By S&S Co. Advocates & Solicitors · Published 30 October 2026 · Informational content, not legal advice: see our disclaimer
A software company in Pune wants to set up a wholly owned subsidiary in Singapore to bill its overseas clients directly. A doctor in Chennai wants to put some savings into a friend's restaurant chain in the United States. Both are asking the same underlying question, though they will not get the same answer: can a person or company resident in India send money out to own a piece of a foreign business, and if so, how much and through what process. The short answer is yes, through what the law calls Overseas Direct Investment, but the route, the ceiling and the paperwork differ sharply depending on whether the investor is a company or an individual.
This guide sets out how the current framework, built around the Foreign Exchange Management (Overseas Investment) Rules, 2022 and the accompanying Reserve Bank of India regulations and Master Direction, actually works for an Indian company, an LLP, and a resident individual acting on their own account. It also flags where the rules have shifted in recent years and where a client should not take a number at face value without checking the current Master Direction.
Who This Applies To, and Who It Doesn't
The overseas investment framework under the Foreign Exchange Management Act, 1999 governs an Indian entity (a company, LLP, or body corporate incorporated in India) and a resident individual making a financial commitment in a foreign entity. It does not govern an NRI's own investment of money that NRI already holds abroad, because an NRI is, for FEMA purposes, not a person resident in India. The confusion arises most often with a person who has recently moved abroad or recently returned. Residential status under FEMA turns on a facts-based stay test, not on citizenship or on what the Income Tax Act says about the same person for a different year, so a person can be a resident under one statute and a non-resident under the other in the same financial year.
A second group that gets this wrong is a promoter who routes an overseas investment through a trust or an individual family member to avoid company-level reporting. The regulations look through such arrangements where the foreign entity is effectively controlled or funded by the Indian company, and a disguised structure of this kind tends to surface exactly when it matters most, during a later funding round, an audit, or a dispute among the promoters themselves.
The Automatic Route and Its Ceiling
An Indian entity can make an overseas direct investment in a foreign entity under the automatic route, meaning without seeking the Reserve Bank's prior approval, provided the investment is in a bona fide business activity and stays within the prescribed financial commitment limit. Multiple sources confirm that limit as 400 per cent of the Indian entity's net worth, taken from its last audited balance sheet, and that the ceiling is applied cumulatively across every foreign entity the Indian party holds a stake in, not per transaction. Equity, loans extended to the foreign entity, and most forms of guarantee given on its behalf are all counted toward this single ceiling.
Some commentary also describes a separate trigger requiring Reserve Bank approval once total commitments in a financial year cross USD 1 billion, even where the 400 per cent limit is not breached. That figure appears in older material and its current applicability was not confirmed in the sources checked for this guide, so a client proposing a very large outbound investment should have that specific point verified against the live RBI Master Direction before structuring the deal, rather than relying on this guide or any blog for the number. What is settled is that an investment outside the 400 per cent ceiling, for whatever reason, needs the Reserve Bank's prior approval and cannot simply proceed on an AD bank's say-so.
A Resident Individual's Route Is Different and Narrower
A resident individual investing abroad on their own account, rather than through a company, generally has to use the Liberalised Remittance Scheme, capped at USD 2,50,000 per financial year across all permitted purposes put together, not just investment. Within that ceiling, an individual can take an equity stake in an operating foreign entity, but the rules restrict what kind of foreign entity qualifies. An individual generally cannot use LRS remittances to set up a step-down subsidiary of a foreign entity they have invested in, and investment into an overseas entity whose business is itself financial services carries extra conditions.
This distinction catches out founders fairly often. A person planning to incorporate a holding company abroad, which will in turn hold shares in an operating business, is usually better served setting up an Indian company first and routing the investment as a corporate ODI rather than trying to force the structure through an individual's LRS remittance, because the step-down restriction will otherwise block exactly the structure the client actually wants. Mixing the two routes for the same deal, part through LRS and part through a newly floated Indian company, needs careful sequencing so that neither route's conditions get breached by the other half of the transaction.
Filing Form FC and Keeping the Annual Performance Report Current
An Indian entity making an ODI files Form FC through its Authorised Dealer Category-I bank, and the foreign entity is allotted a Unique Identification Number once the Reserve Bank's reporting system processes the filing. That UIN has to be quoted in every subsequent filing relating to that foreign entity, including any additional investment, disinvestment, or restructuring.
Every year after that, the Indian party has to file an Annual Performance Report confirming that the foreign entity still exists, is still controlled as declared, and reporting its financial position for the year. Missing an APR, or filing it late across multiple years, is one of the most common FEMA contraventions firms encounter on due diligence for a later transaction, precisely because the obligation continues silently every year with no fresh triggering event to remind anyone. A promoter who set up a foreign subsidiary a decade ago and simply stopped filing once the business wound down abroad often discovers the gap only when a lender or an acquirer's counsel asks for it.
Common Structuring Mistakes
The first recurring mistake is treating a loan to the foreign subsidiary as something separate from the equity ceiling, when in fact both usually count toward the same 400 per cent cap. A company that has used up most of its headroom on equity and then tries to fund the subsidiary's working capital through an intercompany loan can find itself over the limit without having realised it.
The second is assuming that because the foreign jurisdiction has no exchange control objection, the Indian side is automatically fine. FEMA compliance runs independently of whatever the host country requires, and a transaction that closes smoothly abroad can still leave the Indian company in contravention at home if the Form FC filing or the net worth certification was not done properly before the money left India.
The third is using an Indian LLP structure without checking whether the specific activity and the specific jurisdiction fall within what an LLP is currently permitted to do under the overseas investment framework, since LLPs were brought into this regime later than companies and the permitted scope has not always tracked companies exactly.
Regularising a Past Contravention
Where an ODI has already gone wrong, whether through a missed Form FC filing, an investment that exceeded the automatic route ceiling without approval, or years of unfiled APRs, the Reserve Bank's compounding mechanism under Sections 13 to 15 of FEMA is the usual route to regularise the position rather than leave it exposed indefinitely. Compounding involves disclosing the contravention voluntarily, paying a sum fixed by the Reserve Bank based on the nature and amount involved, and closing the matter without further proceedings on that specific breach.
Clients sometimes delay this because they assume silence is safer than disclosure. In practice, an unresolved FEMA contravention tends to surface at the worst possible moment, during due diligence for a sale of the company, a bank's periodic KYC refresh, or an unrelated RBI inspection, and by then the client has lost the ability to choose the timing and has far less room to negotiate how the matter gets closed.
Frequently Asked Questions
Can an NRI invest abroad using the same ODI route described here?
No. This framework governs a person or entity resident in India. An NRI investing money already held abroad is not making an outbound remittance from India and is not governed by these FEMA rules at all, though if the NRI later returns to India and becomes resident, their existing foreign holdings come under a different reporting regime, not this one.
Is the 400 per cent ceiling calculated per foreign entity or across all of them?
Across all of them. The financial commitment limit applies to the Indian entity's total exposure, equity, loans and guarantees combined, across every foreign entity it holds, not as a separate 400 per cent allowance for each new subsidiary or joint venture set up abroad.
What net worth figure is actually used for the calculation?
The Indian entity's net worth as shown in its last audited balance sheet before the date the financial commitment is undertaken. A stale or qualified balance sheet, or one that is close to its usable age limit, can itself become an issue if the Reserve Bank or the AD bank questions the certification later.
Can an individual use LRS remittances to buy a holiday home abroad instead of investing in a business?
Yes, acquiring immovable property abroad is a separate permitted purpose under LRS, subject to the same overall USD 2,50,000 annual ceiling across all LRS remittances made by that individual in the financial year, so a property purchase and a business investment in the same year draw from one combined limit, not two independent ones.
What happens if a company has not filed Annual Performance Reports for several years?
The gap does not cure itself and generally needs to be addressed through the Reserve Bank's compounding process once discovered, since continued non-filing is treated as an ongoing contravention. Companies in this position typically get professional help to prepare the missed filings and the compounding application together, rather than filing the overdue APRs first and hoping the past gap goes unnoticed.
References & Further Reading
The provisions and rulings below were relied on for this guide. The position can change with amendments and later decisions, so check the current text and the latest case law before acting on any of it.
- Foreign Exchange Management Act, 1999, Sections 6, 13-15
- Foreign Exchange Management (Overseas Investment) Rules, 2022
- Foreign Exchange Management (Overseas Investment) Regulations, 2022 (financial commitment limit of 400% of net worth)
- RBI Master Direction on Overseas Investment
- RBI Liberalised Remittance Scheme guidelines (USD 2,50,000 per financial year)