Rules 16 and 17 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.
When an Indian entity or resident individual sells its stake in a foreign entity, two rules of the Foreign Exchange Management (Overseas Investment) Rules, 2022 apply. Rule 16 requires an arm's length price, which the AD bank checks before facilitating the transaction. Rule 17 says who the shares may be sold to, requires approval for mergers, buybacks and liquidation, and sets three conditions for disinvestment of ODI: no dues outstanding on a full exit, at least one year of holding, and no holding of an investment that was not permitted to start with.
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. For reporting a disinvestment and any follow-up filing, our annual performance report filing for ODI service is the usual next step.
The issue or transfer of equity capital of a foreign entity must be at a price arrived at on an arm's length basis, and the AD bank must ensure compliance, taking into consideration any internationally accepted pricing methodology. A resident may transfer equity capital by sale to an eligible resident or to a non-resident. Mergers, buybacks and liquidation need approval of the competent authority. For full disinvestment other than by liquidation, no dues may be outstanding; for any disinvestment of ODI, the transferor must have stayed invested at least one year, with relief for certain mergers of wholly owned entities.
Rule 16: pricing
Sub-rule (1): arm's length price
Unless the Rules provide otherwise, the issue or transfer of equity capital of a foreign entity "from a person resident outside India or a person resident in India to a person resident in India who is eligible to make such investment or from a person resident in India to a person resident outside India" shall be subject to a price arrived on an arm's length basis. Three flows are covered:
| Flow | Covered |
|---|---|
| Non-resident or resident seller to an eligible resident buyer | Yes |
| Resident seller to a non-resident buyer | Yes |
| Issue of equity capital by the foreign entity | Yes ("issue or transfer") |
Sub-rule (2): the AD bank's duty
The AD bank, before facilitating a transaction under sub-rule (1), shall ensure compliance with arm's length pricing taking into consideration the valuation as per any internationally accepted pricing methodology for valuation. The Rules name no method and no certificate; the text is silent on both and none is given here.
The Master Direction - Overseas Investment, updated as on April 01, 2026, gives the Reserve Bank's direction to banks in its paragraph 12. It says the AD bank shall be guided by a board approved policy on the documents to be taken, which may provide for taking into consideration the valuation under any internationally accepted pricing methodology, and that the AD bank shall put in place such a policy within two months from the date of the directions. It adds that the policy may provide for cases where valuation may not be insisted upon, such as a transfer on account of merger, amalgamation, demerger or liquidation where the price has been approved by the competent Court or Tribunal as per the laws in India or the host jurisdiction, or where the price is readily available on a recognised stock exchange. These are the Reserve Bank's statements and not text of the Rules. Our article on rights issue, bidding, pricing, transfer and restructuring takes up that paragraph.
Rule 17: transfer or liquidation
Sub-rule (1): the general rule
Unless the Rules otherwise provide, a person resident in India holding equity capital in accordance with the Rules may transfer the investment, in compliance with the limits and conditions for such investment or disinvestment, the pricing guidelines or the documentation and reporting requirements, in the manner provided in the Rules and the Overseas Investment Regulations, 2022.
Sub-rule (2): to whom
A person resident in India may transfer equity capital by way of sale to a person resident in India who is eligible to make such investment under the Rules, or to a person resident outside India.
Sub-rule (3): approvals for merger, buyback and liquidation
If the transfer is on account of merger, amalgamation or demerger, or on account of buyback of foreign securities, or, in the case of liquidation of the foreign entity, the transfer or liquidation "shall have the approval of the competent authority as per the applicable laws in India or the laws of the host country or host jurisdiction, as the case may be".
Sub-rule (4): conditions for disinvestment of ODI
Where the disinvestment by a person resident in India pertains to ODI:
- Clause (i): in case of full disinvestment other than by way of liquidation, the transferor shall not have any dues outstanding for receipt, which the transferor is entitled to receive from the foreign entity as an investor in equity capital and debt.
- Clause (ii): in case of any disinvestment, the transferor must have stayed invested for at least one year from the date of making ODI.
The proviso says these conditions do not apply in case of a merger, demerger or amalgamation between two or more foreign entities that are wholly-owned, directly or indirectly, by the Indian entity, or where there is no change or dilution in the aggregate equity holding of the Indian entity in the merged or demerged or amalgamated entity.
The Master Direction (paragraph 13) clarifies, as its own statement, that where the transferor is required to repatriate all dues before disinvestment, the requirement does not apply to dues that do not arise on account of investment in equity or debt, like export receivables.
Sub-rule (5): a permitted start
"The holding of any investment or transfer thereof in any manner shall not be permitted if the initial investment was not permitted under the Act." A transfer cannot cure an investment that was not allowed in the first place.
Reporting and the late submission fee
Reporting a disinvestment is under regulation 10 of the Regulations; see our article on Form FC for disinvestment and OPI under regulation 10. Late reporting is dealt with in regulations 11 and 12; see late submission fee and bar on further commitment. No fee amount is stated here. Tax on gains from the sale is for our income-tax guides.
A worked example
Winslow Components Private Limited, an Indian company, invested in the unlisted equity of a foreign company eighteen months ago. It wants to sell its entire stake to a non-resident buyer. Rule 16 requires the price to be arrived at on an arm's length basis, and its AD bank will check this. Under rule 17(4)(i), as a full disinvestment other than by liquidation, Winslow must have no dues outstanding that it is entitled to receive from the foreign entity as an investor in equity and debt, such as an unpaid loan. The one-year condition in clause (ii) is met because eighteen months have passed. If the sale were instead a merger of two foreign companies wholly owned by Winslow, the proviso would lift both conditions. The names are invented.
Need help with disinvestment and reporting?
A sale of overseas equity needs the price evidence, the clearance of dues and the report filed in the right order. Our APR and ODI filing team can check the conditions in rule 17(4) before the transfer and handle the filing after.
Key takeaways
- Equity capital of a foreign entity must be issued or transferred at an arm's length price; the AD bank checks it.
- Sale may be to an eligible resident or to a non-resident (rule 17(2)).
- Merger, demerger, amalgamation, buyback and liquidation need competent-authority approval under Indian or host-country law.
- ODI disinvestment: one year of holding; no dues outstanding on a full exit other than by liquidation; relief for mergers of wholly owned foreign entities.
- An investment not permitted at the start cannot be held or transferred (rule 17(5)).
Read next
- No-objection certificate: rule 10
- Restructuring of a loss-making foreign entity: rule 18
- Manner of making ODI by an Indian entity: Schedule I
- 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.