Many foreign groups use their Indian subsidiary as a regional hub and want it to invest in other countries. They might set up an Indian-owned company in the Middle East, buy a business in Southeast Asia, or fund a sales office in Europe. Under Indian law, this is Overseas Direct Investment, or ODI. An Indian subsidiary of a foreign company can make ODI under the automatic route, within limits and conditions.
ODI is governed by the Foreign Exchange Management Act (FEMA) 1999, the Foreign Exchange Management (Overseas Investment) Rules 2022, the Overseas Investment Regulations 2022, and RBI’s Overseas Investment Directions 2022. The framework is run by the Reserve Bank of India (RBI) through the Authorised Dealer Category-I Bank. The main limit is that an Indian entity can make financial commitments of up to 400% of its net worth under the automatic route.
This guide explains who can make ODI, the limits, the conditions, the filing process, the reporting obligations, and how foreign-owned subsidiaries should approach it.
What Is Overseas Direct Investment Under FEMA?
Overseas Direct Investment is investment by an Indian entity in an unlisted foreign entity’s equity, or in 10% or more of a listed foreign entity’s paid-up equity, or investment that gives control. It is made under the Overseas Investment Rules 2022, through an AD Category-I Bank, and reported to RBI.
ODI is different from Overseas Portfolio Investment (OPI), which is smaller, passive investment in listed foreign securities. ODI usually involves a business interest or control.
| Type | Meaning | Main Rule |
|---|---|---|
| ODI | Unlisted equity, or 10% or more of listed equity, or control | Overseas Investment Rules 2022 |
| OPI | Listed foreign securities below 10% without control | Overseas Investment Rules 2022 |
| Financial commitment | Total of ODI, debt, and non-fund-based support such as guarantees | 400% of net worth limit |
Can an Indian Subsidiary of a Foreign Company Make ODI?
Yes. An Indian company owned by a foreign parent is an “Indian entity” under the Overseas Investment Rules 2022 and can make ODI under the automatic route. It must meet the same conditions as any Indian entity, including the net worth limit, sector restrictions, and rules against round-tripping structures.
A foreign-owned subsidiary should also check its own FDI conditions, shareholders’ agreement, and board authorisations before making ODI.
What Are the Limits and Conditions for ODI?
An Indian entity can make total financial commitments of up to 400% of its net worth, based on its last audited balance sheet, under the automatic route. The foreign entity must be in a bona fide business. Certain sectors are prohibited. Structures with more than two layers of subsidiaries that route investment back into India are restricted.
What sectors are prohibited for ODI?
- Real estate activity as defined in the rules
- Gambling in any form
- Financial products linked to the Indian rupee without RBI permission
What other conditions apply?
- The Indian entity must not be on RBI’s caution list or under certain investigations without the required No Objection Certificate
- The Indian entity must not be a wilful defaulter without lender NOCs as required
- Investment must follow pricing guidelines on an arm’s length basis
- Investment in a financial services foreign entity needs additional conditions, such as profitability track record
| Condition | Requirement |
|---|---|
| Financial commitment limit | Up to 400% of net worth, automatic route |
| Business test | Foreign entity must carry on bona fide business |
| Round-tripping | No more than two layers of subsidiaries where structure invests back into India |
| Pricing | Arm’s length price based on valuation |
| Investigations | NOC needed where certain agency investigations are pending |
How Does an Indian Subsidiary Make ODI?
The Indian subsidiary passes a board resolution, gets a valuation, and checks the net worth limit and sector rules. It then submits Form FC with documents to its AD Category-I Bank, which processes the remittance and gives a Unique Identification Number (UIN) for the overseas entity.
Step 1: Board Approval and Planning
Pass a board resolution approving the ODI. Confirm the foreign entity’s business, structure, and funding source, and check that the plan meets the shareholders’ agreement.
Step 2: Check Limits and Restrictions
Calculate total financial commitments against 400% of net worth. Confirm the sector is permitted and the structure does not breach round-tripping rules.
Step 3: Obtain Valuation and Documents
Get a valuation for share acquisitions as required. Collect incorporation documents, the investment agreement, and declarations required by the AD bank.
Step 4: Submit Form FC to AD Bank
Submit Form FC, reporting the financial commitment, with supporting documents to the AD Category-I Bank. The bank reviews and reports the ODI to RBI.
Step 5: Remit Funds and Get UIN
After approval, the AD bank remits funds. A Unique Identification Number (UIN) is allotted to the overseas entity for tracking all future reporting.
Step 6: Post-Investment Reporting
Submit proof of investment, such as the share certificate, within the time allowed. File the Annual Performance Report, the FLA Return, and any disinvestment reports as required.
What Reporting Is Required After ODI?
After ODI, the Indian entity must report the financial commitment in Form FC and submit proof of investment. It must then file the Annual Performance Report (APR) for each foreign entity by 31 December every year and include ODI in its FLA Return by 15 July. Changes and disinvestment are reported as prescribed.
| Report | Timeline |
|---|---|
| Form FC | At the time of financial commitment |
| Proof of investment | Within the period prescribed after investment |
| Annual Performance Report | By 31 December every year |
| FLA Return | By 15 July every year |
| Disinvestment report | Within the period prescribed after disinvestment |
Delays in ODI reporting can be regularised with a Late Submission Fee within three years of the due date. Longer delays need compounding.
What Tax and Company Law Rules Apply to ODI?
ODI needs board approval under the Companies Act 2013, and shareholder approval where Section 186 limits on investments and loans are crossed. Income from the overseas entity, such as dividends and interest, is taxable in India under the Income Tax Act. Transfer pricing applies to transactions with the overseas subsidiary.
Guarantees given for the overseas entity count toward financial commitment. They may also need transfer pricing analysis. Foreign tax credit may be available under the applicable tax treaty.
What Are the Key Insights and Information on ODI by Indian Subsidiaries?
- A foreign-owned Indian subsidiary can make ODI under the automatic route.
- Total financial commitment is limited to 400% of net worth.
- Real estate, gambling, and rupee-linked financial products are prohibited.
- Structures with more than two layers routing investment back into India are restricted.
- Form FC is filed through the AD Category-I Bank, and a UIN is allotted.
- The APR is due by 31 December every year.
- ODI reporting delays can use the Late Submission Fee within three years.
How Does a Foreign Parent Use an Indian Subsidiary for ODI in Practice?
A foreign group using its Indian subsidiary as a regional hub must make sure the Indian company follows the ODI framework fully.
General Example: A Swedish group wants its Indian subsidiary to set up a software services company in the UAE. The subsidiary’s board approves the plan and checks that the investment is well within 400% of its net worth. It confirms the activity is permitted and the structure does not route money back into India. It submits Form FC to its AD Category-I Bank, which remits the funds and allots a UIN. The subsidiary submits the share certificate, files the APR by 31 December, and includes the investment in its FLA Return.
Frequently Asked Questions on ODI by Indian Subsidiaries
These answers address complex questions faced by foreign-owned Indian subsidiaries making overseas investments. They are based on FEMA, the Overseas Investment Rules, Regulations, and Directions 2022, and RBI practice, focusing on limits, structure, reporting, and edge cases.
1. Does a foreign-owned Indian subsidiary need RBI approval for ODI?
Not under the automatic route, if it is within limits and conditions. Cases outside the automatic route need prior approval.
2. Can the Indian subsidiary invest in its foreign parent?
This needs careful review. It may raise round-tripping and structure issues under the Overseas Investment Rules.
3. Does a guarantee for the foreign entity count toward the limit?
Yes. Guarantees and other non-fund-based support count as financial commitment.
4. Can ODI be funded by borrowing?
It can be funded from permitted sources, including borrowings, subject to the rules and lender conditions.
5. What if the APR is not filed?
Delay can be regularised with the Late Submission Fee within three years. After that, compounding is needed.
6. Can ODI be made in a foreign startup?
Yes, if the startup carries on a bona fide business and the investment meets all conditions.
7. Is ODI allowed in a foreign real estate company?
Real estate activity, as defined in the rules, is prohibited.
8. What is the UIN?
The Unique Identification Number given to each overseas entity for tracking ODI reporting.
9. Does ODI affect the Indian subsidiary’s FDI compliance?
It can, especially if the foreign entity invests back into India. Check both frameworks.
10. Can the subsidiary disinvest later?
Yes, subject to the disinvestment rules and reporting within the prescribed time.
11. Is ODI in a financial services company allowed?
Yes, with additional conditions, such as a profitability track record and any approvals required.
12. Do dividends from the overseas entity have to be brought to India?
Dues receivable from the overseas entity, such as dividends, must be repatriated as required under the overseas investment framework.
Non-resident corporations seeking structured support with ODI by Indian subsidiaries, AD Category-I Bank liaison, ROC registration, and Form FNC filing for branch or liaison offices may contact CompanyIN for end-to-end assistance.
Disclaimer: The information provided in this article is solely for general informational and educational purposes regarding Indian corporate and foreign exchange regulations and does not constitute formal legal, tax, or regulatory advice. Foreign entities should consult qualified professionals at CompanyIN before initiating any statutory filings or commercial commitments in India.
