Rule 19 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 19 of the Foreign Exchange Management (Overseas Investment) Rules, 2022 draws three lines. Overseas direct investment (ODI) may not go into a foreign entity engaged in real estate activity, gambling or rupee-linked financial products without Reserve Bank approval. ODI in startups abroad has to be funded from internal accruals or an individual's own funds. And a financial commitment may not be made in a foreign entity that has invested into India if that results in a structure with more than two layers of subsidiaries. This article reads all three sub-rules.
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. To check whether a proposed foreign structure falls foul of rule 19, our FEMA advisory service can review the chart.
"Unless otherwise provided in the Act or these rules", no person resident in India shall make ODI in a foreign entity engaged in real estate activity, gambling in any form, or financial products linked to the Indian rupee without specific Reserve Bank approval. ODI in start-ups recognised under the law of the host country must be funded from internal accruals (or, for a resident individual, own funds). No financial commitment may be made in a foreign entity that has invested or invests into India, directly or indirectly, resulting in more than two layers of subsidiaries, except for the four classes of company named in the proviso.
Sub-rule (1): the three barred activities
| Clause | Barred activity |
|---|---|
| (a) | Real estate activity |
| (b) | Gambling in any form |
| (c) | Dealing with financial products linked to the Indian rupee without specific approval of the Reserve Bank |
The Explanation says "real estate activity" means buying and selling of real estate or trading in Transferable Development Rights, but does not include the development of townships, construction of residential or commercial premises, roads or bridges for selling or leasing. Clause (c) is the only item that can be unlocked by an approval; clauses (a) and (b) have no approval wording in the sub-rule beyond the opening words "Unless otherwise provided in the Act or these rules".
The Master Direction - Overseas Investment, updated as on April 01, 2026, says in its paragraph 20(1), as its own direction to banks, that an AD bank shall not facilitate any transaction in respect of a foreign entity engaged in a rule 19(1) activity or located in countries or jurisdictions advised by the Central Government under rule 9(2). It clarifies that financial products linked to the Indian rupee include non-deliverable trades involving foreign currency-INR exchange rates, stock indices linked to the Indian market, and similar. The Rules do not print that clarification. Rule 9(2) is explained in our article on bona fide business activity and approval powers.
Sub-rule (2): startups
Rule 19(2) says any ODI in start-ups recognised under the laws of the host country or host jurisdiction, as the case may be, "shall be made by an Indian entity only from the internal accruals whether from the Indian entity or group or associate companies in India and in case of resident individuals, from own funds of such an individual".
| Investor | Source allowed |
|---|---|
| Indian entity | Internal accruals of the Indian entity, or of group or associate companies in India |
| Resident individual | Own funds of the individual |
The Master Direction (paragraph 9) adds, as its own direction, that ODI in startups under rule 19(2) shall not be made out of funds borrowed from others, and that the AD bank shall obtain a certificate to this effect from the statutory auditors or chartered accountant of the Indian entity or investor. The Rules do not print the certificate requirement. "Strategic sector" in rule 2(1)(z) lists "start-ups" among the strategic sectors, which affects the limited-liability condition for the foreign entity; see our article on Indian entity, net worth and strategic sector.
Sub-rule (3): more than two layers
Rule 19(3) says no person resident in India shall make a financial commitment in a foreign entity that has invested or invests into India, "at the time of making such financial commitment or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries".
The proviso lifts the restriction for classes of companies mentioned in sub-rule (2) of rule 2 of the Companies (Restriction on Number of Layers) Rules, 2017, as may be amended from time to time:
- a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;
- a non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934, which is registered with the Reserve Bank and considered a systematically important non-banking financial company by it;
- an insurance company carrying on insurance business under the Insurance Act, 1938 and the Insurance Regulatory and Development Authority Act, 1999; and
- a Government company referred to in clause (45) of section 2 of the Companies Act, 2013.
Those statutes are named as printed and nothing is explained about them here. The Companies (Restriction on Number of Layers) Rules, 2017 are named only.
The rule applies only to a foreign entity that "has invested or invests into India". A foreign structure with no investment into India is outside sub-rule (3). The "subsidiary" for this purpose is rule 2(1)(y): an entity in which the foreign entity has control, and "control" is defined in rule 2(1)(c) with the ten per cent voting rights language; see our article on the headline definitions. The Master Direction adds in paragraph 20(2), as the Reserve Bank's direction, that no further layer of subsidiary shall be added to any structure existing with two or more layers of subsidiaries after the notification of the Rules and Regulations, and in a Note that "subsidiary" has the Rules' meaning, "which includes a stake of 10% or more in an entity as per the OI Rules".
Further reading
For commentary on structures and history, see our note on round-tripping structures under rule 19 and historical externalisation. Our older guide on round-tripping restrictions in ODI is also on the site.
A worked example
Brindle Engineering Private Limited, an Indian company, holds a foreign entity A that has invested into an Indian company. A has subsidiary B, and B has subsidiary C. That is two layers beneath A. If Brindle proposes a financial commitment that would put a subsidiary D under C, the structure has three layers, and rule 19(3) bars the financial commitment unless Brindle falls within the proviso, for example as a banking company. In a separate project, Brindle puts money into a startup abroad funded by a bank loan; rule 19(2) requires internal accruals, so the loan cannot fund it. The names are invented.
Need help with a foreign structure?
Layers, control and funding sources are the three questions that turn a draft chart into a rule 19 problem. Our FEMA advisory team can test a group chart against rule 19 and the Master Direction before money moves.
Key takeaways
- ODI is barred in real estate activity, gambling in any form, and rupee-linked financial products without specific Reserve Bank approval.
- "Real estate activity" excludes development of townships and construction of premises, roads or bridges for selling or leasing.
- Startup ODI is funded from internal accruals or an individual's own funds.
- No financial commitment resulting in more than two layers of subsidiaries in a foreign entity that has invested into India; four named classes of company are exempt.
- The Master Direction adds no-further-layer and certificate directions that the Rules do not print.
Read next
- Bona fide business activity and approval powers: rules 7 and 9
- Restructuring of a loss-making foreign entity: rule 18
- Immovable property outside India: rule 21
- Setting up a subsidiary abroad: Indian company guide
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.