[Note – Regulation 4 is in respect of debt, regulation 5 is in respect of guarantees, regulation

6 in respect of pledge and charge and regulation 7 is in respect of acquisition by deferred
payment].

Meaning of ‘Indian Entity’ – “Indian entity” means – (i) a company defined under the
Companies Act, 2013 (ii) a body corporate incorporated by any law for the time being in
force (iii) a Limited Liability Partnership duly formed and incorporated under the Limited
Liability Partnership Act, 2008; and (iv) a partnership firm registered under the Indian
Partnership Act, 1932 – Rule 2(1)(j) of FEM (Overseas Investment) Rules, 2022 same
definition in RBI Direction No.1(iv) of FEM (Overseas Investment) Directions, 2022.

3.2 Financial commitment by Indian entity by way of debt

An Indian entity may lend or invest in any debt instruments issued by a foreign entity subject
to the condition that such loans are duly backed by a loan agreement where the rate of interest
shall be charged on an arm’s length basis. – – For the purpose of this regulation, the
expression “arm’s length” means a transaction between two related parties that is conducted
as if they were unrelated, so that there is no conflict of interest – Regulation 4 of FEM
(Overseas Investment) Regulations, 2022, issued by RBI.

RBI directions in respect of Financial commitment by way of debt – AD bank shall

facilitate an outward remittance towards financial commitment by way of debt only after
obtaining the necessary agreement/documents for ensuring the bona fides of the transaction.
An Indian entity shall not lend directly to its overseas SDS. Further a resident individual shall
not make financial commitment by way of debt – RBI Direction No.21(3) of FEM (Overseas
Investment) Directions, 2022.

3.3 Financial commitment by way of guarantee for Overseas Investment

The following guarantees may be issued to or on behalf of the foreign entity or any of its step
down subsidiary (SDS) in which the Indian entity has acquired control through the foreign
entity, namely – (a) corporate or performance guarantee by such Indian entity (b) corporate or
performance guarantee by a group company of such Indian entity in India, being a holding
company (which holds at least 51% stake in the Indian entity) or a subsidiary company (in
which the Indian entity holds at least 51% stake) or a promoter group company, which is a
body corporate (c) personal guarantee by the resident individual promoter of such an Indian
entity (d) bank guarantee, which is backed by a counter-guarantee or collateral by the Indian
entity or its group company as above, and issued, by a bank in India – Regulation 5(1) of
FEM (Overseas Investment) Regulations, 2022, issued by RBI.

Guarantee by group company – Where the guarantee is extended by a group company, it

shall be counted towards the utilisation of its financial commitment limit independently and
in case of a resident individual promoter, the same shall be counted towards the financial
commitment limit of the Indian entity. – – Where the commitment under regulation 5(1) is
extended by a group company, any fund-based exposure to or from the Indian entity shall be
deducted from the net worth of such group company for computing its financial commitment
limit – – Where the guarantee under regulation 5(1) is extended by a promoter, which is a
body corporate or an individual, the Indian entity shall be a part of the promoter group –
Regulation 5(2) of FEM (Overseas Investment) Regulations, 2022, issued by RBI.

For the purposes of regulation 5(2), the expression “promoter group” shall have the meaning
as assigned to it in the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018 – Explanation to Regulation 5(2) of FEM
(Overseas Investment) Regulations, 2022, issued by RBI.

No open ended guarantee – No guarantee shall be open-ended – Regulation 5(3) of FEM

(Overseas Investment) Regulations, 2022, issued by RBI.

Guarantee invoked will be considered as lending – The guarantee, to the extent of the
amount invoked, shall cease to be a part of the non-fund based commitment but be considered
as lending – Regulation 5(4) of FEM (Overseas Investment) Regulations, 2022 , issued by
RBI.

Joint guarantee will be considered as 100% guarantee by each guarantor – Where a

guarantee has been extended jointly and severally by two or more Indian entities, 100% of the
amount of such guarantee shall be reckoned towards the individual limits of each of such
Indian entities – Regulation 5(5) of FEM (Overseas Investment) Regulations, 2022, issued by
RBI.

Performance guarantee will be reckoned as 50% commitment – In case of performance

guarantee, 50% of the amount of guarantee shall be reckoned towards the financial
commitment limit – Regulation 5(6) of FEM (Overseas Investment) Regulations, 2022,
issued by RBI.

Roll over is not fresh commitment – Roll-over of guarantee shall not be treated as fresh
financial commitment where the amount on account of such roll-over does not exceed the
amount of original guarantee – Regulation 5(7) of FEM (Overseas Investment) Regulations,
2022, issued by RBI.

RBI directions in respect of financial commitment by way of guarantee – As per RBI

Direction No.21(4) of FEM (Overseas Investment) Directions, 2022, with respect to financial
commitment by way of Guarantee –
(a) In the case of performance guarantee, time specified for the completion of the contract
shall be treated as its validity period.

(b) No prior approval from the Reserve Bank shall be needed for remitting the funds from
India on account of invocation of a performance guarantee extended in accordance with OI
Rules/Regulations.

(c) Any guarantee, to the extent of the amount invoked, shall cease to be a part of the non-
fund based financial commitment but will be considered as financial commitment by way of
debt. Such invocation shall be reported in Form FC.

(d) Roll-over of guarantee shall not be treated as fresh financial commitment. However, such
roll-over shall be reported in Form FC.

(e) A group company of the Indian entity may extend a guarantee in accordance with the OI
Regulations if such group company is eligible to make ODI as per the OI Rules and such
guarantee shall be counted towards the utilisation of the financial commitment limit of such
group company and shall be reported by the group company concerned. In case of a resident
individual promoter, the same shall be counted towards the financial commitment limit of the
Indian entity and accordingly be reported by the Indian entity. The concept of utilising the net
worth of the subsidiary/holding company by the Indian entity has been discontinued
henceforth. Further, for computing the financial commitment limit of the group company, any
fund-based exposure of such group company to the Indian entity or of the Indian entity to
such group company, as the case may be, shall be deducted from the net worth of such group
company.

3.4 Financial commitment by way of pledge or charge

As per Regulation 6 of FEM (Overseas Investment) Regulations, 2022, issued by RBI, an

Indian entity, which has made ODI by way of investment in equity capital in a foreign entity,
may––

(a) pledge the equity capital of the foreign entity in which it has made ODI or of its step
down subsidiary outside India, held directly by the Indian entity in a foreign entity and
indirectly in step down subsidiary, in favour of an AD bank or a public financial institution in
India or an overseas lender, for availing fund based or non-fund based facilities for itself or
for any foreign entity in which it has made ODI or its step down subsidiaries outside India or
in favour of a debenture trustee registered with SEBI for availing fund based facilities for
itself;
 (b) create charge by way of mortgage, pledge, hypothecation or any other identical mode on –
(i) its assets in India, including the assets of its group company or associate company,
promoter or director, in favour of an AD bank or a public financial institution in India or an
overseas lender as security for availing of the fund based or non-fund based facility or both,
for any foreign entity in which it has made ODI or for its step down subsidiary outside India;
or(ii) the assets outside India of the foreign entity in which it has made ODI or of its step
down subsidiary (SDS) outside India in favour of an AD bank in India or a public financial
institution in India as security for availing of the fund based or non-fund based facility or
both, for itself or any foreign entity in which it has made ODI or for its step down subsidiary
(SDS) outside India or in favour of a debenture trustee registered with SEBI in India for
availing fund based facilities for itself:

Provided that– (a) the value of the pledge or charge or the amount of the facility, whichever
is less, shall be reckoned towards the financial commitment limit in force at the time of such
pledge or charge provided such facility has not already been reckoned towards such limit and
excluding cases where the facility has been availed by the Indian entity for itself (b) overseas
lender in whose favour there is such a pledge or charge shall not be from any country or
jurisdiction in which financial commitment is not permissible under the FEM (Overseas
Investment) Rules, 2022 (c) the creation or enforcement of such pledge or charge shall be in
accordance with the provisions of the Act or rules or regulations made or directions issued
thereunder – proviso to Regulation 6 of FEM (Overseas Investment) Regulations, 2022,
issued by RBI.

Meaning of ‘PFI’ and negative pledge – For the purposes of regulation 6– (a) the
expression “public financial institution” shall have the same meaning as assigned to it under
clause section 2(72) of the Companies Act, 2013 (b) the “negative pledge” or “negative
charge” created by an Indian entity or a bid bond guarantee obtained in accordance with FEM
(Overseas Investment) Regulations, 2022 for participation in a bidding or tender procedure
for the acquisition of a foreign entity shall not be reckoned towards the financial commitment
limit referred to in regulation 3(1).

Summary of provisions relating to financial commitment by way of pledge/charge– The

provisions related to financial commitment by way of pledge/charge [regulation 6 of OI
Regulations] are summarised by way of a chart in RBI Direction No.21(5) of FEM (Overseas
Investment) Directions, 2022 [Not reproduced here for sake of brevity].

RBI directions in respect of pledge/charge – Financial commitment by way of

pledge/charge shall be subject to following conditions, as specified in RBI Direction
No.21(6) of FEM (Overseas Investment) Directions, 2022.

 The value of the pledge/charge or the amount of the facility, whichever is less, shall be reckoned towards
the financial commitment limit provided such facility has not already been reckoned towards the limit
prescribed;
 Overseas lender in whose favour such pledge/charge is created shall not be from any country or
jurisdiction in which financial commitment is not permissible under the OI Rules;
 the creation/enforcement of such pledge/charge shall be in accordance with the relevant provisions of the
Act or rules or regulations made, or directions issued thereunder;
 The assets on which charge is being created are not securitised;
 The period of charge, if not specified upfront, shall be co-terminus with the period of facility (like loan or
other facility) for which charge has been created;
 in the event of enforcement of charge created on domestic assets, such domestic assets shall be transferred
by way of sale to a person resident in India only;
 Wherever creation of charge involves pledge of shares of an Indian company in favour of an overseas
lender, the pledge shall also be governed by the extant FEMA provisions contained in FEM (Non-Debt
Instruments) Rules, 2019.

3.5 Acquisition or transfer of equity capital by way of deferred payment

Where a person resident in India acquires equity capital by way of subscription to an issue or
by way of purchase from a person resident outside India or where a person resident outside
India acquires equity capital by way of purchase from a person resident in India, and where
such equity capital is reckoned as ODI, the payment of amount of consideration for the equity
capital acquired may be deferred for such definite period from the date of the agreement as
provided in such agreement subject to the following terms and conditions, namely – (a) the
foreign securities equivalent to the amount of total consideration shall be transferred or
issued, as the case may be, upfront by the seller to the buyer (b) the full consideration finally
paid shall be compliant with the applicable pricing guidelines. – – The deferred part of the
consideration in case of acquisition of equity capital of a foreign entity by a person resident in
India shall be treated as non-fund based commitment – Regulation 7(1) of FEM (Overseas
Investment) Regulations, 2022, issued by RBI.

The buyer may be indemnified by the seller up to such amount and be subject to such terms
and conditions as may be mutually agreed upon and laid down in the agreement. – – Such
agreement shall be in compliance with the provisions of FEMA and the rules and regulations
made thereunder – Regulation 7(2) of FEM (Overseas Investment) Regulations, 2022, issued
by RBI.

Conditions and procedure for acquisition or transfer by way of deferred payment – AD

bank shall verify the bona fides of the transactions from the underlying agreement/documents
in case of deferment of payment of consideration in accordance with regulation 7 of OI
Regulations. The period of deferment shall be defined upfront. In case the remittance towards
acquisition of equity capital is to be made post subscription to Memorandum of Association,
the period within which such remittance is to be made shall be defined in the underlying
agreement/documents/applicable laws else the remittance shall be made on or before
acquisition of/setting up of the foreign entity.

The part of the payment towards consideration deferred by the person resident in India shall
be treated as non-fund based financial commitment by such person and shall be reported
accordingly. Subsequent payments towards deferred consideration shall be reported in Form
FC as conversion of non-fund based financial commitment to equity. The valuation in
accordance with pricing guidelines, wherever applicable, shall be done upfront – RBI
Direction No.10 of FEM (Overseas Investment) Directions, 2022.

4. Overseas Portfolio Investment

“Overseas Portfolio Investment” or “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 an IFSC. – – – OPI by a person resident in India in the equity capital of
a listed entity, even after its delisting shall continue to be treated as OPI until any further
investment is made in the entity. For the purposes of this clause, the expression “debt
instruments” means the instruments specified as such in rule 5(A) of FEM (Overseas
Investment) Rules, 2022 – Rule 2(1)(s) of FEM (Overseas Investment) Rules, 2022.

Meaning of ‘Equity Capital’ – “Equity capital” means equity shares or perpetual capital or
instruments that are irredeemable or contribution to non-debt capital of a foreign entity in the
nature of fully and compulsorily convertible instruments – Rule 2(1)(e) of FEM (Overseas
Investment) Rules, 2022.

Any instrument which is redeemable or non-convertible or optionally convertible shall be

treated as debt for the purpose of OI Rules/Regulations/Directions – RBI Direction No.1(vii)
of FEM (Overseas Investment) Directions, 2022.

4.1 Directions of RBI in respect of OPI

The following is provided in RBI Direction No.1(x) of FEM (Overseas Investment)

Directions, 2022.

(a) OPI shall not be made in (1) any unlisted debt instruments; or (2) any security which is
issued by a person resident in India who is not in an IFSC; or (3) any derivatives unless
otherwise permitted by Reserve Bank; or (4) any commodities including Bullion Depository
Receipts (BDRs).

(b) OPI by a person resident in India in the listed equity capital of a listed entity, even after its
delisting, shall continue to be treated as OPI until any further investment is made in the
entity, i.e., any further investment made in the equity capital of the foreign entity after its
delisting shall be made as ODI.

(c) A listed Indian company may make OPI, including by way of reinvestment, in accordance
with schedule II of the OI Rules. ‘Reinvestment’ means that the OPI proceeds are exempted
from repatriation provisions as long as such proceeds are reinvested within the time specified
for realisation and repatriation as per.FEM (Realisation, repatriation and surrender of foreign
exchange) Regulations. 2015.

(d) An unlisted Indian entity may make OPI in accordance with schedule II of the OI Rules.

(e) The investment (including sponsor contribution) in units of any investment fund overseas,
duly regulated by the regulator for the financial sector in the host jurisdiction, shall be
considered as OPI. Accordingly, in jurisdictions other than IFSC, listed Indian companies and
resident individuals may make such investment. Whereas in IFSC an unlisted Indian entity
may also make such OPI in units of an investment fund or vehicle, in terms of schedule V of
the OI Rules subject to limits, as applicable.
(f) Resident individuals may make OPI within the overall limit for Liberalised Remittance
Scheme (LRS) in terms of schedule III of the OI Rules. Further, shares or interest acquired by
the resident individuals by way of sweat equity shares or minimum qualification shares or
under Employee Stock Ownership Plan (ESOP)/ Employee Benefits Scheme up to 10% of
the paid-up capital/stock, whether listed or unlisted, of the foreign entity and without control
shall also qualify as OPI.

(g) Any investment made overseas in accordance with Schedule IV of the OI Rules in
securities as stipulated by SEBI by Mutual Funds (MFs), Venture Capital Funds (VCFs) and
Alternative Investment Funds (AIFs) registered with SEBI shall be considered as OPI.

4.2 Meaning of debt instruments

As per Rule 5(A) of FEM (Overseas Investment) Rules, 2022, following shall be debt
instruments as determined under section 6(7) of FEMA –

(i) Government bonds;

(ii) corporate bonds;

(iii) all tranches of securitisation structure which are not equity tranche;

(iv) borrowings by firms through loans; and

(v) depository receipts whose underlying securities are debt securities.

4.3 Meaning of Non-debt instruments

As per Rule 5(B) of FEM (Overseas Investment) Rules, 2022, following shall be Non-debt
instruments as determined under section 6(7) of FEMA –

(i) all investments in equity in incorporated entities (public, private, listed and unlisted)

(ii) capital participation in Limited Liability Partnerships

(iii) all instruments of investment as recognised in the Foreign Direct Investment policy from
time to time

(iv) investment in units of Alternative Investment Funds and Real Estate Investment Trust
and Infrastructure Investment Trusts

(v) investment in units of mutual funds and Exchange-Traded Fund which invest more than
fifty per cent in equity. “Mutual fund” means any fund registered as such with SEBI – Rule
2(1)(o) of FEM (Overseas Investment) Rules, 2022.

(vi) the junior-most layer (i.e. equity tranche) of securitisation structure

(vii) acquisition, sale or dealing directly in immovable property

(viii) contribution to trusts; and

(ix) depository receipts issued against equity instruments.

4.4 Manner of making Overseas Portfolio Investment by an Indian entity

The provisions as contained in Schedule II of FEM (Overseas Investment) Rules, 2022 are as
follows –

An Indian entity may make OPI which shall not exceed 50% of its net worth as on the date of
its last audited balance sheet, in the manner and subject to the conditions laid down in
Schedule II.

A listed Indian company may make OPI including by way of reinvestment.

An unlisted Indian entity may make OPI only under clauses (iii), (iv), (v) and (vi) of
paragraph 1(2) of Schedule I.

Net Worth – “Net worth” shall have the same meaning as assigned to it in section 2(57) of
the Companies Act, 2013. – – – For the purposes of this clause, “net worth” of registered
partnership firm or Limited Liability Partnership (LLP) shall be the sum of the capital
contribution of partners and undistributed profits of the partners after deducting therefrom the
aggregate value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the last audited balance sheet – Rule 2(1)(p) of FEM
(Overseas Investment) Rules, 2022.

“Last audited balance sheet” means audited balance sheet as on date not exceeding eighteen
months preceding the date of the transaction – Rule 2(1)(l) of FEM (Overseas Investment)
Rules, 2022.

Listed and Unlisted Indian Company – “Listed Indian company” means an Indian
company that has equity shares or any of its fully and compulsorily convertible instruments
listed on a recognised stock exchange in India and the expression “unlisted Indian company”
shall be construed accordingly – Rule 2(1)(n) of FEM (Overseas Investment) Rules, 2022.

5. No Objection Certificate requirement from Bank or

regulatory authority in certain cases
Any person resident in India who (i) has an account appearing as a non-performing asset; or
(ii) is classified as a wilful defaulter by any bank; or (iii) is under investigation by a financial
service regulator or by investigative agencies in India, namely, the Central Bureau of
Investigation or Directorate of Enforcement or Serious Frauds Investigation Office, shall,
before making any financial commitment or undertaking disinvestment under FEM (Overseas
Investment) Rules, 2022 or the FEM (Overseas Investment) Regulations, 2022, obtain a No
Objection Certificate from the lender bank or regulatory body or investigative agency by
making an application in writing to such bank or regulatory body or investigative agency
concerned – Rule 10(1) of FEM (Overseas Investment) Rules, 2022.

Where the lender bank or regulatory body or investigative agency concerned fails to furnish
the certificate within sixty days from the date of receipt of such application, it may be
presumed that there was no objection to the proposed transaction – proviso to Rule 10(1) of
FEM (Overseas Investment) Rules, 2022.

The No Objection Certificate issued under rule 10(1) shall be addressed by the lender bank or
regulatory body or investigative agency concerned to the designated AD bank with an
endorsement to the applicant – Rule 10(2) of FEM (Overseas Investment) Rules, 2022.

“Authorised Dealer Category-I bank or “AD bank” means a person authorised as such under
section 10(1) of FEMA and for the purposes of FEM (Overseas Investment) Rules, 2022,
shall mean only the domestic branches of such AD bank – Rule 2(1)(b) of FEM (Overseas
Investment) Rules, 2022.

6. Pricing guidelines for issue or transfer of equity of a

foreign entity
Unless otherwise provided in FEM (Overseas Investment) Rules, 2022, the issue or transfer
of equity capital of a foreign entity from a person resident outside India or a person resident
in India to a person resident in India who is eligible to make such investment or from a
person resident in India to a person resident outside India shall be subject to a price arrived
on an arm’s length basis – Rule 16(1) of FEM (Overseas Investment) Rules, 2022.

The AD bank, before facilitating a transaction under rule 16(1), shall ensure compliance with
arm’s length pricing taking into consideration the valuation as per any internationally
accepted pricing methodology for valuation – Rule 16(2) of FEM (Overseas Investment)
Rules, 2022.

Authorised Dealer Category-I bank or “AD bank” means a person authorised as such under
section 10(1) of FEMA and for the purposes of FEM (Overseas Investment) Rules, 2022,
shall mean only the domestic branches of such AD bank – Rule 2(1)(b) of FEM (Overseas
Investment) Rules, 2022.

Meaning of ‘Equity Capital’ – “Equity capital” means equity shares or perpetual capital or
instruments that are irredeemable or contribution to non-debt capital of a foreign entity in the
nature of fully and compulsorily convertible instruments – Rule 2(1)(e) of FEM (Overseas
Investment) Rules, 2022.

Any instrument which is redeemable or non-convertible or optionally convertible shall be

treated as debt for the purpose of OI Rules/Regulations/Directions – RBI Direction No.1(vii)
of FEM (Overseas Investment) Directions, 2022.

6.1 RBI directions in respect of Pricing Guidelines

RBI Direction No.12 of FEM (Overseas Investment) Directions, 2022 provides following
pricing guidelines.

(1) The AD bank, before facilitating an overseas investment related transaction, shall ensure
compliance with the provisions contained in rule 16 of OI Rules. With respect to the
documents to be taken by the AD bank, they shall be guided by their board approved policy,
which may, inter alia, provide for taking into consideration the valuation as per any
internationally accepted pricing methodology for valuation. The AD bank shall put in place a
board approved policy within two months from the date of these directions.

(2) Such policy may also provide for scenarios where the valuation may not be insisted upon,
such as (i) transfer on account of merger, amalgamation or demerger or liquidation, where the
price has been approved by the competent Court/Tribunal as per the laws in India and/or the
host jurisdiction or (ii) price is readily available on a recognised stock exchange, etc. The
policy shall also clearly provide for additional documents such as the audited financial
statements of the foreign entity, etc. that may be taken by the AD banks for ascertaining
the bona fides in cases involving write-off of the investment.

7. Transfer of investment or liquidation

Unless otherwise provided, a person resident in India holding equity capital in accordance
with FEM (Overseas Investment) Rules, 2022 may transfer such investment, in compliance
with the limits and subject to the conditions for such investment or disinvestment, pricing
guidelines or documentation and reporting requirements, in the manner provided in FEM
(Overseas Investment) Rules, 2022 and the FEM (Overseas Investment) Regulations, 2022 –
Rule 17(1) of FEM (Overseas Investment) Rules, 2022.

A person resident in India may transfer equity capital by way of sale to a person resident in
India, who is eligible to make such investment under FEM (Overseas Investment) Rules,
2022, or to a person resident outside India – Rule 17(2) of FEM (Overseas Investment) Rules,
2022.

In case the transfer is on account of merger, amalgamation or demerger or on account of

buyback of foreign securities, such transfer or liquidation in case of liquidation of the foreign
entity, shall have the approval of the competent authority as per the applicable laws in India
or the laws of the host country or host jurisdiction, as the case may be – Rule 17(3) of FEM
(Overseas Investment) Rules, 2022.

Where the disinvestment by a person resident in India pertains to ODI–(i) the transferor, in
case of full disinvestment other than by way of liquidation, shall not have any dues
outstanding for receipt, which such transferor is entitled to receive from the foreign entity as
an investor in equity capital and debt (ii) the transferor, in case of any disinvestment must
have stayed invested for at least one year from the date of making ODI. – – These conditions
shall not be applicable in case of a merger, demerger or amalgamation between two or more
foreign entities that are wholly-owned, directly or indirectly, by the Indian entity or where
there is no change or dilution in aggregate equity holding of the Indian entity in the merged
or demerged or amalgamated entity – Rule 17(4) of FEM (Overseas Investment) Rules, 2022.

The holding of any investment or transfer thereof in any manner shall not be permitted if the
initial investment was not permitted under FEMA – Rule 17(5) of FEM (Overseas
Investment) Rules, 2022.

Meaning of ‘Disinvestment’ – “Disinvestment” means partial or full extinguishment of

right, title or possession of equity capital acquired under FEM (Overseas Investment) Rules,
2022 – Rule 2(1)(d) of FEM (Overseas Investment) Rules, 2022.
RBI directions in respect of transfer or liquidation – A person resident in India holding
equity capital in accordance with OI Rules may transfer such investment in accordance with
rule 17 of OI Rules. It is clarified that where the transferor is required to repatriate all the
dues before disinvestment, such requirement shall not apply to the dues that do not arise on
account of investment in equity or debt like export receivables, etc. – RBI Direction No.13 of
FEM (Overseas Investment) Directions, 2022.

8. Restructuring of ODI
A person resident in India who has made ODI in a foreign entity may permit restructuring of
the balance sheet by such foreign entity, which has been incurring losses for the previous two
years as evidenced by its last audited balance sheets, subject to ensuring compliance with
reporting, documentation requirements and subject to the diminution in the total value of the
outstanding dues towards such person resident in India on account of investment in equity
and debt, after such restructuring not exceeding the proportionate amount of the accumulated
losses – Rule 18 of FEM (Overseas Investment) Rules, 2022.

“Last audited balance sheet” means audited balance sheet as on date not exceeding eighteen
months preceding the date of the transaction – Rule 2(1)(l) of FEM (Overseas Investment)
Rules, 2022.

In case of such diminution where the amount of corresponding original investment is more
than USD 10 million or in the case where the amount of such diminution exceeds 20% of the
total value of the outstanding dues towards the Indian entity or investor, the diminution in
value shall beduly certified on an arm’s length basis by a registered valuer as per the
Companies Act, 2013 or corresponding valuer registered with the regulatory authority or
certified public accountant in the host jurisdiction – first proviso to Rule 18 of FEM
(Overseas Investment) Rules, 2022.

The certificate dated not more than six months before the date of the transaction shall be
submitted to the designated AD bank – second proviso to Rule 18 of FEM (Overseas
Investment) Rules, 2022.

Authorised Dealer Category-I bank or “AD bank” means a person authorised as such under
section 10(1) of FEMA and for the purposes of FEM (Overseas Investment) Rules, 2022,
shall mean only the domestic branches of such AD bank – Rule 2(1)(b) of FEM (Overseas
Investment) Rules, 2022.

8.1 RBI directions in respect of Restructuring

RBI Direction No.14 of FEM (Overseas Investment) Directions, 2022 contains following
guidelines in respect of restructuring:

(1) A person resident in India who has made ODI in a foreign entity, may permit
restructuring of the balance sheet by such foreign entity in accordance with rule 18 of OI
Rules. The aggregate investment in both the equity and debt of the foreign entity shall be
taken into consideration for computing the proportionate amount of accumulated losses.
However, in case the restructuring involves only equity, investment only in equity of the
foreign entity may be taken into consideration for computing proportionate losses.
(2) The certificate required to be furnished in accordance with rule 18 of OI Rules shall
mention the amount of accumulated losses as per the audited balance sheet of the foreign
entity, the proportionate amount of accumulated losses based upon the share of the Indian
entity/investor, the amount of diminution in the value of the outstanding dues towards the
Indian entity/investor post restructuring and that such diminution does not exceed the
proportionate amount of accumulated losses.

(3) These provisions shall not be used where the assets are simply revalued in the books of
the Indian entity without any restructuring of the balance sheet of the foreign entity.

9. Restrictions and prohibitions in ODI or Financial

Commitment
Unless otherwise provided in FEMA or of FEM (Overseas Investment) Rules, 2022, no
person resident in India shall make ODI in a foreign entity engaged in – (a) real estate
activity (b) gambling in any form; and (c) dealing with financial products linked to the Indian
rupee without specific approval of the RBI.

The expression “real estate activity” means buying and selling of real estate or trading in
Transferable Development Rights but does not include the development of townships,
construction of residential or commercial premises, roads or bridges for selling or leasing –
Rule 19(1) of FEM (Overseas Investment) Rules, 2022.

RBI directions in respect of Restrictions and prohibitions under rule 19(1) – AD bank
shall not facilitate any transaction in respect of any foreign entity engaged in an activity
mentioned in rule 19(1) of OI Rules or located in countries/jurisdictions as advised by the
Central Government under rule 9(2) of OI Rules. It is clarified that financial products linked
to Indian Rupee shall include non-deliverable trades involving foreign currency-INR
exchange rates, stock indices linked to Indian market, etc. – RBI Direction No.22(1) of FEM
(Overseas Investment) Directions, 2022 provides as follows.

9.1 Investment in start-ups only from internal accruals

Any ODI in start-ups recognised under the laws of the host country or host jurisdiction as the
case may be, shall be made by an Indian entity only from the internal accruals whether from
the Indian entity or group or associate companies in India and in case of resident individuals,
from own funds of such an individual – Rule 19(2) of FEM (Overseas Investment) Rules,
2022.
Resident Individual – “Resident individual” means a person resident in India who is a
natural person – Rule 2(1)(u) of FEM (Overseas Investment) Rules, 2022.

Procedure and conditions for ODI in start-ups – Any ODI in startups in accordance with
rule 19(2) of OI Rules shall not be made out of funds borrowed from others. The AD bank,
before facilitating the transaction, shall obtain necessary certificate in this regard from the
statutory auditors/chartered accountant of the Indian entity/investor – RBI Direction No. 9 of
FEM (Overseas Investment) Directions, 2022.

9.2 Restrictions on making financial commitment in foreign entity with

structure more than two layers of subsidiaries

No person resident in India shall make financial commitment in a foreign entity that has
invested or invests into India, at the time of making such financial commitment or at any time
thereafter, either directly or indirectly, resulting in a structure with more than two layers of
subsidiaries – Rule 19(3) of FEM (Overseas Investment) Rules, 2022.

Such restriction shall not apply to the following classes of companies mentioned in rule 2(2)
of the Companies (Restriction on Number of Layers) Rules, 2017 as may be amended from
time to time, namely – (a) a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949 (b) a non-banking financial company as defined in section 45-
I(f) of the Reserve Bank of India Act, 1934 which is registered with the Reserve Bank and
considered as systematically important non-banking financial company by RBI (c) an
insurance company being a company which carries on the business of insurance in
accordance with provisions of the Insurance Act, 1938 and the Insurance Regulatory and
Development Authority Act, 1999 and (d) a Government company referred to in section
2(45) of the Companies Act, 2013 – proviso to Rule 19(3) of FEM (Overseas Investment)
Rules, 2022.

9.3 RBI directions in respect of Restrictions on layers of subsidiaries

The financial commitment by a person resident in India in a foreign entity that has invested or
invests into India at the time of making such financial commitment or at any time thereafter,
either directly or indirectly, resulting in a structure with more than two layers of subsidiaries
is not permitted in accordance with rule 19(3) of the OI Rules. It is provided that no further
layer of subsidiary or subsidiaries shall be added to any structure existing with two or more
layers of subsidiaries post notification of the OI Rules/Regulations. – – It may be noted that
subsidiary shall have the meaning as provided in the OI Rules i.e. an entity in which the
foreign entity has control (which includes a stake of 10% or more in an entity as per the OI
Rules) RBI Direction No. 22(2) of FEM (Overseas Investment) Directions, 2022.