Setting Up Business Outside India — Complete Guide for Indian Companies
Indian companies and individuals seeking to establish business operations overseas must comply with the Foreign Exchange Management (Overseas Investment) Rules 2022 and the Foreign Exchange Management (Overseas Investment) Regulations 2022, which replaced the erstwhile FEMA (Transfer or Issue of Any Foreign Security) Regulations 2004 effective 22 August 2022. The new framework significantly liberalised and simplified the Overseas Direct Investment (ODI) regime, providing Indian entities greater flexibility to invest abroad while maintaining regulatory oversight.
What Constitutes Overseas Investment
Under the 2022 framework, overseas investment by Indian entities is categorised into: Overseas Direct Investment (ODI) — acquisition of unlisted equity capital of a foreign entity, representing at least 10 per cent of the paid-up capital, or investment in a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) abroad. Overseas Portfolio Investment (OPI) — investment in listed foreign securities or less than 10 per cent of unlisted equity. Financial Commitment (FC) — includes equity investment, loan, and guarantee issued to a foreign entity.
Who Can Make Overseas Investment
An Indian entity (company incorporated under the Companies Act 2013 or an LLP registered under the LLP Act 2008 or a partnership firm registered under the Indian Partnership Act 1932 or a body created under an Act of Parliament) can make ODI under the automatic route without prior RBI approval. Resident individuals can also make ODI under the Liberalised Remittance Scheme (LRS) — up to USD 250,000 per financial year for permissible current and capital account transactions.
Automatic Route — No Prior RBI Approval
Under the automatic route, Indian entities can invest overseas subject to: total financial commitment (equity + loan + guarantee) not exceeding 400 per cent of the net worth of the Indian entity as per the last audited balance sheet. For listed Indian companies, this can be enhanced if the investment is funded by ADR/GDR proceeds. Investment must be in a bona fide business activity abroad. The foreign entity must not be engaged in real estate, banking, or financial services in a jurisdiction that is a member of FATF or a jurisdiction with which India has an agreement for exchange of tax information.
Regulatory Process
Step 1 — Board Approval: The board of directors of the Indian entity must pass a resolution approving the overseas investment, specifying the amount, purpose, country, and nature of the foreign entity.
Step 2 — Valuation: For investment in an existing foreign entity, valuation must be conducted by a Category I Merchant Banker registered with SEBI or by an investment banker or merchant banker registered with the appropriate regulatory authority in the host country.
Step 3 — AD Bank Filing: File Form ODI (Overseas Direct Investment) with the designated Authorised Dealer Category-I Bank. The AD Bank examines the application for compliance with FEMA regulations and ODI limits. No prior RBI approval is needed under the automatic route — the AD Bank is authorised to process the transaction.
Step 4 — Remittance: Upon approval by the AD Bank, remit the investment amount through banking channels. All remittances must be through the AD Bank.
Step 5 — Annual Compliance: File Annual Performance Report (APR) for the foreign entity through the AD Bank. File Annual Return on Foreign Liabilities and Assets (FLA) with the RBI by 15 July each year. Report any change in the overseas investment (additional investment, disinvestment, change in shareholding, winding up) through the AD Bank.
Issues in Choosing Location for Overseas Business
Key factors include: tax regime and DTAA availability (India has DTAAs with 95+ countries — choosing a treaty jurisdiction can significantly reduce effective tax rate on repatriated profits), ease of doing business ranking (World Bank/IFC rankings provide useful benchmarks), regulatory environment and political stability, currency convertibility and exchange controls, availability of skilled labour and market access, bilateral investment treaties (BITs) for investment protection, and compliance with FATF requirements (FEMA prohibits ODI in non-FATF jurisdictions for financial services). Popular jurisdictions for Indian ODI include Singapore (tax efficiency, DTAA, Asian market access), UAE/Dubai (CEPA agreement, no income tax, Middle East/Africa gateway), USA (largest market, well-developed legal system), UK (historical ties, skilled labour, European access), and Netherlands (EU gateway, favourable holding company regime).
Tax Implications
Income earned by the overseas entity is not taxable in India — it is taxed in the host country under local tax laws. However, dividends, interest, and capital gains repatriated to India are taxable in the hands of the Indian entity under the Income Tax Act 2025 (corresponding provisions under IT Act 1961). DTAA relief is available — the Indian entity can claim credit for taxes paid in the host country against Indian tax liability under Section 90/91. Transfer pricing provisions (Section 92) apply to all international transactions between the Indian entity and its overseas JV/WOS. The Indian entity must maintain transfer pricing documentation and file Form 3CEB with the Income Tax Return.
Latest Updates (2024-2026)
The FEMA (ODI) Rules and Regulations 2022 have been operational for over 3 years and are now well-established. The RBI clarified (circular dated June 2024) that crypto/digital asset investments abroad are not permitted under the ODI framework. The government's Production Linked Incentive (PLI) schemes have indirectly boosted ODI as Indian manufacturers seek overseas distribution and marketing subsidiaries. India's outward FDI reached approximately USD 16 billion in FY 2024-25, reflecting the growing internationalisation of Indian businesses.
Disclaimer: This article is for informational purposes only and does not constitute legal or professional advice. Please consult a qualified CA/CS for advice specific to your situation.