Master Direction 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.
Paragraph 21 of the Reserve Bank's Master Direction on overseas investment is the central paragraph on what an Indian entity may commit abroad. This article reads the opening sentence and sub-paragraphs (1), (2), (7) and (8): swap of securities, shares held by partners of a registered firm, ODI in financial services activity, and what counts towards the financial commitment limit. Sub-paragraphs (3) to (6) are in the articles on regulation 4, guarantees and pledge and charge.
As per the Master Direction, updated as on April 01, 2026, an Indian entity, within the overall limit in Schedule I of the OI Rules and subject to regulation 3 of the OI Regulations, may make financial commitment by ODI, by debt and by non-fund based commitment. ODI in a financial services foreign entity is conditioned on the Indian entity's own activity, and resources such as EEFC balances, ADR/GDR proceeds and ECB proceeds used for financial commitment are reckoned towards the limit.
The text and its footing
The Master Direction - Overseas Investment is FED Master Direction No.15/2024-25, July 24, 2024, "Updated as on April 01, 2026", issued to Authorised Dealer Category - I banks under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999; see our articles on section 10 and sections 11 and 12. It is the Reserve Bank's direction to authorised dealers, not a rule. The Overseas Investment Rules, 2022 (Schedules I and V, and paragraph 3 of Schedule I on the limit) are not in the sources consulted, so no limit figure is stated here. Later amendments and circulars should be checked on the Reserve Bank site. For a commitment of your own, our ODI reporting team can compute and report it.
The opening sentence
An Indian entity, within the overall limit provided in Schedule I of the OI Rules and subject to regulation 3 of the OI Regulations, may make:
- financial commitment by way of ODI as per Schedule I of the OI Rules;
- financial commitment by way of debt as per regulation 4 of the OI Regulations; and
- non-fund based financial commitment as per regulations 5, 6 and 7 of the OI Regulations.
Sub-paragraph (1): swap of securities
In a swap of securities, both legs of the transaction shall comply with FEMA provisions, as applicable.
Sub-paragraph (2): registered partnership firms
In the case of investment in a foreign entity by a registered partnership firm, it will be in order for individual partners to hold shares for and on behalf of the firm in the foreign entity if the host country regulations or operational requirements warrant such holdings.
Sub-paragraph (7): ODI in financial services activity
The Master Direction summarises paragraph 2 of Schedule I and paragraph 2 of Schedule V of the OI Rules (not in the sources consulted) in a table. The ODI is "subject to the financial commitment limit, reporting and documentation as per the OI Rules/Regulations and other applicable provisions as under":
| Indian entity | ODI in foreign entity | Position as printed |
|---|---|---|
| (a) Engaged in financial services activity | Engaged in financial services activity | Subject to paragraph 2(1) of Schedule I of the OI Rules. Where the investment is in an IFSC, the requisite approval by the financial services regulator concerned shall be decided within 45 days from receipt of the application complete in all respects, failing which it shall be deemed to be approved |
| (a) as above | Not engaged in financial services activity | Subject to the guidelines issued by the respective regulator |
| (b) Not engaged in financial services activity | Engaged in financial services activity except banking or insurance | The Indian entity has posted net profits during the preceding three financial years. An Indian entity not meeting the three-year profitability condition may make such ODI in a foreign entity in an IFSC in India |
| (b) as above | Engaged in general and health insurance | Apart from the three-year profitability criterion, the insurance business supports the core activity undertaken overseas by the Indian entity (examples: health insurance supporting a medical or hospital business; vehicle insurance supporting manufacture or export of motor vehicles) |
Two further points in sub-paragraph (7):
- (c) Overseas investment in any sector by banks and non-banking financial institutions regulated by the Reserve Bank is subject to such other conditions as the regulatory department concerned of the Reserve Bank stipulates.
- (d) A foreign entity is considered to be engaged in financial services activity if it undertakes an activity which, if carried out by an entity in India, requires registration with, or is regulated by, a financial sector regulator in India.
Note how the test is applied: it looks at the Indian entity first, then at the foreign entity, and for the Indian entity that is not itself in financial services it adds a profitability condition. The Master Direction does not define "net profits" beyond the words printed; the Rules are needed for that, and they are not in the sources consulted. For IFSC investments see the article on paragraphs 20 and 23 to 25.
Sub-paragraph (8): the limit and the resources used
The limit of financial commitment is governed by paragraph 3 of Schedule I of the OI Rules (not in the sources consulted). The Master Direction adds:
- (a) Utilisation of balances held in an EEFC account, and of the amount raised by issue of American Depository Receipts or Global Depositary Receipts and ADR/GDR stock-swap, for making financial commitment is also reckoned towards the limit. Financial commitment made through such resources before the date of notification of the OI Rules and Regulations is not reckoned.
- (b) Where the proceeds of External Commercial Borrowings are used for financial commitment, they are reckoned towards the limit. But only that part of the ECB which exceeds the amount of the corresponding pledge or charge on assets already counted towards the limit is reckoned.
Example
Tapti Engineering Ltd, a manufacturer, wants to take a stake in a foreign entity in an IFSC that provides financial services (not banking or insurance). Tapti is not engaged in financial services. Under row (b) of the table, Tapti must have posted net profits during the preceding three financial years, but an entity that does not meet that condition may still make the investment in a foreign entity in an IFSC in India. Tapti also plans to fund part of the commitment with ECB proceeds; under (8)(b) those proceeds count towards the limit, except the part that merely matches a pledge or charge already counted. Separately, a registered partnership firm that invests abroad may let its individual partners hold the shares on its behalf if host country rules or operations require it, under sub-paragraph (2).
Common mistakes
- Overlooking that the same funds can be reckoned twice; (8)(b) counts only the part of the ECB above a corresponding pledge or charge.
- Assuming a manufacturing entity can invest in a financial services foreign entity without a profitability test.
- Forgetting that insurance ODI by a non-financial entity must support the core overseas activity.
- Treating the swap of securities as outside FEMA because no money moves; both legs must comply.
Need help with a financial services ODI?
The route depends on both entities' activity, the host regulator and the resources used. Our ODI reporting team can test your structure against paragraph 21 and prepare the reporting.
Key takeaways
- Paragraph 21 allows ODI, debt and non-fund based commitment within the Schedule I limit and regulation 3.
- Swap of securities requires both legs to comply with FEMA.
- Financial services ODI by a non-financial entity needs three years of net profits, with an IFSC exception and an insurance condition.
- EEFC balances, ADR/GDR proceeds and ECB proceeds used for commitment are reckoned towards the limit.
- The numeric limit is in the OI Rules, not in the sources consulted.
Read next
- Regulations 1 to 4: financial commitment other than equity
- Overseas investment by resident individuals: paragraph 22
- Financial commitment by equity, debt, guarantee and pledge
- ECB: external commercial borrowings under FEMA
Disclaimer: Based on the rules, regulations and Reserve Bank Master Directions under the Foreign Exchange Management Act, 1999 that this article names, each in the version and up to the date stated in the article, as consulted on 2 October 2026. Some texts are third-party copies or older prints and are identified as such. Limits, forms and time limits change by amendment and circular; later changes should be checked on the Reserve Bank and Gazette sites. This article is general information, not legal advice; check the official text before acting.