Overseas Investments by persons resident in India are presently governed by the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. With a view to further liberalize the regulatory framework and to promote ease of doing business, the Government of India decided to revise the mentioned regulations.

Consequently, the Reserve Bank of India (“RBI”) had issued the Draft Foreign Exchange Management (Non-debt Instruments – Overseas Investment) Rules, 2021 (“Draft Rules”) and Foreign Exchange Management (Overseas Investment) Regulations, 2021 (“Regulations”) governing overseas investment by persons resident in India.

This article discusses the key provisions of the Draft Rules.

I. Definitions

The key definitions that are proposed or amended are:

1. The term “Control” has been defined as the right to appoint the majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements that entitle to 10% or more of voting rights or in any other manner in the foreign entity.

2. The term “Disinvestment” has been introduced and has been defined as transfer by sale of right, title or possession of equity capital and includes liquidation.

3. The term “Financial Commitment” has been amended to clarify that portfolio investments made overseas shall not be included and all overseas direct investment in equity, debt instruments and non-fund-based facilities shall be considered for calculation of the financial commitment of an entity.

4. The term “Overseas Direct Investment” (ODI) is defined as investment by way of

    • acquisition of equity capital of an unlisted foreign entity or
    • subscription to the MoA of a foreign entity, or
    • investment in 10% or more of the paid-up equity capital of a listed foreign entity, or
    • where the person resident in India, making such investment, has or acquires control, directly or indirectly, in the foreign entity.

Any sponsor contribution made, directly or indirectly, by an Indian entity to an Alternative Investment Fund or Investment vehicle set up in an overseas jurisdiction as per the laws of such host jurisdiction; or any acquisition outside India of ‘participating interest or right’ in the energy sector or investment outside India in agriculture shall also be treated as ODI by way of equity capital.

II. General conditions applicable to all investors: The Draft Rules propose the following key general conditions applicable to all overseas investments (1):

1. No Objection Certificate (NOC) (2): In case of a person resident in India appearing as special mention account or Non-Performing Asset (NPA) or wilful defaulter or who is under investigation by a regulatory body in India, such person shall have to obtain a NOC from the lender bank(s) or regulatory body or investigative agency concerned before making a financial commitment or undertaking disinvestment.

2. Pricing guidelines (3): The valuation of any equity capital shall be subject to conditions that in case of an issue or transfer of equity capital from a person resident outside India (“NR”) to a person resident in India (“R”) or from an R to another R or from an R to an NR:
(i) In case of listed foreign securities, the price worked out in accordance with the concerned stock exchanges of the host country; or
(ii) In other cases, the price should be within 5% range of the fair value arrived on an arm’s length basis as per any internationally acceptable pricing methodology for valuation duly certified by a registered valuer as per the Companies Act 2013; or similar valuer registered with the regulatory authority in the host jurisdiction to the satisfaction of the bank.

3. Transfer/Liquidation (4):

(1) An R may transfer equity capital by way of sale to another R, or to an NR;
(2) In case the transfer is on account of a merger, amalgamation or demerger or account of buyback of foreign securities, such transfer, or liquidation in case of liquidation of the foreign entity, should have the approval of the competent authority as per the laws in India and/or the host country, as the case may be;
(3) Where the disinvestment by the R pertains to ODI, certain additional conditions specified in the Draft Rules shall be applicable.

4. Restructuring: An Indian entity that 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 the Indian entity including investment in equity and debt, after such restructuring does not exceed the proportionate amount of the accumulated losses.

However, in case of such diminution where the amount of corresponding original investment is more than USD 10 million or in a case where the amount of such diminution exceeds 10% of the total value of the outstanding dues towards the Indian entity, the diminution in value shall be duly certified on an arm’s length basis by a registered valuer as per the Companies Act 2013 or a similar valuer registered with the regulatory authority in the host jurisdiction (5).

5. Restrictions (6):

(1) An R is prohibited from making ODI in a foreign entity engaged in real estate activity; gambling in any form and offering financial products linked to the Indian Rupee except for products offered in an International Financial Services Centre (IFSC).
(2) The Financial Commitment by an R in a foreign entity that has invested or invests into India, at the time of making such Financial Commitment or at any time thereafter, which is designed for the purpose of tax evasion/ tax avoidance is not permitted.

Conclusion: The proposal in the Draft Rules introduces several conceptual changes and regulatory nuances which are expected to revise the regulatory regime for overseas investment. Once the Draft Rules are finalized and notified, it should help all stakeholders to structure their investments with better clarity and certainty.



(1) Chapter II of the Draft Rules.
(2) Chapter-II, Rule 4 (D) of the Draft Rules.
(3) Chapter-II, Rule 5 (A) of the Draft Rules.
(4) Chapter-II, Rule 5 (B) of the Draft Rules.
(5) Chapter-II, Rule 5 (C) of the Draft Rules.
(6) Chapter-II, Rule 6 of the Draft Rules.