Regulations 1 to 4 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.
Regulations 1 to 4 of the Overseas Investment Regulations, 2022 give the title and commencement, define two terms, and set the conditions on which an Indian entity may lend to, invest in debt of, or extend a non-fund based commitment to a foreign entity. They also say that the commitments in regulations 4 to 7 all count towards one limit. This article reads them with paragraph 21(3) of the Reserve Bank's Master Direction and explains how the Rules, the Regulations and the Master Direction fit together.
As per the copy of the notification consulted (No. FEMA 400/2022-RB, as notified on 22 August 2022), regulation 3(1) lets an Indian entity lend, invest in debt or extend a non-fund based commitment to a foreign entity only if it is eligible to make ODI, has made ODI in that foreign entity and has acquired control in it, within the financial commitment limit in the Overseas Investment Rules, 2022. Regulation 4 adds that a loan must be backed by a loan agreement with interest charged on an arm's length basis.
The three texts and the dates used
The Regulations are made by the Reserve Bank under sub-section (1) and clause (a) of sub-section (2) of section 47 of the Foreign Exchange Management Act, 1999. See our articles on sections 47 and 48, section 6 and section 4.
The text of the Regulations is taken from a third-party copy of the notification as notified on 22 August 2022; later amendments are not shown in that copy. Each regulation is read beside the Master Direction - Overseas Investment (FED Master Direction No.15/2024-25, July 24, 2024, "Updated as on April 01, 2026"), which is the Reserve Bank's direction to authorised dealers under sections 10(4) and 11(1). Later amendments and circulars should be checked on the Reserve Bank and Gazette sites. For help with an overseas investment filing, see our ODI reporting service.
How the texts fit, as the Master Direction states it:
| Text | Who issues it | What it does |
|---|---|---|
| Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules), G.S.R. 646(E), August 22, 2022 | Central Government | Gives the definitions, the financial commitment limit and the Schedules. Not in the sources consulted for this series |
| Overseas Investment Regulations, 2022 (OI Regulations), No. FEMA 400/2022-RB | Reserve Bank | The conditions for financial commitment by debt, guarantee, pledge and deferred payment; mode of payment; obligations; reporting |
| Master Direction - Overseas Investment | Reserve Bank | Directions to authorised dealers on how to implement both. It says it is to be read with the Rules and the Regulations |
The Master Direction says reporting instructions are in Part VIII of the Master Direction on Reporting under FEMA, also not in the sources consulted. Where the Regulations say "as prescribed in the Rules", this article states that the rule is not in the sources consulted and does not fill the gap. For the ODI framework generally, see our guides on ODI under FEMA and overseas direct investment under the 2022 Rules.
Regulations 1 and 2
Regulation 1 gives the short title and says the Regulations come into force on the date of their publication in the Official Gazette. Regulation 2 defines "Act", and "debt instruments", which has the meaning in the OI Rules; the Rules are not in the sources consulted, so that meaning is not stated here. Words not defined take their meaning from the Act or the OI Rules.
Regulation 3: the three conditions
Regulation 3 is headed "Financial commitment by Indian entity by modes other than equity capital" (the heading is printed with a comma at the end). Regulation 3(1) says the Indian entity may lend or invest in any debt instrument issued by a foreign entity, or extend non-fund based commitment to or on behalf of a foreign entity including overseas step down subsidiaries of that Indian entity, "subject to the following conditions within the financial commitment limit as prescribed in the Foreign Exchange Management (Overseas Investment) Rules, 2022":
- the Indian entity is eligible to make Overseas Direct Investment (ODI);
- the Indian entity has made ODI in the foreign entity; and
- the Indian entity has acquired control in such foreign entity at the time of making such financial commitment.
The financial commitment limit and the meanings of ODI and control are in the OI Rules, which are not in the sources consulted. The Master Direction (paragraph 1) restates the concept: "financial commitment" is the aggregate amount of investment by way of ODI, debt other than overseas portfolio investment and non-fund based facilities extended to all foreign entities, with the same three conditions. One difference is worth noticing: paragraph 1(viii) of the Master Direction says control must have been acquired "on or before the date of making such financial commitment", while regulation 3(1)(iii) of the copy consulted says "at the time of making". The Master Direction, as the later text, is the one that banks follow.
Regulation 3(2) says financial commitments under regulations 4, 5, 6 and 7 shall be reckoned towards the financial commitment limit in sub-regulation (1). So debt, guarantees, pledges and charges, and deferred payment all draw on one limit. Exceptions are in the Explanation to regulation 6 (negative pledge and bid bond guarantee), covered in the article on pledge and charge.
Regulation 4: financial commitment by way of debt
An Indian entity may lend or invest in any debt instruments issued by a foreign entity subject to the condition that such loans are duly backed by a loan agreement where the rate of interest shall be charged on an arm's length basis. The Explanation says "arm's length" means a transaction between two related parties conducted as if they were unrelated, so that there is no conflict of interest.
Paragraph 21(3) of the Master Direction
Paragraph 21 of the Master Direction opens by saying an Indian entity, within the overall limit in Schedule I of the OI Rules and subject to regulation 3, may make financial commitment by ODI as per Schedule I, by debt as per regulation 4, and by non-fund based commitment as per regulations 5, 6 and 7. Sub-paragraph (3) then says:
- the authorised dealer shall facilitate an outward remittance towards financial commitment by way of debt only after obtaining the necessary agreement or documents to ensure the bona fides of the transaction;
- an Indian entity shall not lend directly to its overseas step down subsidiary; and
- a resident individual shall not make financial commitment by way of debt.
Paragraph 27(2) of the Master Direction adds that banks should allow a remittance towards a loan to the foreign entity, or issue a bank guarantee, only after ensuring that the Indian entity has made ODI and has control in the foreign entity.
Example
Sahyadri Auto Components Pvt Ltd, an Indian company, holds equity in a foreign entity in a third country and has control. It wants to lend funds to that foreign entity. Under regulation 3(1) it checks that it is eligible to make ODI, that it has made ODI in that entity and that it has control. Under regulation 4 it signs a loan agreement with interest on an arm's length basis. Under paragraph 21(3) of the Master Direction the bank asks for the agreement before the remittance. If Sahyadri wanted to lend to a step down subsidiary of that foreign entity directly, the Master Direction does not allow an Indian entity to lend directly to its overseas step down subsidiary. The limit in the OI Rules would also apply, and that rule is not in the sources consulted.
Common mistakes
- Treating a loan as a separate matter from the ODI. Regulation 3(1)(ii) requires an earlier ODI in the same foreign entity.
- Lending without a written loan agreement or at a rate that is not arm's length.
- Lending directly to an overseas step down subsidiary (paragraph 21(3)).
- Forgetting that debt, guarantees, pledges and deferred payment all count towards one limit (regulation 3(2)).
Need help with a financial commitment abroad?
Financial commitment questions involve three texts and several forms, and the Rules that set the limit sit outside the Regulations. Our ODI reporting team can map your structure to the Rules, the Regulations and the Master Direction and prepare the filings.
Key takeaways
- Regulation 3(1) imposes three conditions: ODI eligibility, ODI made, control acquired.
- Regulation 3(2) pools the commitments in regulations 4 to 7 under one limit.
- Regulation 4 requires a loan agreement and arm's length interest.
- The Master Direction says an Indian entity shall not lend directly to its overseas step down subsidiary, and a resident individual shall not make financial commitment by debt.
- The OI Rules, which set the limit, are not in the sources consulted.
Read next
- Guarantees for a foreign entity: regulation 5
- Pledge and charge for a foreign entity: regulation 6
- Financial commitment by equity, debt, guarantee and pledge
- ODI: financial commitment and reporting
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.