Overseas Direct Investment: formula sheet

Key formulas

Section 3 prohibition (default rule)

No dealing in foreign exchange or foreign security with a non-authorised person, no payment to a non-resident, and no financial transaction for acquiring an asset outside India, unless FEMA, rules, regulations or RBI permission allow it

Section 3(d) is the clause that catches overseas investment. Quote it as the legal base.

Who makes what

Central Government: rules (section 46) | RBI: regulations (section 47) | RBI: directions to authorised persons (section 11)

Capital account transaction rules sit with the Central Government. The RBI regulates the details.

ODI test (summary)

ODI = investment in an unlisted foreign entity, OR in a listed foreign entity giving 10% or more of paid-up equity or control, OR any investment giving control

Check the exact wording and thresholds in your study material before the exam.

OPI test (summary)

OPI = overseas investment that is not ODI (excluding units of investment funds and unlisted debt instruments)

Typically a small listed-company holding below the ODI threshold with no control.

Direction test

Resident investing outside India = ODI or OPI | Non-resident investing in India = FDI or FPI

Use this to avoid mixing up OPI and FPI.

Penalty on authorised person

Up to ₹10,000, plus up to ₹2,000 per day for continuing contravention (section 11(3))

Applies after reasonable opportunity of being heard, for breach of RBI directions or failure to file a return.

Financial commitment limit (automatic route)

Total financial commitment ≤ 400% × net worth (last audited balance sheet)

Financial commitment includes equity, debt and guarantees given to the foreign entity. Net worth is that of the Indian entity.

Available headroom

Headroom = (400% × net worth) − existing financial commitment

Use this to test whether a new investment fits within the automatic route.

Large commitment rule

Financial commitment above USD 1 billion in a financial year → prior approval

This applies even if the 400% limit is met. Confirm the current threshold in the Rules.

Prohibited activities

Real estate activity, gambling, rupee-linked financial products (without Central Government approval)

Foreign entity must not be engaged in these. Learn the township exception in real estate.

Legal source of ODI conditions

Section 6 (capital account) → Rules under s.46 and Regulations under s.47

Non-debt classes: Central Government under s.6(2A). Debt instruments: Reserve Bank under s.6(2).

Penalty for breach

Section 13(1): up to thrice the sum involved, or up to ₹2 lakh if not quantifiable, plus up to ₹5,000 per day for continuing contraventions

Imposed after adjudication.

Section 3 prohibition

No dealing in foreign exchange, no payment to a non-resident, no financial transaction for an asset abroad, unless permitted by the Act, rules, regulations or RBI

This is the base rule. ODI is a permitted exception, valid only within the Overseas Investment Rules and Regulations.

Who may deal in foreign exchange

Section 10(1): RBI authorises a person as authorised dealer, money changer, offshore banking unit or in another manner

The authorisation is in writing and carries conditions (Section 10(2)).

AD's duty before a transaction

Section 10(5): obtain declaration and information; if unsatisfied, refuse in writing and report to RBI where contravention is suspected

Use this to explain why the AD checks ODI remittances.

Revocation of authorisation

Section 10(3): revoked if public interest requires, or on breach of conditions or the Act, after a reasonable opportunity to be heard in breach cases

The hearing opportunity applies to the clause (b) ground, not the public interest ground.

RBI power over ADs

Section 11: directions and information requests; penalty up to ₹10,000 plus up to ₹2,000 per day of continuing contravention, after a hearing

Section 12 adds the power to inspect an AD's books.

Reporting chain for ODI

Initial investment: Form FC via AD. Every year: APR. Disinvestment and restructuring: report as the rules require

Take due dates and time limits from the current regulations, not from memory.

Penalty where sum is quantifiable

Maximum penalty = 3 × sum involved in the contravention

Section 13(1). The words are "up to", so the authority may impose a lower amount.

Penalty where sum is not quantifiable

Maximum penalty = ₹2,00,000

Section 13(1). Applies when the amount involved cannot be quantified.

Continuing contravention

Further penalty ≤ ₹5,000 × number of days after the first day

Section 13(1). The first day is not counted for this additional penalty.

Confiscation and repatriation

Adjudicating Authority may confiscate currency, security or property involved and direct foreign exchange holdings to be brought back or retained outside India

Section 13(2). It is in addition to the penalty, at the authority's discretion.

Undisclosed foreign assets above threshold

Penalty up to 3 × sum involved plus confiscation of equivalent value in India; imprisonment up to 5 years and fine under 13(1C)

Section 13(1A) and (1C). Applies where value exceeds the threshold prescribed under the proviso to Section 37A(1). Court takes cognizance only on a written complaint by an officer not below Assistant Director.

Compounding

Application by contravener; compounded within 180 days of receipt of application

Section 15. Once compounded, no further proceedings for that contravention.

Adjudication timeline

Endeavour to dispose of complaint within 1 year of receipt

Section 16(6). If delayed, reasons must be recorded periodically in writing.

Contravention by companies

Company plus persons in charge and responsible are deemed guilty

Section 42(1). A person escapes by proving lack of knowledge or due diligence.

Quick revision

• Section 6: any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction, subject to sub-section (2).
• Under Section 6(2), the Reserve Bank, in consultation with the Central Government, specifies permissible classes of capital account transactions involving debt instruments, limits and conditions.
• Under Section 6(2A), the Central Government, in consultation with the Reserve Bank, prescribes those not involving debt instruments.
• Section 6 proviso: no restriction on drawal of foreign exchange for amortisation of loans or depreciation of direct investments in the ordinary course of business.
• Section 10: the Reserve Bank authorises authorised persons such as authorised dealers, money changers and off-shore banking units, in writing and subject to conditions.
• Section 10(3): authorisation may be revoked in public interest, or for breach after a reasonable opportunity to make a representation.
• Section 10(5): an authorised person must require a declaration and refuse in writing if compliance is unsatisfactory, reporting suspected contravention to the Reserve Bank.
• Section 13(1): penalty up to thrice the sum involved if quantifiable, or up to ₹2,00,000 if not, imposed upon adjudication.
• Section 13(1): for a continuing contravention, a further penalty up to ₹5,000 for every day after the first day.
• Section 13(2): the Adjudicating Authority may direct confiscation of the currency, security or property involved and direct that foreign exchange holdings be brought back to India or retained outside.
• Section 13(1A) and (1C): foreign assets above the prescribed threshold bring a penalty up to three times the sum involved, confiscation of equivalent value in India, and imprisonment up to five years with fine.
• Section 11(3): an authorised person who breaches Reserve Bank directions faces a penalty up to ₹10,000, plus up to ₹2,000 per day if continuing.

Common mistakes

• Saying the RBI makes all rules on capital account transactions. Fix: Rules on capital account classes come from the Central Government under section 46. The RBI makes regulations under section 47 to carry out the Act and rules.
• Treating OPI and FPI as the same thing. Fix: OPI is outbound by a resident. FPI is inbound by a non-resident. Check the direction first.
• Applying 400% to the equity alone and ignoring loans and guarantees Fix: Count all financial commitment: equity, debt and guarantees, before comparing with 400% of net worth.
• Using the wrong net worth Fix: Use the Indian entity's net worth as per its last audited balance sheet, as the Rules require.
• Saying ODI is free of any FEMA control. Fix: Open the answer with Section 3 and then show ODI as a permitted exception.
• Filing reports directly with RBI and skipping the authorised dealer. Fix: Write that Form FC and related reports go through the authorised dealer.
• Stating the penalty as exactly three times the sum involved. Fix: Always write "up to thrice the sum involved". The authority has discretion to impose less.
• Counting the first day for the daily penalty. Fix: The further penalty runs for every day after the first day. Use total days minus one.

Exam tips

• Open every answer with FEMA 1999 and section 3. It shows the examiner you know the legal base.
• Memorise the three sections: 11 for RBI directions, 46 for Central Government rules, 47 for RBI regulations.
• For classification questions, write each limb of the ODI definition and tick it against the facts before concluding.
• Write the direction of money in one line to separate OPI from FPI. This is a common distinction question.
• Learn the exact definition wording from your ICSI study material, and use the Overseas Investment Rules and Regulations, 2022 by name.
• Start the answer with section 6 FEMA and the Overseas Investment Rules, 2022. This shows you know where the power comes from.
• In numerical cases, write the 400% calculation line by line. Marks go for the method even if the final step slips.
• List the three prohibited areas (real estate, gambling, rupee-linked financial products) from memory, with the township exception.