ODI Rules 2022: Step-Down Subsidiary, Round-Tripping & Complete Compliance Framework

1. Legislative Architecture: From 2004 Regulations to 2022 Rules

The regulatory framework for overseas investments by Indian residents has undergone a fundamental structural shift. The Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, which governed ODI for nearly two decades, were repealed and replaced by a three-tier statutory structure that came into force on 22 August 2022:

• Foreign Exchange Management (Overseas Investment) Rules, 2022 — notified by the Central Government under Section 6(3)(b) of FEMA, 1999, through Notification G.S.R. 646(E) dated 22 August 2022.
• Foreign Exchange Management (Overseas Investment) Regulations, 2022 — notified by the Reserve Bank of India under Regulation 5 of FEMA, 1999, through Notification No. FEMA 400/2022-RB dated 22 August 2022.
• RBI Master Direction — Overseas Investment (RBI/2022-23/72, A.P. (DIR Series) Circular No. 12 dated 22 August 2022) — providing operational guidelines, reporting formats, and procedural clarifications.

This three-tier approach separates policy (Rules by the Central Government), regulation (Regulations by the RBI), and operational procedure (Master Direction by the RBI), bringing the overseas investment framework in line with the structural model adopted for inbound FDI through the Non-Debt Instrument Rules.

1.1 Key Structural Differences from the 2004 Regime

The 2004 Regulations relied on a single notification that attempted to cover everything from definitions to reporting. The 2022 framework distributes these functions more logically. The Rules define the substantive permissions and restrictions — what can be invested, where, and by whom. The Regulations provide the procedural mechanisms — how to make the investment and report it. The Master Direction operationalises both through detailed guidance, illustrations, and FAQs.

For practitioners, the most consequential changes include the introduction of Overseas Portfolio Investment as a separately defined category, the explicit codification of round-tripping restrictions, a unified definition of financial commitment, the elimination of the distinction between Joint Ventures and Wholly Owned Subsidiaries for regulatory purposes, and a completely redesigned reporting architecture built around the FIRMS portal.

2. Who Can Make Overseas Direct Investment?

Rule 3 of the Overseas Investment Rules, 2022 identifies two categories of persons who may make ODI: an Indian entity (meaning a company incorporated in India, a body corporate, a Limited Liability Partnership registered under the LLP Act 2008, or a partnership firm registered under the Indian Partnership Act 1932) and a resident individual.

2.1 Indian Entity — Eligibility and Restrictions

An Indian entity may make ODI in a foreign entity engaged in a bona fide business activity, subject to certain conditions under Rule 3(1). The entity must not be on the Reserve Bank’s Caution List or under investigation by the Directorate of Enforcement. The entity must not have been classified as a wilful defaulter by any bank or financial institution. Further, if the entity is a Nidhi Company, it is prohibited from making ODI. A Core Investment Company registered with the RBI as an NBFC-CIC is also restricted from making ODI unless it obtains prior RBI approval.

The 2022 framework eliminates the earlier ceiling linked to net worth under the 2004 Regulations, which had capped ODI at 400% of net worth. However, the overall financial commitment, defined under Rule 2(1)(h), must still be reported and must be within limits prescribed by the RBI from time to time through the Master Direction. Currently, the RBI Master Direction permits financial commitment up to 400% of the net worth of the Indian entity as per the last audited balance sheet, but this is now an operational guideline rather than a statutory ceiling.

2.2 Resident Individual — Eligibility and LRS Interface

A resident individual may make ODI only under the Liberalised Remittance Scheme (LRS) of the RBI. Under Rule 3(2), a resident individual can acquire equity capital or make a financial commitment to a foreign entity within the LRS ceiling (currently USD 250,000 per financial year). The ODI by a resident individual is subject to additional conditions: the foreign entity must not be engaged in real estate activity, gambling, or dealing in financial products linked to the Indian rupee without specific RBI approval.

One critical change is that a resident individual is now explicitly permitted to make ODI in a foreign entity that has step-down subsidiaries, provided the ultimate downstream activity does not fall within the prohibited categories. This was an area of ambiguity under the 2004 Regulations, and we have seen significant practical relief for individual investors in overseas holding structures following this clarification.

For a complete understanding of how LRS limits interact with ODI ceilings, our guide on the Liberalised Remittance Scheme provides detailed analysis of permissible limits, documentation, and tax implications.

3. Permitted and Prohibited Activities for the Foreign Entity

3.1 Permitted Sectors

Rule 4 of the 2022 Rules permits ODI in any bona fide business activity, a significant liberalisation from the earlier regime. The 2004 Regulations had required the overseas entity to be engaged in a business activity that had a connection with the Indian party’s core business or that could demonstrate synergies. This nexus requirement has been removed. The foreign entity can now be engaged in any activity that is legally permitted in the host country, subject to the negative list described below.

3.2 Prohibited Activities — Rule 4(2)

Rule 4(2) enumerates specific activities in which ODI is prohibited:

• Real estate activity: Defined under Rule 2(1)(r) to mean buying and selling of real estate or trading in Transferable Development Rights, but explicitly excluding the development of townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, and real estate broking services.
• Gambling in any form: Including casinos and online gambling.
• Dealing in financial products linked to the Indian rupee: Without specific approval from the RBI. This covers currency derivatives on the INR that are not traded on recognised exchanges.
• Activity not permitted under the laws of the host country or host jurisdiction.

The real estate exclusion deserves careful attention. We have advised multiple clients where the foreign entity’s activity involves property management, co-working space operation, or PropTech platforms. These activities are generally not considered “real estate activity” under the definition, as they do not involve buying and selling of real estate per se. However, the line can be thin, and the structure must be carefully examined to ensure that the predominant activity is operational rather than speculative.

4. Step-Down Subsidiaries: The Multi-Layered Structure

4.1 Defining the Step-Down Subsidiary Under the 2022 Rules

The concept of step-down subsidiaries is formally recognised under the 2022 framework. Rule 2(1)(u) defines a step-down subsidiary as any entity in which the foreign entity (the direct ODI recipient) holds equity capital. This creates a layered structure: the Indian entity holds ODI in Foreign Entity A (the first layer), and Foreign Entity A holds equity in Foreign Entity B (the step-down subsidiary, the second layer). There is no statutory restriction on the number of layers, but each layer creates reporting and compliance obligations.

4.2 Permissibility of Step-Down Investments

Under Rule 12 of the 2022 Rules, an Indian entity is permitted to make ODI in a foreign entity that subsequently acquires or sets up step-down subsidiaries. The critical condition is that the step-down subsidiary must also be engaged in a bona fide business activity, and none of the prohibited activities under Rule 4(2) should be undertaken at any layer. If the step-down subsidiary is in a Financial Action Task Force (FATF) non-compliant jurisdiction, prior RBI approval is required under Rule 7.

Rule 12 also clarifies that the financial commitment of the Indian entity, for the purpose of computing the 400% ceiling, includes guarantees and commitments extended to step-down subsidiaries. This means that if an Indian company provides a corporate guarantee for a loan taken by a step-down subsidiary, the guarantee amount is included in the Indian company’s overall financial commitment calculation.

4.3 Reporting Requirements for Step-Down Subsidiaries

The reporting for step-down subsidiaries is integrated into the Annual Performance Report (APR) that must be filed by the Indian entity for each foreign entity in which it has ODI. Regulation 13 of the 2022 Regulations requires that the APR include details of all step-down subsidiaries, their financial performance, the nature of activity, and the extent of holding. The APR must be filed by 31 December each year for the financial year ended 31 March (or the financial year followed by the foreign entity, if different).

This is a significant compliance burden in multi-layered structures. We have worked with Indian conglomerates that have ODI in a holding company in Singapore, which in turn holds subsidiaries in the UAE, the UK, and the United States. Each subsidiary’s financials must be captured in the APR, and any material change in the structure — such as a new step-down subsidiary being set up or an existing one being wound up — must be reported to the AD bank within 30 days.

4.4 Practical Considerations for Multi-Layered Structures

The choice of jurisdiction for each layer has FEMA implications, tax implications, and substance requirements. From the FEMA perspective, if any layer is in a jurisdiction that is not FATF-compliant, the entire structure may require prior RBI approval. From the tax perspective, the General Anti-Avoidance Rule (GAAR) under Sections 95 to 102 of the Income-tax Act, 1961 can be invoked if a particular layer has no commercial substance and exists solely for tax benefit. From the substance perspective, jurisdictions like Singapore, the Netherlands, and Mauritius have enacted their own substance requirements, and a shell entity without employees, office space, or genuine management may face adverse consequences under local law.

At our practice, we typically recommend that clients undertake a comprehensive structuring exercise before setting up multi-layered overseas structures, examining not just the FEMA compliance but also the transfer pricing implications under Section 92 of the Income-tax Act, the Controlled Foreign Company provisions under Section 94B (applicable to certain financial transactions), and the tax treaty position of each intermediate jurisdiction.

5. Round-Tripping: The Pivotal Restriction Under Rule 19

5.1 What Constitutes Round-Tripping

Rule 19 of the Overseas Investment Rules, 2022 is the most significant anti-avoidance provision in the entire framework. Round-tripping is defined as a transaction or an arrangement involving the transfer of funds from India to a foreign entity and the subsequent return of such funds, directly or indirectly, to India. The key element is that the funds complete a circular journey — originating in India, going overseas, and returning to India — without genuine economic activity occurring in the foreign jurisdiction.

Rule 19(1) states that no person resident in India shall make or transfer any investment, whether directly or indirectly, outside India if such investment is funded, in part or in full, through a transfer from a foreign entity that has received investment from India. The circularity is the core concern — Indian money going out and coming back in a different form to circumvent FEMA restrictions on inbound investment, tax obligations, or pricing guidelines.

5.2 Why Round-Tripping is a Critical Concern

The RBI and the Directorate of Enforcement have historically treated round-tripping as a serious contravention. The concern is multi-dimensional:

• FEMA circumvention: An Indian entity could, in theory, invest overseas and then have the overseas entity invest back into India in a sector where FDI pricing guidelines or entry conditions would otherwise apply. By round-tripping, the entity bypasses the FEMA valuation requirements that govern inbound FDI.
• Tax avoidance: Round-tripping can be used to convert Indian-source income into foreign-source income, thereby availing treaty benefits that would not otherwise be available. This is particularly relevant in the context of capital gains, where a Mauritius or Singapore entity might be used to route investments back into India.
• Money laundering: Circular flows of funds obscure the origin and destination of money, making it difficult for authorities to trace the actual beneficial ownership and source of funds.
• Erosion of capital controls: India maintains a managed capital account, and round-tripping effectively creates an uncontrolled channel for capital flows that the RBI cannot monitor.

5.3 Exceptions and Carve-Outs

Rule 19(2) provides important exceptions to the round-tripping prohibition. Investment into India by a foreign entity that has received ODI from India is not treated as round-tripping if:

• The foreign entity has been in existence for at least one year and is engaged in bona fide business activity in the host country.
• The investment into India by the foreign entity is made out of funds generated from its own business operations and not from funds remitted from India.
• The investment into India complies with all applicable FEMA regulations governing inbound investment, including the FDI pricing guidelines and valuation requirements.

However, even where the exceptions apply, the Indian entity must ensure that the investment back into India is on an arm’s length basis and at a valuation that complies with the Non-Debt Instrument Rules and the relevant RBI Master Direction. Pricing is the key safeguard — if the valuation at which the foreign entity invests back into India is not at fair market value, it will attract scrutiny regardless of whether the formal exceptions are met.

5.4 Round-Tripping in the Context of Step-Down Subsidiaries

The intersection of step-down subsidiaries and round-tripping is where compliance becomes most complex. Consider the following structure: Indian Company A invests in Singapore Entity B (ODI). Singapore Entity B sets up a step-down subsidiary, Mauritius Entity C. Mauritius Entity C then proposes to invest back into India through the FDI route in Indian Company D. This is a classic round-tripping structure.

Under Rule 19, this structure would be permissible only if: (a) Mauritius Entity C has been in existence for at least one year, (b) it has bona fide business operations in Mauritius, (c) the investment into Indian Company D is made from funds generated through Mauritius Entity C’s own operations and not from funds remitted by Indian Company A (directly or through Singapore Entity B), and (d) the pricing of shares of Indian Company D complies with FEMA NDI Rules pricing guidelines.

In our experience, the most common failure point is the source of funds condition. If Mauritius Entity C’s only revenue is dividends received from Singapore Entity B, and Singapore Entity B’s only revenue is management fees received from Indian Company A, the chain of funding clearly originates from India. This structure is very likely to be treated as round-tripping unless Mauritius Entity C has genuine third-party revenues unrelated to the Indian investment chain.

6. Prior RBI Approval: When Is It Required?

6.1 Mandatory Prior Approval Cases Under Rule 7

While the 2022 framework follows the general principle of Automatic Route for ODI (through Authorised Dealer banks), Rule 7 identifies specific situations that require prior RBI approval:

• Investment in FATF non-compliant jurisdictions: As per the FATF grey list and black list published periodically, investment in entities incorporated in non-compliant jurisdictions requires prior approval.
• Investment by an entity that has a Non-Performing Asset (NPA): If the Indian entity has been classified as NPA by any lender, prior RBI approval is needed.
• Investment in a foreign entity engaged in financial services: Under Rule 7(1)(d), if the foreign entity is engaged in the financial services sector, prior RBI approval is needed unless the Indian entity is regulated by a financial sector regulator in India (such as RBI, SEBI, IRDAI, or PFRDA) and satisfies the regulatory requirements for such overseas investment.
• Acquisition of an existing foreign entity where the consideration is to be paid through swap of securities: This requires prior RBI approval under Rule 7(1)(f).
• Investment exceeding USD 1 billion in a financial year: Where the total financial commitment of the Indian entity in all foreign entities exceeds USD 1 billion in a financial year, prior RBI approval is necessary.

6.2 The Financial Services Sector Restriction

The financial services restriction under Rule 7(1)(d) deserves detailed analysis because it captures a wide range of activities. The Master Direction clarifies that “financial services” includes banking, insurance, asset management, securities trading, lending, payment services, and any activity that would be classified as a financial service in India. This means an Indian IT company that wants to invest in a fintech subsidiary in Singapore offering payment services would need prior RBI approval unless the Indian entity is itself regulated by a financial sector regulator.

This restriction has generated significant compliance work in our practice. Indian NBFCs wanting to set up overseas subsidiaries, Indian insurance companies looking to expand into Southeast Asia, and Indian banks establishing branches or subsidiaries abroad all need to navigate the dual approval process — approval from their primary regulator in India and approval from the RBI under the ODI rules.

7. Financial Commitment: Definition and Computation

7.1 What Constitutes Financial Commitment

Rule 2(1)(h) defines “financial commitment” as the aggregate of equity capital, loan, and guarantee issued by an Indian entity to a foreign entity. This is broader than the earlier concept, which focused primarily on equity investment. The inclusion of guarantees is particularly significant because Indian parent companies frequently provide corporate guarantees or letters of comfort for borrowings by their overseas subsidiaries.

The components of financial commitment include:

• Equity capital: This includes the subscription to shares, contribution to the capital of a partnership or LLP, or any other form of equity participation in the foreign entity.
• Loan: Any loan extended by the Indian entity to the foreign entity, whether interest-bearing or interest-free, secured or unsecured.
• Guarantee: Any guarantee, letter of comfort, letter of undertaking, or other commitment issued by the Indian entity to any lender of the foreign entity or the step-down subsidiary. The full value of the guarantee is included in financial commitment, not just the outstanding amount drawn against it.

7.2 The 400% Net Worth Ceiling

The RBI Master Direction prescribes that the total financial commitment of an Indian entity in all foreign entities shall not exceed 400% of the net worth of the Indian entity as per the last audited balance sheet. Net worth is computed as per the definition in the Companies Act, 2013 — paid-up share capital plus free reserves plus securities premium minus accumulated losses minus deferred expenditure minus miscellaneous expenditure not written off.

For LLPs and partnership firms, net worth is computed on an analogous basis using the partners’ capital and reserves. For proprietorship firms, which are now permitted to make ODI under certain conditions, the net worth is the proprietor’s capital invested in the business.

If the financial commitment exceeds 400% of net worth or exceeds USD 1 billion in aggregate, prior RBI approval is required. The approval process involves filing an application through the AD bank, which is then forwarded to the RBI’s Foreign Exchange Department. Processing timelines have varied between 4 to 12 weeks in our experience, depending on the complexity of the proposal.

8. Mode of Funding: How Can ODI Be Financed?

8.1 Permissible Sources of Funding

Rule 8 of the 2022 Rules specifies the permissible sources of funding for ODI:

• Remittance from India: Drawing down foreign exchange from an AD bank in India.
• Capitalisation of exports: Where the Indian entity has exported goods or services to the foreign entity and the export receivable is capitalised as equity in the foreign entity. This is subject to the condition that the export must have been made within the preceding 5 years.
• Swap of shares: Where the Indian entity issues its own shares to the shareholders of the foreign entity in exchange for shares of the foreign entity. This requires prior RBI approval.
• Proceeds of ADRs/GDRs: For listed Indian companies that have raised funds through American or Global Depository Receipts.
• Balances in EEFC account: The Exchange Earners’ Foreign Currency account balance can be used for ODI.
• Balances in RFC account: For resident individuals, balances in the Resident Foreign Currency account.

8.2 Prohibition on Borrowed Funds

Rule 8(2) prohibits the use of borrowed funds for making ODI. This means that an Indian entity cannot take a loan from a bank in India and use those proceeds to make an overseas investment. The investment must come from the entity’s own funds — retained earnings, share capital, or other owned resources. However, there is an important nuance: ECB proceeds can be used for overseas investment if specifically permitted under the ECB framework, and the Indian entity can borrow overseas (through its foreign entity) to fund the foreign entity’s operations.

For details on how External Commercial Borrowing intersects with overseas investment structures, refer to our comprehensive guide on the FDI regulatory triangle covering FEMA, tax, and compliance.

9. Reporting Framework: The FIRMS Portal and Single Master Form

9.1 The FIRMS Portal

The entire reporting architecture for ODI has been migrated to the RBI’s Foreign Investment Reporting and Management System (FIRMS) portal. The FIRMS portal was originally designed for inbound FDI reporting, and the 2022 framework extends it to outbound investments. All reports — from initial ODI reporting to annual compliance — must be filed electronically through FIRMS.

9.2 Form OI — The Initial Report

Regulation 10 of the 2022 Regulations requires that an Indian entity making ODI shall report the investment to the RBI through the AD bank within 30 days of remittance or transfer. The report is filed through Form OI on the FIRMS portal. Form OI captures details of the Indian entity, the foreign entity, the amount invested, the mode of funding, the nature of the investment (equity, loan, or guarantee), and the business activity of the foreign entity.

9.3 Annual Performance Report (APR)

Regulation 13 requires the filing of an Annual Performance Report for each foreign entity in which the Indian party has ODI. The APR must be filed by 31 December each year and covers the financial year of the foreign entity. The APR includes the foreign entity’s audited financial statements (or unaudited, where audit is not mandatory in the host jurisdiction), details of step-down subsidiaries, dividend received, and details of any restructuring or disinvestment during the year.

Non-filing or delayed filing of the APR has significant consequences. Under the 2022 framework, an Indian entity that has not filed the APR for any foreign entity will be restricted from making any further ODI until the compliance default is regularised. This restriction also applies to step-down subsidiary reporting — if the APR does not include complete details of all step-down subsidiaries, the AD bank may treat it as an incomplete filing.

9.4 Other Reporting Obligations

Additional reporting triggers include:

• Disinvestment: Where the Indian entity exits its investment in the foreign entity (fully or partially), a disinvestment report must be filed within 30 days.
• Restructuring: Any merger, demerger, amalgamation, or restructuring of the foreign entity must be reported within 30 days.
• Write-off: Where the Indian entity writes off its investment in the foreign entity due to the foreign entity’s liquidation or closure, a write-off report is required.
• Change in shareholding pattern: Any change in the Indian entity’s shareholding in the foreign entity must be reported within 30 days.

10. Overseas Portfolio Investment (OPI): The New Category

10.1 Definition and Scope

The 2022 framework introduces Overseas Portfolio Investment as a distinct category under Rule 2(1)(n). OPI is defined as investment in foreign securities, other than ODI, including listed equity shares, debt instruments, units of mutual funds, and any other instrument permissible under the RBI Master Direction. The critical distinction from ODI is the threshold — investment below 10% of the paid-up equity capital of a listed foreign entity is OPI, not ODI.

10.2 OPI by Resident Individuals

Resident individuals can make OPI under the LRS ceiling. This includes investment in listed shares on foreign stock exchanges (such as the NYSE, NASDAQ, or LSE), investment in units of foreign mutual funds, and investment in foreign debt instruments. The OPI must be made through a recognised broker or investment platform, and the remittance must be through an AD bank.

10.3 OPI by Indian Entities

Indian entities can make OPI out of their own funds, subject to the aggregate ceiling prescribed by the RBI. Importantly, mutual funds registered with SEBI, insurance companies registered with IRDAI, and pension funds registered with PFRDA can make OPI within the limits prescribed by their respective regulators. For other Indian entities, OPI is subject to the overall financial commitment ceiling of 400% of net worth.

11. Disinvestment: Exit and Repatriation

11.1 Modes of Disinvestment

Rule 16 permits disinvestment (full or partial exit from the foreign entity) through several modes:

• Sale of equity capital to another person at a price not less than the fair market value determined by a Category I Merchant Banker or a practising Chartered Accountant or any other valuer recognised by the host country.
• Liquidation or winding-up of the foreign entity.
• Merger, amalgamation, or restructuring of the foreign entity with another foreign entity.
• Buyback of shares by the foreign entity.

11.2 Valuation and Pricing on Exit

The disinvestment must be at a price not less than the fair market value of the equity being sold. The valuation can be done by a Category I Merchant Banker registered with SEBI, a practising Chartered Accountant, or a valuer recognised in the host jurisdiction. The valuation methodology must be globally accepted — DCF, comparable company analysis, or net asset value are all permissible.

In our practice, we have handled several disinvestment mandates where the Indian entity was exiting an overseas subsidiary at a loss. Rule 16 permits sale below fair market value in specific circumstances — primarily where the foreign entity is being liquidated and the liquidation proceeds are less than the investment. However, the AD bank will require documentary evidence of the loss, including the foreign entity’s financial statements and the liquidator’s report.

For valuation advisory on overseas investments and exits, our valuation services cover the full spectrum of methodologies applicable to cross-border exits.

11.3 Repatriation Obligation

Rule 17 imposes a mandatory repatriation obligation. The sale proceeds of disinvestment must be repatriated to India within 90 days of the receipt of funds by the Indian entity or the resident individual. If the proceeds are received in instalments (for example, in an earn-out arrangement), each instalment must be repatriated within 90 days of receipt. Failure to repatriate within the prescribed period is a contravention of FEMA and can attract penalties under Section 13 of FEMA, 1999.

12. Late Submissions and Compounding

12.1 Consequences of Non-Compliance

Non-compliance with the reporting requirements under the 2022 framework can take several forms: delayed filing of Form OI, non-filing of APR, failure to report disinvestment, or failure to repatriate sale proceeds within 90 days. Each of these is a contravention of FEMA.

Under Section 13 of FEMA, 1999, the penalty for contravention can be up to three times the amount involved in the contravention, or up to Rs. 2 lakh where the amount is not quantifiable. For continuing contraventions, an additional penalty of Rs. 5,000 per day can be levied.

12.2 Compounding of Contraventions

The RBI permits compounding of contraventions under Section 15 of FEMA, 1999. Compounding is essentially an administrative settlement where the contravener admits the contravention and pays a compounding amount determined by the RBI. The compounding amount depends on the nature of the contravention, the period of delay, and the amount involved.

We have handled multiple compounding applications for delayed ODI reporting and non-filing of APRs. The compounding amount has typically ranged from Rs. 10,000 for minor delays to several lakhs for prolonged non-compliance involving substantial investment amounts. Our detailed guide on FEMA compounding and late filing penalties provides a comprehensive analysis of the compounding procedure, timelines, and typical penalty calculations.

13. Tax Implications of ODI for Indian Entities and Resident Individuals

13.1 Dividend Income from Foreign Entities

Dividend received by an Indian entity from a foreign subsidiary is taxable in India under the head “Income from Other Sources” (for companies) or “Profits and Gains of Business or Profession” (if the investment is held as stock-in-trade). Following the abolition of the Dividend Distribution Tax in India from April 2020, dividends are now taxable in the hands of the recipient at the applicable rate.

Relief from double taxation is available under Section 90 or Section 91 of the Income-tax Act, 1961. If India has a Double Taxation Avoidance Agreement (DTAA) with the host country, the Indian entity can claim credit for taxes paid on the dividend in the host country. If there is no DTAA, unilateral relief under Section 91 is available, but only to the extent of the Indian tax rate or the foreign tax rate, whichever is lower.

13.2 Capital Gains on Disinvestment

Capital gains arising on the sale of equity in a foreign entity are taxable in India. If the holding period exceeds 24 months, the gain is long-term and taxable at 20% with indexation benefit (or 10% without indexation for listed securities, where applicable). If the holding period is 24 months or less, the gain is short-term and taxable at the applicable slab rate or corporate tax rate.

The cost of acquisition for computing capital gains is the amount actually invested, converted to Indian rupees at the exchange rate prevailing on the date of investment. The sale consideration is converted at the exchange rate prevailing on the date of sale. This can create foreign exchange gains or losses that are separate from the capital gain on the underlying investment.

13.3 Controlled Foreign Company (CFC) Provisions

While India does not have a formal Controlled Foreign Company regime in the manner of the US or the UK, the GAAR provisions under Sections 95 to 102 of the Income-tax Act can operate as a de facto CFC rule. If an overseas subsidiary is set up primarily for the purpose of tax avoidance — for instance, to park profits in a low-tax jurisdiction without genuine commercial substance — the GAAR can deem the arrangement to be an impermissible avoidance arrangement and tax the income in the hands of the Indian entity.

14. Structuring Considerations: Jurisdiction Selection for ODI

14.1 Singapore

Singapore remains one of the most popular jurisdictions for Indian ODI. The India-Singapore DTAA provides favourable treatment for dividends (limiting withholding tax to 10% in most cases), capital gains (with a limitation-on-benefits clause that requires examination), and business profits. Singapore’s robust regulatory framework, common law legal system, and proximity to key Asian markets make it a natural choice for Indian entities expanding into Southeast Asia.

14.2 United States

ODI into the United States is typically structured through a Delaware LLC or a Delaware C-Corporation. The India-US DTAA does not provide capital gains exemption (unlike some other Indian treaties), so the tax efficiency of a US structure depends on the nature of income — business profits, royalties, or capital gains — and the entity type chosen. LLC structures require careful analysis because the US treats LLCs as pass-through entities, but India may not recognise the pass-through treatment, leading to potential double taxation.

14.3 United Arab Emirates

The UAE, particularly the DIFC and ADGM free zones, has become increasingly popular for Indian ODI. Following the introduction of UAE corporate tax at 9% from June 2023, the tax-free advantage has been partially reduced, but the free zone incentives continue to provide benefits for qualifying activities. The India-UAE DTAA provides reasonable dividend and interest withholding rates, and the UAE’s position as a gateway to the Middle East and Africa makes it strategically attractive.

14.4 Netherlands

The Netherlands has historically been used as an intermediate holding jurisdiction for Indian outbound investments. The India-Netherlands DTAA provides favourable rates, and the Dutch participation exemption allows dividends and capital gains from qualifying subsidiaries to be received tax-free in the Netherlands. However, the Netherlands has introduced substance requirements that make empty shell structures unviable — a Dutch entity must have genuine management, employees, and office space to avail treaty benefits.

15. Practical Compliance Roadmap for ODI

15.1 Pre-Investment Stage

1. Board Resolution: The Indian entity must pass a board resolution (or partners’ resolution for LLPs/firms) approving the overseas investment, specifying the amount, the foreign entity details, and the purpose.
2. Valuation: If the ODI involves acquisition of an existing foreign entity, a valuation report from a qualified valuer is required. The valuation must be at fair market value or above.
3. Check Eligibility: Confirm that the Indian entity is not on the RBI Caution List, is not a wilful defaulter, and has no regulatory restrictions on making ODI.
4. Check Sector: Confirm that the foreign entity’s activity is not in the prohibited list under Rule 4(2).
5. Check Jurisdiction: Confirm that the host jurisdiction is FATF-compliant. If not, initiate the prior RBI approval process.
6. Compute Financial Commitment: Calculate the total financial commitment (equity + loan + guarantee) across all foreign entities and ensure it is within the 400% of net worth ceiling.
7. Check Round-Tripping: If the structure involves any investment back into India by the foreign entity or its step-down subsidiaries, conduct a round-tripping analysis under Rule 19.

15.2 Investment Stage

1. AD Bank Application: Submit the ODI application to the Authorised Dealer bank with all supporting documents — board resolution, valuation report (if applicable), details of the foreign entity, source of funds certificate, and net worth certificate.
2. Remittance: The AD bank processes the remittance after verifying compliance with the Rules and Regulations.
3. Form OI Filing: File Form OI on the FIRMS portal within 30 days of remittance.
4. Unique Identification Number (UIN): Upon successful filing of Form OI, a UIN is allotted to the foreign entity. This UIN is used for all subsequent reporting.

15.3 Post-Investment Ongoing Compliance

1. Annual Performance Report: File APR by 31 December each year, covering the foreign entity and all step-down subsidiaries.
2. Material Changes: Report any material change — new step-down subsidiary, change in activity, restructuring, additional investment, or disinvestment — within 30 days.
3. Dividend Repatriation: Any dividend received from the foreign entity should be reported to the AD bank.
4. Tax Compliance: Report overseas income in the Indian tax return, claim DTAA relief, and comply with transfer pricing requirements for intercompany transactions.

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