Rules 7 and 9 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 9 of the Foreign Exchange Management (Overseas Investment) Rules, 2022 is the main permission rule: overseas investment must go into a foreign entity engaged in a bona fide business activity, directly or through a step down subsidiary or special-purpose vehicle, within the limits in the Rules and Regulations. It also holds the approval powers of the Central Government and the Reserve Bank. Rule 7 covers rights issues and bonus shares in a foreign entity already held. This article takes both rules.
The Rules are quoted as notified on 22 August 2022 (G.S.R. 646(E)); no amendment is in the texts consulted. Amendments after that date should be checked in the Gazette. They rest on section 46 of the Foreign Exchange Management Act, 1999; see our article on section 46 of the Act. Rule 8, the general bar that rule 9 departs from, is in our article on scope, administration and exclusions. For an overseas investment that needs an approval filing or a Form FC, our overseas direct investment reporting service applies.
Overseas investment must be made in a foreign entity engaged in a bona fide business activity, which the Explanation defines as any business activity permissible under any law in force in India and the host country. A subsidiary or step down subsidiary must meet the structural requirements of a foreign entity. Investment in Pakistan, or in a jurisdiction the Central Government advises, needs prior approval of the Central Government. The Central Government may permit financial commitment above the limits in strategic sectors or geographies; the Reserve Bank may permit other transactions for sufficient reasons, and may set aggregate outflow ceilings.
Rule 7: rights issue and bonus shares
Rule 7(1) says any person resident in India who has acquired and continues to hold equity capital of any foreign entity in accordance with the Act, or the rules or regulations under it, may invest in the equity capital issued by that entity as a rights issue (clause (a)), or may be granted bonus shares subject to the terms and conditions under the Rules (clause (b)). Rule 7(2) says the person acquiring the rights may renounce them in favour of a person resident in India or a person resident outside India.
The Master Direction - Overseas Investment, updated as on April 01, 2026, adds in its paragraph 7, as its own statements, that acquisition through exercise of rights is reported in Form FC, that renunciation does not require reporting, and that bonus shares are not treated as fresh financial commitment and need no reporting. Our article on rights issue, bidding, pricing, transfer and restructuring goes through that paragraph of the Master Direction. Rule 7 applies only to someone who already holds equity capital acquired in accordance with the law.
Rule 9(1): bona fide business activity
Rule 9(1) says that, save as otherwise provided in the Rules or the Overseas Investment Regulations, 2022, any investment made outside India by a person resident in India shall be made in a foreign entity engaged in a bona fide business activity, directly or through a step down subsidiary or the special-purpose vehicle, subject to the limits and conditions in the Rules and the Regulations.
Two provisos follow:
- The structure of the subsidiary or step down subsidiary of the foreign entity must comply with the structural requirements of a foreign entity.
- Overseas Investment, or transfer of such investment including swap of securities, in a foreign entity formed, registered or incorporated in Pakistan, or in any other jurisdiction as may be advised by the Central Government from time to time, requires prior approval of the Central Government.
The Explanation says "bonafide business activity" means any business activity permissible under any law in force in India and the host country or host jurisdiction, as the case may be. The Explanation ends with a colon where a full stop would be expected; the text is quoted as printed. The "structural requirements of a foreign entity" are those in rule 2(1)(h), explained in our article on the headline definitions: limited liability, unless the core activity is in a strategic sector.
Rule 9(2): the approval powers
Rule 9(2) begins "Notwithstanding anything contained in these rules or Foreign Exchange Management (Overseas Investment) Regulations 2022". It then gives two powers:
| Clause | Power |
|---|---|
| (i) | The Central Government may, on an application made to it through the Reserve Bank, permit financial commitment in strategic sectors or geographies, above the limits laid down in the Rules, subject to such terms and conditions as it considers necessary |
| (ii) | The Reserve Bank may, on an application made to it through the designated AD bank and for sufficient reasons, permit a person resident in India to make or transfer any investment or financial commitment outside India, subject to conditions it lays down |
The proviso to clause (ii) says that Overseas Investment by a person resident in India shall not be made in a foreign entity located in a country or jurisdiction as may be decided by the Central Government from time to time. The Rules name no such country or jurisdiction; the text is silent, and none is given here.
Rule 9(3): ceilings
Rule 9(3) says the Reserve Bank, if it considers necessary and in consultation with the Central Government, may:
- (i) stipulate the ceiling for the aggregate outflows during a financial year on account of financial commitment or Overseas Portfolio Investment; and
- (ii) stipulate the ceiling beyond which the amount of financial commitment by a person resident in India in a financial year shall require its prior approval.
The Rules print no figure. The Master Direction states, as its own direction, in paragraph 5 that a financial commitment by an Indian entity exceeding USD 1 (one) billion (or its equivalent) in a financial year requires prior approval of the Reserve Bank even when the total financial commitment is within the eligible limit under the automatic route. That is the Reserve Bank's statement and not text of the Rules.
How the Master Direction handles approvals
The Master Direction's paragraphs 3 to 5 apply rule 9 for the banks. It says that:
- a person resident in India may make or transfer an investment or financial commitment under general permission, or automatic route, within the Rules, Regulations and directions, in a foreign entity engaged in a bona fide business activity, directly or through a subsidiary or SPV (paragraph 3(1));
- a person making a financial commitment fills up Form FC and approaches the designated AD bank (paragraph 3(2));
- in the approval route the AD bank forwards the proposal to the concerned Regional Office of the Reserve Bank with its recommendations, with a set list of documents (paragraph 3(3)); and
- applications for investment in Pakistan or other jurisdictions advised by the Central Government, or in strategic sectors or specific geographies under rule 9, are forwarded by AD banks to the Reserve Bank for onward submission to the Central Government (paragraph 4).
The procedure and the portal are for the Reserve Bank's own instructions and are not described here. The same approvals are explained in our article on automatic route, approval route and NOC.
A worked example
Larch Analytics Private Limited, an Indian company, wants to put capital into a foreign subsidiary through an SPV. The foreign subsidiary's business is permitted in India and in the host country, so the bona fide business activity condition is met. The SPV has to have the structure of a foreign entity. If the host country were Pakistan, the first proviso to rule 9(1) would require the prior approval of the Central Government. If Larch's planned financial commitment exceeded the limits in the Rules in a strategic sector, rule 9(2)(i) is the route: an application to the Central Government through the Reserve Bank. The names are invented.
Need help with an overseas investment approval?
Choosing between the automatic route and an application, and drafting the reasons the Reserve Bank asks for under rule 9(2)(ii), are the points where a clean file matters. Our overseas direct investment reporting team can prepare the investment note and the form with you.
Key takeaways
- Overseas investment must be in a foreign entity engaged in a bona fide business activity, lawful in India and the host country.
- Subsidiaries and step down subsidiaries must meet the structural requirements of a foreign entity.
- Prior Central Government approval is needed for Pakistan and other jurisdictions it advises.
- The Central Government can permit financial commitment above the limits in strategic sectors or geographies; the Reserve Bank can permit other cases for sufficient reasons.
- The Reserve Bank may set aggregate outflow ceilings and the ceiling beyond which prior approval is needed; the Rules print no figure.
Read next
- Scope, administration and exclusions: rules 1, 3, 4, 6, 8 and 20
- No-objection certificate: rule 10
- Pricing, transfer and liquidation: rules 16 and 17
- Setting up a business outside India: complete guide
Disclaimer: Based on the Gazette text of the instrument this article names, as notified and as amended by the notifications named in the article (for the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 the latest amendment consulted is S.O. 4870(E) dated 2 September 2026), as consulted on 2 October 2026. There is no official consolidated text; the provisions were read with each amendment applied. Sectoral caps, entry routes, conditions, forms and time limits change by notification, press note and circular; later changes should be checked on the Gazette, DPIIT and Reserve Bank sites. This article is general information, not legal advice; check the official text before acting.