Rule 2 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.
Almost every limit in the Foreign Exchange Management (Overseas Investment) Rules, 2022 depends on how rule 2 defines the investment. Whether a holding in a foreign company is "overseas direct investment" (ODI) or "overseas portfolio investment" (OPI) turns on a ten per cent test and on control; "financial commitment" adds loans and guarantees to ODI; and the investee must be a "foreign entity" with limited liability unless it is in a strategic sector. This article takes those clauses of sub-rule (1) of rule 2 in turn.
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. The Rules were made under section 46 of the Foreign Exchange Management Act, 1999, with section 47(3); see our article on section 46 of the Act. The remaining definitions are in our article on Indian entity, net worth and strategic sector. If you are classifying a holding abroad and need the reporting that follows, our overseas direct investment reporting service covers it.
ODI is acquisition of unlisted equity capital, subscription under the memorandum of a foreign entity, investment of ten per cent or more of the paid-up equity capital of a listed foreign entity, or investment with control below ten per cent. Once ODI, always ODI, even if the holding later falls below ten per cent or control is lost. OPI is any other investment in foreign securities, but not in unlisted debt instruments or in securities issued by a resident outside an IFSC. Financial commitment is ODI plus debt (other than OPI) plus non-fund-based facilities extended to the foreign entity.
The core definitions
| Clause | Term | As printed (in substance) |
|---|---|---|
| (c) | Control | The right to appoint majority of the directors or to control management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders' agreements or voting agreements that entitle them to ten per cent. or more of voting rights, or in any other manner in the entity |
| (d) | Disinvestment | Partial or full extinguishment of right, title or possession of equity capital acquired under the Rules |
| (e) | Equity capital | 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 |
| (f) | Financial commitment | The aggregate amount of investment made by a person resident in India by way of ODI, debt other than OPI in a foreign entity or entities in which the ODI is made, and includes the non-fund-based facilities extended by that person to or on behalf of such foreign entity or entities |
| (h) | Foreign entity | An entity formed or registered or incorporated outside India, including an IFSC, that has limited liability; the proviso says the restriction of limited liability does not apply to an entity with core activity in a strategic sector |
| (i) | Host country or host jurisdiction | The country or jurisdiction, including the IFSC, in which the foreign entity is formed, registered or incorporated |
| (m) | Listed foreign entity | A foreign entity whose equity shares or any other fully and compulsorily convertible instrument is listed on a recognised stock exchange outside India |
| (y) | Subsidiary or step down subsidiary of a foreign entity | An entity in which the foreign entity has control |
A note on clause (h)
Clause (h) defines a foreign entity as one "that has limited liability", with the limited-liability restriction lifted for strategic-sector entities. The Master Direction - Overseas Investment, updated as on April 01, 2026, explains in its paragraph 1(i) that limited liability means a structure such as a limited liability company or limited liability partnership where the liability of the person resident in India is clear and limited, and adds rules for foreign investment funds set up as trusts (the trustee must be a person resident outside India). Those are the Reserve Bank's own explanations, not text of the Rules. "Strategic sector" is defined in clause (z), which is covered in our article on the other definitions.
ODI: clause (q)
"Overseas Direct Investment" or "ODI" means investment by way of:
- acquisition of unlisted equity capital of a foreign entity;
- subscription as a part of the memorandum of association of a foreign entity;
- investment in ten per cent, or more of the paid-up equity capital of a listed foreign entity; or
- investment with control where the investment is less than ten per cent. of the paid-up equity capital of a listed foreign entity.
The Explanation says that where an investment by a person resident in India in the equity capital of a foreign entity is classified as ODI, it continues to be treated as ODI even if it falls to a level below ten per cent. of the paid-up equity capital or the person loses control in the foreign entity. The Master Direction repeats the four limbs and the Explanation in paragraph 1(vi). "Control", defined in clause (c) above, is the test for the fourth limb.
OPI: clause (s)
"Overseas Portfolio Investment" or "OPI" means investment, other than ODI, in foreign securities, but not in any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC. The proviso says OPI by a person resident in India in the equity capital of a listed entity, even after its delisting, continues to be treated as OPI until any further investment is made in the entity. The Explanation says "debt instruments" means the instruments specified as such in clause (A) of rule 5. Rule 5 is explained in our article on the other definitions.
The Master Direction explains, as its own statements, that after delisting any further investment is made as ODI, that OPI is not made in derivatives (unless the Reserve Bank permits) or commodities including bullion depository receipts, and which entities may make OPI, including resident individuals within the overall limit of the Liberalised Remittance Scheme. For the scheme see our article on the Liberalised Remittance Scheme. The manner of OPI by an Indian entity is in our article on Schedule II.
Overseas Investment: clause (r)
"Overseas Investment" or "OI" means financial commitment and Overseas Portfolio Investment by a person resident in India. The two together are what rule 8 bars unless the Rules permit it; see our article on scope, administration and exclusions.
How the definitions work together
| Situation | Classification under rule 2 |
|---|---|
| Buying shares of an unlisted foreign company | ODI (unlisted equity capital) |
| Taking shares in the memorandum of a new foreign company | ODI |
| Buying 12 per cent of a listed foreign company | ODI (ten per cent or more) |
| Buying 4 per cent of a listed foreign company with a right to appoint a majority of directors | ODI (investment with control) |
| Buying 4 per cent of a listed foreign company without control | OPI |
| A loan to the foreign entity in which ODI is held | Financial commitment (debt other than OPI) |
| A guarantee or other non-fund-based facility for that entity | Financial commitment |
| A holding that was ODI falls below ten per cent after a share issue | Still ODI under the Explanation to clause (q) |
The limit on financial commitment is in our article on Schedule I, paragraph 3. The live articles on the Regulations treat financial commitment other than equity, guarantees and pledges in regulations 1 to 4.
A worked example
Quill Instruments Private Limited, an Indian company, buys 8 per cent of the paid-up equity capital of a foreign company that is listed on an overseas exchange and also holds a shareholders' agreement giving it the right to appoint the majority of the directors. Under clause (q) it is ODI, because it is investment with control below ten per cent. Quill later lends money to that foreign company: the loan is debt other than OPI in the entity in which ODI is made, and so counts toward financial commitment. If the foreign company issues more shares and Quill's holding falls to 5 per cent and it loses the board right, the Explanation keeps the investment classified as ODI. The names are invented.
Need help classifying an overseas holding?
The ODI and OPI line decides which Schedule applies, which limit counts and which form is filed. Our overseas direct investment reporting team can classify a holding against clauses (c), (e), (f), (q) and (s) before the next remittance.
Key takeaways
- ODI: unlisted equity, memorandum subscription, ten per cent or more of a listed foreign entity, or control below ten per cent.
- Once ODI, always ODI, even below ten per cent or without control.
- OPI: everything else in foreign securities, but not unlisted debt or securities of a resident outside an IFSC.
- Financial commitment: ODI plus debt (other than OPI) plus non-fund-based facilities.
- A foreign entity must have limited liability unless its core activity is in a strategic sector.
Read next
- Indian entity, net worth and strategic sector defined: rules 2 and 5
- Scope, administration and exclusions: rules 1, 3, 4, 6, 8 and 20
- Financial commitment limit: Schedule I, paragraph 3
- Overseas direct investment under FEMA
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.