Rule 11 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 11 of the Foreign Exchange Management (Overseas Investment) Rules, 2022 says an Indian entity may make Overseas Direct Investment (ODI) in the manner and on the terms of Schedule I. Paragraph 1 of Schedule I then sets out the ways an Indian entity may make or hold ODI: six routes, from subscribing to the memorandum of a new foreign entity to merger and swap of securities. This article reads rule 11 and paragraph 1.
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. The financial services conditions in paragraph 2 and the financial commitment limit in paragraph 3 of the same Schedule are in separate articles, listed below. Reporting of an ODI is covered by our overseas direct investment reporting service.
An Indian entity may make ODI by way of investment in equity capital for the purpose of undertaking bona fide business activity, within the limits and conditions of Schedule I. Paragraph 1(2) lists six ways ODI may be made or held: subscription to the memorandum or purchase of equity capital; bidding or tender; rights issue or bonus shares; capitalisation of dues from the foreign entity; swap of securities; and merger, demerger, amalgamation or arrangement. The Master Direction adds that both legs of a swap must comply with FEMA, and that individual partners may hold shares on behalf of a firm where host-country rules require.
Rule 11
Rule 11 is one sentence: "An Indian entity may make Overseas Direct Investment in the manner and subject to the terms and conditions prescribed in Schedule I." Schedule I is headed "" and "Manner of making Overseas Direct Investment by Indian entity". "Indian entity" and "Overseas Direct Investment" are defined in rule 2(1)(j) and (q); see our articles on Indian entity, net worth and strategic sector and on ODI, OPI, financial commitment and control.
Paragraph 1(1): equity capital for bona fide business
An Indian entity may make ODI "by way of investment in equity capital for the purpose of undertaking bonafide business activity in the manner and subject to the limits and conditions provided in this Schedule". "Equity capital" in rule 2(1)(e) means equity shares or perpetual capital or instruments that are irredeemable or contribution to non-debt capital of a foreign entity in the nature of fully and compulsorily convertible instruments. "Bona fide business activity" is explained in the Explanation to rule 9(1); see our article on rules 7 and 9.
Paragraph 1(2): the six ways
The ODI may be made or held by way of:
| Item | Way | What the text says |
|---|---|---|
| (i) | Subscription or purchase | Subscription as part of the memorandum of association, or purchase of equity capital, listed or unlisted |
| (ii) | Bidding or tender | Acquisition through bidding or tender procedure |
| (iii) | Rights or bonus | Acquisition of equity capital by way of rights issue or allotment of bonus shares |
| (iv) | Capitalisation | Capitalisation, within the time period, if any, specified for realisation under the Act, of any amount due towards the Indian entity from the foreign entity, the remittance of which is permitted under the Act or does not require prior permission of the Central Government or the Reserve Bank under the Act or any rules or regulations made or directions issued under it |
| (v) | Swap | The swap of securities |
| (vi) | Merger and similar | Merger, demerger, amalgamation or any scheme of arrangement as per the applicable laws in India or laws of the host country or the host jurisdiction, as the case may be |
Items (i) and (ii): memorandum, purchase, bid
Item (i) covers both a new entity, by subscription as part of the memorandum of association, and an existing one, by purchase of equity capital, listed or unlisted. Item (ii) covers acquisition through a bidding or tender procedure. The Master Direction - Overseas Investment, updated as on April 01, 2026, gives the Reserve Bank's directions on bids in paragraph 8: AD banks may allow remittance towards an Earnest Money Deposit after obtaining a Form A2, or issue a bid bond guarantee on the investor's behalf under regulation 9(5) of the Regulations; on winning the bid they may facilitate further remittances after obtaining Form FC and report the financial commitment; unsuccessful bidders are to repatriate the amount; and the bank is to ensure the bona fides of the transaction if the successful bidder decides not to proceed. These are the Reserve Bank's directions to banks. Our article on rights issue, bidding, pricing, transfer and restructuring goes through that paragraph.
Item (iii): rights and bonus
This links to rule 7(1), explained in the article on rules 7 and 9. An Indian entity that already holds equity capital of the foreign entity in accordance with the law may subscribe to a rights issue or be allotted bonus shares.
Item (iv): capitalisation of dues
The Indian entity may convert an amount due to it from the foreign entity into equity capital, but only within the time period, if any, specified for realisation under the Act, and only where remittance of the amount is permitted or needs no prior permission. The Rules do not name the realisation period; it is set elsewhere. The Master Direction's paragraph 27(5) deals with capitalisation of export proceeds in Form FC; that is a bank-level direction and not text of the Rules.
Items (v) and (vi): swap and merger
Item (v) covers the swap of securities and item (vi) merger, demerger, amalgamation or any scheme of arrangement under the applicable law of India or the host country. The Master Direction (paragraph 21(1)) states that in a swap of securities both legs of the transaction must comply with FEMA provisions as applicable. For approval of a transfer on merger, demerger or amalgamation, see rule 17(3), explained in our article on pricing, transfer and liquidation.
What the Master Direction says on the opening of paragraph 21
The Master Direction's paragraph 21 opens by saying that an Indian entity, within the overall limit in Schedule I of the Rules and subject to regulation 3 of the Regulations, may make financial commitment by way of ODI as per Schedule I, by way of debt under regulation 4 and by way of non-fund-based commitment under regulations 5, 6 and 7. Its sub-paragraph (2) adds that for 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 if the host country regulations or operational requirements warrant. The Rules do not print that second permission. The limit is in our article on Schedule I, paragraph 3, and the debt and guarantee regulations are in the live articles starting with regulations 1 to 4.
Where the rest of Schedule I sits
Paragraph 2 of Schedule I, on ODI in financial services activity, is explained in our article on ODI in financial services. Paragraph 3, on the limit for financial commitment, is in our article on the financial commitment limit.
A worked example
Corbett Dyes Limited, an Indian company, forms a new foreign company by subscribing to its memorandum of association (item (i)). A year later the foreign company owes Corbett an amount for goods supplied, and Corbett converts the amount into equity capital within the time allowed for realisation (item (iv)); remittance of that amount did not need prior permission. Corbett then buys a competitor abroad by a swap of securities (item (v)); both legs of the swap must comply with FEMA provisions as applicable. The names are invented.
Need help structuring an overseas investment?
Choosing between a fresh subscription, a swap, a capitalisation of dues and a merger changes the approvals, the pricing evidence and the form to be filed. Our overseas direct investment reporting team can set out the route and the filing that goes with it.
Key takeaways
- Rule 11 sends an Indian entity to Schedule I for the manner of making ODI.
- ODI is by investment in equity capital for bona fide business activity.
- Six routes: subscription or purchase, bidding or tender, rights or bonus, capitalisation of dues, swap of securities, and merger or arrangement.
- Capitalisation is within the realisation period, if any, and only where remittance of the dues was permitted or needed no prior permission.
- Both legs of a swap must comply with FEMA, according to the Master Direction.
Read next
- ODI in financial services: Schedule I, paragraph 2
- Financial commitment limit: Schedule I, paragraph 3
- Overseas portfolio investment by an Indian entity: Schedule II
- How to file Form ODI for overseas investment
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.