Setting Up of Business, Industrial and Labour Laws · Setting up of Business outside India and Issues Relating thereto

Overseas Direct Investment under FEMA Explained

Updated 11 October 2026 · Fact-checked

Overseas Direct Investment (ODI) is an Indian resident's investment in a foreign entity's unlisted equity, in 10% or more of a listed foreign entity, or with control. Anything else in foreign securities is Overseas Portfolio Investment (OPI). To answer, classify the investment, check eligibility and limits, route it through an authorised dealer bank, then report.

Understand Overseas Direct Investment under FEMA

FEMA treats most money going out of India for investment as a capital account transaction. Section 3 of FEMA bars dealing in foreign exchange or making payments to a person resident outside India, unless the Act, rules or regulations allow it or the Reserve Bank gives permission. Section 3(d) also bars financial transactions in India linked to acquiring assets outside India. So an Indian resident can invest abroad only within the framework made under FEMA.

That framework has three layers. The Rules are made by the Central Government under section 46 (which covers permissible classes of capital account transactions and their limits). The Regulations are made by the Reserve Bank under section 47. The Directions are issued by the Reserve Bank to authorised persons under section 11. For overseas investment, these are the Foreign Exchange Management (Overseas Investment) Rules, 2022, with the matching Regulations and Directions. Rules and regulations must be laid before Parliament under section 48.

Overseas investment has two main forms. Overseas Direct Investment (ODI) means acquiring unlisted equity capital of a foreign entity, or subscribing to its memorandum, or acquiring 10% or more of the paid-up equity of a listed foreign entity, or investing in a listed foreign entity with control even when below 10%. Control means the right to appoint a majority of directors or to control management or policy decisions, including through shareholding, management rights, shareholder agreements or voting agreements. Overseas Portfolio Investment (OPI) is any other overseas investment in foreign securities, such as a small stake in a listed foreign company without control. It is generally treated as a passive investment and is not allowed in certain items, such as unlisted debt instruments.

Who can invest differs. An Indian entity (such as a company or LLP) can make ODI, subject to eligibility conditions and a ceiling on its total financial commitment. Financial commitment covers equity, debt and guarantees given to the foreign entity. A resident individual can make ODI only in limited cases, for example in a foreign entity that is not engaged in financial services. Resident individuals can make OPI within the Liberalised Remittance Scheme (LRS) limit. A listed Indian company can make OPI within a net-worth-based limit. Unlisted Indian entities cannot make OPI.

Two features run through the topic. First, investments are normally made under the automatic route, meaning no prior approval from the Reserve Bank, if all conditions are met. Where a condition fails, or a limit is crossed, you need prior approval. Second, everything goes through an authorised dealer (AD) bank, and you must file reports on time. Under section 10, the AD bank takes declarations and refuses transactions that look like evasion of FEMA.

Key rules to remember

ODI test: ODI = unlisted foreign equity, OR ≥ 10% of a listed foreign entity, OR any stake in a listed foreign entity with control; Control means the right to appoint a majority of directors or to control management or policy decisions. If the investment is not ODI, check whether it is OPI.
OPI: OPI = overseas investment in foreign securities that is not ODI; Certain items are excluded from OPI, such as unlisted debt instruments. Do not call every small foreign shareholding OPI without checking control.
ODI financial commitment ceiling (automatic route): Total financial commitment in all foreign entities ≤ 400% of net worth of the Indian entity; Net worth is taken from the last audited balance sheet. Above this limit, prior Reserve Bank approval is needed.
OPI limit for a listed Indian company: OPI ≤ 50% of net worth as per last audited balance sheet; Applies to listed Indian entities. Unlisted Indian entities cannot make OPI.
OPI by resident individuals: OPI within the LRS limit of USD 250,000 per financial year; Check the current LRS limit in the latest Reserve Bank directions before quoting it.
Financial commitment: Financial commitment = equity capital + debt + guarantees and similar non-fund-based support given to the foreign entity; Guarantees count towards the ceiling, not only cash invested.
Sectors barred without specific approval: No ODI in a foreign entity engaged in real estate activity, gambling of any form, or dealing in financial products linked to the Indian rupee; Financial services activity abroad is allowed only subject to specified conditions.

How to solve Overseas Direct Investment under FEMA questions

Use this order for any problem or theory question on overseas investment. It follows the ICSI answer style: provision, analysis, conclusion.

1Identify the investor: Indian company or other entity, or resident individual. The rules and limits differ by investor type.
2Classify the investment. Check whether it is unlisted equity, a stake of 10% or more in a listed foreign entity, or any stake with control. If yes, it is ODI; otherwise it is OPI.
3Check prohibited activities. If the foreign entity is in real estate, gambling or rupee-linked financial products, ODI is not allowed without specific approval.
4Check eligibility conditions of the Indian entity, such as no default to the banking system and no pending investigation by a regulator or agency, along with the financial services conditions where relevant.
5Apply the numerical limit. For ODI, compare total financial commitment with 400% of net worth. For OPI by a listed company, compare with 50% of net worth. For an individual, compare with the LRS limit.
6State the route: automatic route if all conditions are met, otherwise prior approval of the Reserve Bank.
7Mention the process and compliance: remittance through an authorised dealer, the declaration the AD takes, reporting, and the annual performance report where the Indian entity has control.
8Conclude clearly: permitted under the automatic route, permitted only with approval, or not permitted.

Quickest way: Three-question shortcut

When to use it: Use this when you have a short time and a fact-based question asking whether an overseas investment is allowed.

Ask 1: Is it ODI or OPI? Look for unlisted equity, 10% or more, or control.
Ask 2: Is any limit crossed? Add existing and new financial commitments including guarantees, then compare with 400% of net worth (ODI) or 50% (OPI by a listed company).
Ask 3: Is the sector or the investor barred? Then write the conclusion in one line and name the route.

Common mistakes in Overseas Direct Investment under FEMA

Treating every investment below 10% in a foreign company as OPI.
Students memorise the 10% threshold and forget the control test.
Fix: Check for control, such as a right to appoint a majority of directors. A stake below 10% in a listed foreign entity with control is still ODI.
Counting only the equity invested while testing the 400% ceiling.
The word 'investment' makes students think of shares alone.
Fix: Include debt and guarantees, and add commitments already made in all foreign entities, not just the new one.
Using the paid-up capital instead of net worth, or an old balance sheet.
Students mix up the capital figure with net worth.
Fix: Use net worth as per the last audited balance sheet of the Indian entity.
Saying an unlisted Indian company can make OPI.
The OPI limit for listed companies is remembered but the listing condition is dropped.
Fix: State that OPI by an Indian entity is open to listed entities within 50% of net worth. Unlisted entities cannot make OPI.
Mixing up Rules, Regulations and Directions.
All three are called 'FEMA rules' in casual speech.
Fix: Rules are made by the Central Government (section 46), Regulations by the Reserve Bank (section 47), and Directions by the Reserve Bank to authorised persons (section 11).
Ignoring post-investment compliance.
Students stop the answer once the investment is permitted.
Fix: Add reporting through the AD bank, the annual performance report for controlled foreign entities, and the consequences of default, including penalties under FEMA.

Worked examples

Example 1

Ganga Textiles Ltd., an Indian company, has a net worth of ₹50 crore as per its last audited balance sheet. It already has a total financial commitment of ₹120 crore in its foreign subsidiaries. It now wants to invest a further ₹90 crore in a foreign subsidiary under the automatic route. Advise.

Show the solution

Provision: under the Overseas Investment Rules, 2022, an Indian entity can make ODI under the automatic route if its total financial commitment in all foreign entities does not exceed 400% of its net worth as per the last audited balance sheet.
Calculate the ceiling: 400% of ₹50 crore = ₹200 crore.
Calculate the total commitment after the proposed investment: ₹120 crore + ₹90 crore = ₹210 crore.
Compare: ₹210 crore is more than ₹200 crore, so the ceiling is exceeded by ₹10 crore.
Conclusion: the automatic route is not available for the full ₹90 crore. The company needs prior approval of the Reserve Bank, or it may invest only up to ₹80 crore (₹200 crore − ₹120 crore) under the automatic route, subject to the other conditions.

Answer: The proposed investment of ₹90 crore takes total commitment to ₹210 crore, above the ceiling of ₹200 crore. Prior Reserve Bank approval is required, or the company can limit the new investment to ₹80 crore.

Example 2

Mr. Rao, a resident individual, buys shares in three foreign companies: (a) 12% of the equity of a listed foreign company; (b) 6% of a listed foreign company, with no control; (c) 6% of another listed foreign company, along with a shareholders' agreement that gives him the right to appoint a majority of its directors. Classify each.

Show the solution

Provision: ODI includes acquiring 10% or more of the paid-up equity of a listed foreign entity, or investing in a listed foreign entity with control. Any other overseas investment in foreign securities is OPI.
Case (a): 12% is 10% or more, so it is ODI.
Case (b): 6% is below 10% and there is no control, so it is OPI.
Case (c): 6% is below 10%, but the right to appoint a majority of directors is control. So it is ODI.
Note for the individual: ODI by a resident individual is permitted only in limited cases, such as a foreign entity not engaged in financial services. OPI must stay within the LRS limit.
Conclusion: classification is decided by the stake and by control, and the applicable conditions follow from the classification.

Answer: (a) ODI; (b) OPI; (c) ODI, because the agreement gives control even though the stake is below 10%.

Exam tips

Begin every answer by defining ODI and OPI. Many questions are really about classification, so the definition earns the first marks.
Learn the two numbers well: 400% of net worth for ODI financial commitment and 50% of net worth for OPI by listed Indian entities. Show the calculation in numerical questions.
Name the source of power: Central Government rules under section 46, Reserve Bank regulations under section 47, and Reserve Bank directions to authorised persons under section 11. Cite sections only where you are sure.
End with a firm conclusion in ICSI style: permitted under the automatic route, permitted with prior approval, or not permitted.
Check the latest Reserve Bank directions before the exam, as limits and procedures are amended from time to time.

Practice questions from Setting up of Business outside India and Issues Relating thereto

Overseas Direct Investment under FEMA in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Overseas Direct Investment under FEMA: frequently asked questions

What is the difference between ODI and OPI?

ODI is an investment in unlisted foreign equity, in 10% or more of a listed foreign entity, or in a listed foreign entity with control. OPI is any other investment in foreign securities. OPI is a more passive investment, and it excludes certain items such as unlisted debt instruments.

What is the automatic route for ODI?

Under the automatic route, an eligible Indian entity can invest abroad without prior Reserve Bank approval, as long as it meets the conditions and stays within the financial commitment ceiling. The remittance goes through an authorised dealer bank. If any condition or limit is not met, prior approval is needed.

What is the ODI limit for an Indian company?

Under the automatic route, the total financial commitment in all foreign entities should not exceed 400% of the Indian entity's net worth as per its last audited balance sheet. Beyond that, prior approval of the Reserve Bank is required.

Can a resident individual make overseas investments?

Yes. A resident individual can make OPI within the LRS limit, and can make ODI only in limited cases, for example in a foreign entity that is not engaged in financial services. Check the latest directions for the current conditions.

Which laws govern overseas investment in the CS Executive syllabus?

FEMA, 1999 is the parent Act. The Overseas Investment Rules, 2022 are made by the Central Government, and the Reserve Bank issues the matching Regulations and Directions. Section 3 of FEMA is the base prohibition, and section 11 allows the Reserve Bank to direct authorised persons and penalise them for contravention.