ODI rules: how Indian startups set up or invest in companies abroad

ODI stands for overseas direct investment. It means an Indian entity takes a lasting stake in a foreign entity, to own a subsidiary or a joint venture. The Foreign Exchange Management Act 1999 (FEMA) governs money moving in and out of India, and the Overseas Investment Rules 2022 set the detailed rules for money going out.

The 2022 rules came into effect on 22 August 2022. They replaced the older regime and merged direct investment, portfolio investment and some related items into one structure, as of November 2026. Under it, an Indian entity is the one making the investment and the foreign entity is the one receiving it.

The usual case is a startup opening a subsidiary in the United States, Singapore or the UAE. Reasons include selling to foreign customers, hiring local staff, meeting the contract needs of big customers, and getting closer to investors who prefer a foreign holding company.

Setting up the subsidiary needs money from India to go out. That money transfer is the ODI, and it must follow the rules and be reported.

The 2022 rules use the term financial commitment. It covers not just shares but also loans and guarantees given to the foreign entity. The main cap is a limit on the total financial commitment by an Indian entity to all its foreign entities taken together.

As widely summarised, that cap is 400% of the Indian entity's net worth as of the date of its last audited balance sheet. Investment above it needs prior RBI approval. For a young startup with small net worth, this can bind early, so the planning of the first transfers matters. Other thresholds apply, for example, an overall amount under the automatic route in a year, and these should be checked against the rules.

• Financial commitment includes equity, loans and guarantees to the foreign entity.
• Limit: 400% of net worth in the last audited balance sheet, as widely summarised.
• Above the limit: RBI approval is needed.
• Overseas portfolio investment is treated under separate rules and does not count in the same way.

Round tripping means money goes out of India to a foreign entity and then comes back into India as an investment, which can be used to hide the real owner or evade rules. The 2022 rules deal with it by limiting the layers of subsidiaries.

In broad terms, an Indian entity cannot make an investment that creates a structure of more than two layers of subsidiaries, with defined exceptions. The rule applies where the foreign entity has an investment in India. Because the detail is technical, the exact conditions should be read in the rules or checked with an adviser.

Overseas investment is reported to the RBI through the authorised dealer bank, which is the bank that handles the foreign exchange. The main form is Form FC, filed through the bank. The Indian entity gets a unique identification number for the foreign entity. After that, an annual performance report on the foreign entity has to be filed each year.

Reporting is the part that startups often forget. Late filing can lead to a late submission fee or a compounding application to the RBI to regularise the lapse. A reader should treat reporting as part of the cost of having a foreign subsidiary.

The first is sending money abroad before the structure is clear. A transfer made as a loan, as equity or as a payment for services can fall under different rules, and the label on the bank remittance matters. A transfer that was meant as ODI but was never reported can later need a fix with the RBI.

The second is ignoring the limit. A young company with small net worth can reach the cap faster than expected, especially when guarantees are counted along with equity.

The third is skipping the annual filing. The foreign entity's yearly report is easy to forget, and reminders are worth setting. A good practice is to keep one person responsible for the bank, the valuation of shares where needed and the filing dates, and to speak to a chartered accountant or a lawyer who works on FEMA matters before the first transfer.

The 2022 rules cover several kinds of Indian residents. A company is the usual investor, but an LLP can also invest abroad, and a resident individual can invest within a separate set of limits. For an individual, the limits are set under the Liberalised Remittance Scheme and the rules for overseas investment by residents, which have their own conditions.

For startups, the company route is the common one. If a founder holds shares in the foreign parent personally, that is a different matter from the Indian company funding a subsidiary, and each may call for its own reporting. This is one more reason to get written advice before the structure is set.

Whichever route is used, the same discipline applies. Keep a clear record of every transfer, who approved it, which bank handled it and which form was filed, so that an audit or a later funding round does not find gaps.

A flip is when a founder moves the holding company abroad, often to the US, so that the foreign company owns the Indian startup. This is the opposite direction from ODI. A reverse flip brings the holding company back to India. ODI applies when the Indian entity is the one investing in the foreign one.

Many startups have both. They may have a foreign parent that owns an Indian company, and that Indian company may also invest in a foreign subsidiary of its own. In such a structure, round-tripping rules can matter.

Check the type of transaction, the amount against net worth, the number of layers and the reporting status. Ask whether the foreign entity has invested or will invest in India, since that triggers the round-tripping conditions. Ask whether the Indian entity is a company, an LLP or a resident individual, since the rules differ slightly.

Rules and thresholds change, and the RBI updates its master direction and FAQs from time to time. This page is general information, so check with a qualified professional before moving money abroad.