Schedule I 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.
A foreign entity in financial services is a special case in the Foreign Exchange Management (Overseas Investment) Rules, 2022. Paragraph 2 of Schedule I sets different conditions depending on whether the Indian entity is itself in financial services: net profits in each of the preceding three financial years, registration with a financial services regulator, regulator approvals in India and the host country, an exclusion of banking and insurance for others, a limited insurance carve-out, a Covid-19 relief for the profitability test, and a clause that leaves banks and NBFCs to the Reserve Bank. This article reads paragraph 2, the Explanation at the end of Schedule I, and the related IFSC proviso in Schedule V.
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. Our overseas direct investment reporting service covers the filings that follow an investment under paragraph 2.
An Indian entity engaged in financial services may make ODI in a foreign entity in financial services if it has net profits in the preceding three financial years, is registered with or regulated by a financial services regulator, and has the approvals needed in India and the host country. An Indian entity not in financial services may do so except in banking or insurance, on the same three-year profit condition, with a general and health insurance carve-out where the insurance supports its core overseas activity. The profit test could exclude 2020-2021 to 2021-2022 because of Covid-19. Banks and NBFCs regulated by the Reserve Bank follow the Reserve Bank's conditions.
Sub-paragraph (1): Indian entity engaged in financial services
An Indian entity engaged in financial services activity in India may make ODI in a foreign entity "which is directly or indirectly engaged in financial services activity", subject to three conditions:
| Clause | Condition |
|---|---|
| (i) | The Indian entity has posted net profits during the preceding three financial years |
| (ii) | The Indian entity is registered with or regulated by a financial services regulator in India |
| (iii) | The Indian entity has obtained approval as may be required from the regulators of such financial services activity, both in India and the host country or host jurisdiction, as the case may be, for engaging in such financial services |
"Financial service regulator" is defined in rule 2(1)(g) to include the Reserve Bank, SEBI, IRDAI and PFRDA; see our article on no-objection certificates under rule 10, which uses the same definition.
Sub-paragraph (2): Indian entity not engaged in financial services
An Indian entity not engaged in financial services activity in India may make ODI in a foreign entity "which is directly or indirectly engaged in financial services activity, except banking or insurance", subject to the condition that it has posted net profits during the preceding three financial years.
The proviso says an Indian entity not engaged in the insurance sector may make ODI in general and health insurance where such insurance business is supporting the core activity undertaken overseas by that Indian entity.
The Master Direction - Overseas Investment, updated as on April 01, 2026, restates this in a table in paragraph 21(7). It gives, as examples, health insurance to support a medical or hospital business and vehicle insurance to support manufacture or export of motor vehicles. Those examples are the Reserve Bank's and are not in the Rules.
Sub-paragraph (3): Covid-19 relief
If an Indian entity does not meet the net profits required under sub-paragraphs (1) and (2) "due to the impact of Covid-19 during the period from 2020-2021 to 2021-2022, then the financial results of such period may be excluded for considering the profitability period of three years". A proviso says that period may be extended by the Reserve Bank in consultation with the Central Government, as it may deem necessary. The text of the Rules is dated 22 August 2022; whether the Reserve Bank has extended the period is not stated in the texts consulted, and the reader should check the current position.
Sub-paragraph (4): banks and NBFCs
Notwithstanding anything in paragraph 2, Overseas Investment by banks and non-banking financial institutions regulated by the Reserve Bank "shall be subject to the conditions laid down by the Reserve Bank under applicable laws in this regard". The Master Direction repeats this in paragraph 21(7)(c): overseas investment in any sector by banks and non-banking financial institutions regulated by the Reserve Bank is subject to conditions stipulated by the regulatory department concerned of the Reserve Bank. The conditions themselves are not in the texts consulted.
The Explanation: what counts as financial services
The Explanation at the end of Schedule I says: "For the purposes of this Schedule, a foreign entity shall be considered to be engaged in the business of 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." The test is not what the foreign entity calls itself; it is whether the same activity in India would need registration with, or be regulated by, a financial sector regulator. The Master Direction restates the test in paragraph 21(7)(d).
Summary table
| Indian entity | Foreign entity in financial services | Condition |
|---|---|---|
| In financial services | In financial services | Three-year net profit; registered with or regulated by regulator; approvals in India and host country |
| In financial services | Not in financial services | The Master Direction says it is subject to the guidelines issued by the respective regulator |
| Not in financial services | In financial services, except banking or insurance | Three-year net profit |
| Not in financial services | General or health insurance | Three-year net profit, and the insurance supports the core overseas activity |
| Not in financial services | Banking or insurance (other than the carve-out) | Not covered by the permission in sub-paragraph (2) |
| Bank or NBFC regulated by the Reserve Bank | Any | Reserve Bank's conditions |
The second row is the Master Direction's statement in paragraph 21(7)(a); the Rules do not print it.
The IFSC exception
Schedule V, paragraph 1(2), proviso (ii), says that an Indian entity not engaged in financial services activity in India, making ODI in a foreign entity directly or indirectly engaged in financial services activity except banking or insurance, who does not meet the net profit condition, may make ODI in an IFSC. The Master Direction (paragraph 21(7)(b)) says the same: an entity not meeting the three-year profitability condition may make such ODI in a foreign entity in an IFSC. The full IFSC Schedule is explained in our article on overseas investment in an IFSC: Schedule V. The Master Direction also says, for ODI in an IFSC by a financial services entity, that the regulator's approval is to be decided within 45 days of a complete application failing which it is deemed approved. The Rules print the same 45-day rule in proviso (i) to Schedule V, paragraph 1(2).
A worked example
Hessle Agro Foods Limited, an Indian company that is not in financial services, wants to buy a stake in a foreign payments company. The foreign company's activity, if carried out in India, would need registration with a financial sector regulator, so it counts as financial services under the Explanation. Hessle can do this under sub-paragraph (2) only if it posted net profits in each of the preceding three financial years, and the foreign activity is not banking or insurance. If Hessle did not meet the profit test, the Schedule V proviso would still let it invest through an IFSC. The names are invented.
Need help with ODI in a financial services business?
The three-year test, the regulator approvals in India and the host country, and the classification of the foreign activity are where these files are queried. Our overseas direct investment reporting team can test the facts against paragraph 2 and file after the investment.
Key takeaways
- A financial-services Indian entity needs three years of net profit, regulator registration and approvals in India and the host country.
- Other Indian entities need three years of net profit and cannot invest in banking or insurance, except general and health insurance that supports the core overseas activity.
- 2020-2021 and 2021-2022 could be excluded from the profit test because of Covid-19; the Reserve Bank may extend that.
- Banks and NBFCs regulated by the Reserve Bank follow the Reserve Bank's conditions.
- An IFSC investment is the exception to the profit test (Schedule V).
Read next
- Manner of making ODI by an Indian entity: Schedule I, paragraph 1
- Financial commitment limit: Schedule I, paragraph 3
- Overseas investment in an IFSC: Schedule V
- Financial commitment by an Indian entity: paragraph 21 of the Master Direction
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.