Key Regulatory Pitfalls Observed While Undertaking Overseas Investments

Introduction

Ease of global mobility has given rise to a manifold increase in foreign exchange transactions across the globe, in both frequency and amount. India is a key participant in this process. From an Indian perspective, foreign exchange transactions generally involve the receipt of export proceeds and payment of import obligations, overseas remittances for travel, education, health and family maintenance, investments made from India in foreign jurisdictions, investments made by foreigners in India, and so on. With the significant increase in foreign transactions, users of foreign exchange often fail to comply with the principal statute governing such transactions, the Foreign Exchange Management Act, 1999 (FEMA).

Non-adherence to the regulatory and reporting requirements of FEMA has serious ramifications, with a maximum penalty of 3 times the amount involved in the foreign exchange transaction under Section 13 of FEMA. This penalty may also be levied at 3 times the market value of the transaction, regardless of the real value of the transaction from the user's perspective. Levying a penalty is, however, a subjective matter decided case by case, either by the Reserve Bank of India ("RBI") or the Directorate of Enforcement ("ED").

This article deliberates on the key pitfalls, or common mistakes, made by Persons Resident in India ("PRI") while making investments abroad. It aims to explain simply what mistakes PRIs make by ignoring the provisions of the Foreign Exchange Management (Overseas Investment) Rules, 2022 ("OI Rules 2022") and the Foreign Exchange Management (Overseas Investment) Regulations, 2022 ("OI Regulations 2022") while undertaking Overseas Investment ("OI").

Among the many subjects administered under FEMA, OI was selected given the rapid increase in foreign remittances made by PRIs under the Liberalised Remittance Scheme¹ ("LRS") of the RBI. Outbound investment transactions increased 67.74% to USD 41.6 billion in FY 2024-25 (against USD 24.8 billion in FY 2023-24), as reported by EY in its press release dated 21 August 2025. As reported by The Policy Edge, outbound investment has outpaced Foreign Direct Investment ("FDI") into India: investment abroad by Indian entities grew 17.9%, compared with FDI growth of 11.1% in FY 2024-25.

Important definitions

Before coming to the subject matter, the following terms are relevant to the discussion that follows.

Control

Control is said to exist if any one of the following parameters is fulfilled:

• Right to control the majority of the board of directors or management
• Right to control policy decisions by virtue of shareholding
• Holding 10% or more of the voting rights in the overseas entity

Equity Capital

Equity shares or other instruments that shall compulsorily be converted into equity shares at a later stage. It also includes instruments which are irredeemable in nature, or non-debt capital that is fully and compulsorily convertible.

Overseas Direct Investment (ODI)

ODI means:

• Acquisition of shares of an unlisted foreign entity; or
• Acquisition of shares of a listed foreign entity² of 10% or more of its paid-up capital; or
• Acquisition of shares of a foreign entity as a subscription to its memorandum; or
• Acquisition of shares of a listed foreign entity of less than 10% of its paid-up capital, but with control; or
• Acquisition of shares of an entity incorporated in GIFT City (under the IFSCA³)

Overseas Portfolio Investment (OPI)

OPI means investment in foreign securities other than ODI. This primarily refers to investments in listed foreign entities with no control and below 10% of the paid-up capital of the entity. OPI does not include investment in debt instruments of unlisted foreign entities.

Relative

Relative is to be construed as defined under Section 2(77) of the Companies Act, 2013.

Person Resident in India

Under Section 2(v) of FEMA, an individual is a PRI if he or she has stayed in India for more than 182 days in the preceding financial year. However, the 182-day rule has no significance, and an individual is still considered resident, if he or she comes to India in the current financial year:

• To carry on any business or vocation in India (even if the stay was 182 days or less in the preceding financial year); or
• To take up employment in India (even if the stay was 182 days or less in the preceding financial year); or
• For an uncertain period, where the outward journey from India cannot be determined

Equally, even if a person has stayed in India for more than 182 days in the preceding financial year, he or she is not a PRI if any one of the following applies:

• Has left India to carry on any business or vocation outside India
• Has left India for, or on, taking up employment outside India
• Has left India and the stay outside India is uncertain, with the date of return not determinable

Section 2(v) of FEMA also defines residential status for persons other than individuals. For a person to rely on the above exceptions (other than the 182-day rule), he or she must have substantial documents or information supporting them; otherwise the exceptions cannot be used to determine residential status.

The SAFEMA Tribunal recently pronounced a controversial judgement in the case of Pradeep Mishra⁴, holding that the 182-day rule is the principal test for determining whether a person is resident or non-resident, and that the exceptions are ancillary to it. The ruling has not been well received among stakeholders and requires judicious review, since it defeats the very purpose of the exceptions in Section 2(v) of FEMA. One must therefore still give equal importance to the business or vocation, employment and uncertain-period exceptions, which are the heart and soul of the provision.

People generally believe that residential status under FEMA and under the Income-tax Act, 2025 is determined in the same way. As the definition above shows, the two statutes differ substantially, and this is why residential status under FEMA is considered principle-based rather than rule-based.

Host Country

The country where OI is made or proposed to be made.

Key pitfalls and common mistakes

PRIs tend to make a range of mistakes while making OI, from regulatory lapses to reporting lapses. The most common are set out below.

1. Not applying for UIN and not filing Form FC

A PRI wishing to undertake ODI must first obtain a Unique Identification Number ("UIN") from the RBI through his Authorised Dealer Bank ("AD Bank"), under Regulation 9 of the OI Regulations 2022. Every ODI has a unique registration number which helps the RBI and the AD Bank identify the details of the ODI. Yet PRIs invest in entities outside India without considering this and, to expedite the transaction, often misguide bankers on RBI purpose codes as well.

While filing Form FC and generating the UIN takes time, not filing has serious ramifications: the RBI or ED can direct the PRI to wind up the transaction, bring the amount back to India and pay hefty penalties, which could reach 3 times the amount involved.

2. Investing in a non-operating or inactive entity

Under the OI Rules 2022, a PRI may make ODI only in an operating entity engaged in bona fide business. "Operating" is not defined in the OI Rules 2022 or the OI Regulations 2022, but from an Indian standpoint it is to be construed as an entity carrying on regular business that is not dormant or a shell. The entity should be in active business that is lawful in both India and the host country, and should not have been formed solely to hold investments or move capital across jurisdictions.

It is commonly noticed that people invest in an entity outside India for the purpose of making investments across other jurisdictions. Such structures are not permissible under FEMA and should be avoided. If one wants to invest in an entity doing bona fide business, one can invest in it directly instead of routing the money through an investment arm.

FEMA does not restrict a foreign entity from making further foreign investments. However, if the sole activity of the foreign entity is to invest in other entities, that is not allowed. If the first line of investment (the foreign entity) is also engaged in active, lawful and bona fide business, its investment in another entity is not restricted, subject to Rule 9 and Schedule III of the OI Rules 2022.

Recently, the ED's Bangalore Zonal Office conducted a search in the case of WinZO Private Limited⁵ for alleged ODIs in real-money gaming or gambling businesses that were not bona fide in nature. Additionally, WinZO's foreign entities were controlled from India and had no regular employees or independent establishments abroad to carry out their operations.

3. Investment through multiple layers of entities

Under Schedule III of the OI Rules 2022, a PRI (individual) cannot invest in a foreign entity which already has a subsidiary or step-down subsidiary where the PRI would assume control of the foreign entity after the investment. Likewise, if ODI has been made in an overseas entity with control, that overseas entity cannot invest further in other foreign entities in a way that makes them its subsidiaries or step-down subsidiaries. PRIs often overlook this and continue to control foreign entities that go on to invest in another foreign entity, which in turn becomes a subsidiary or step-down subsidiary.

By contrast, an investor other than an individual is allowed to invest in a foreign entity (on a control basis) which then invests in another foreign entity, creating a subsidiary or step-down subsidiary. The principle remains the same: all such foreign entities must be operating entities engaged in bona fide business.

4. Investment out of borrowed funds

The OI Rules 2022 and OI Regulations 2022 do not specifically state that OI cannot be made out of borrowed funds. However, the RBI's instructions to AD Banks for OI and LRS explicitly require AD Banks to ensure that OI investments and LRS remittances are made out of the remitter's own funds only. For ODI in foreign start-ups, Rule 19 of the OI Rules 2022 states explicitly that Indian entities must invest out of internal accruals and PRIs out of their own funds.

It is generally observed that Indian investors unaware of the law take loans from foreign banks, relatives or friends and use the proceeds for ODI. PRIs visiting the host country also swipe their credit cards to make investments outside India, which is not allowed under FEMA. Investment proceeds must go through banking channels after obtaining the UIN and filing Form FC (for ODI).

5. Application of sale proceeds of ODI and OPI

Under Regulation 9 of the OI Regulations 2022, sale proceeds of ODI must be repatriated to India within 90 days of receipt; otherwise it is a violation of FEMA. Under Schedule III of the OI Rules 2022, sale proceeds of OPI need not be repatriated if the PRI intends to reinvest them in another OPI. However, if the accumulated OPI sale proceeds are not reinvested in OPI, they must be repatriated to India within 180 days⁶ of receipt.

PRIs tend to apply these sale proceeds without repatriating them, in avenues where reinvestment without repatriation is not allowed under the OI Rules 2022: new ODIs, purchase of immovable property, payment of education fees of family members, cryptocurrencies and so on. The lawful approach is to repatriate the sale proceeds to India within the prescribed timelines and then remit them again under LRS for the desired purpose, except where OPI sale proceeds are reinvested in OPI.

6. ODI made on a deferred payment basis

Regulation 7 of the OI Regulations 2022 allows PRIs to make ODI on a deferred payment basis, subject to a deferred ODI agreement that explicitly sets out the timelines for future remittances. As remittances progress, the financial commitment⁷ converts from non-fund-based to fund-based. For various reasons, PRIs often fail to complete all remittances before the last date under the agreement, which is a violation of FEMA.

This violation can be made good only through compounding before the RBI or ED under Section 15 of FEMA (as the case may be); Late Submission Fees ("LSF") are of no use here. A PRI making ODI on a deferred payment basis must be sure that he can honour the commitment within the agreed time frame. Otherwise there can be serious consequences, including penalties and even an order to wind up the transaction and bring earlier remittances back to India. Regularisation is at the RBI's discretion: with the RBI's prior permission, remittances for ODI can still be made if it is satisfied that the delay was genuine.

7. Purchase of immovable property outside India

Many investors prefer to invest in immovable property outside India. Jurisdictions such as Portugal, the UAE, Greece and Malta grant residency to foreign nationals who invest in their real estate. PRIs who wish to live outside India use such schemes and buy property abroad. While doing so, they often make mistakes such as taking loans from foreign banks or from family and friends in India. There is no explicit bar under FEMA on investing through such schemes, but if a transaction lacks a bona fide intention to invest, the AD Bank and the RBI may not allow it.

Since real estate⁸ is a restricted area of investment under FEMA (whether OI or FDI), PRIs keen to invest in foreign markets sometimes give wrong purpose codes to their AD Banks when remitting money for the purchase of property. Many send the money under LRS to acquaintances, such as family members or friends living abroad, and then instruct them to transfer it to the developer or seller. This is unacceptable and a serious violation of FEMA. The ED has carried out search operations in India to unearth property deals abroad made in violation of FEMA, for example:

• ED Press Release, 19 March 2026: the ED's Bhopal Sub-Zonal Office searched the premises of the Rajul Group⁹ in Jabalpur for alleged FEMA violations relating to the purchase of immovable property outside India and use of the LRS limit.
• ED Press Release, 25 February 2026: the ED's Ahmedabad Zonal Office searched the premises of the Anas Group¹⁰ in Ahmedabad for alleged FEMA violations relating to the purchase of immovable property outside India.
• ED Press Release, 4 February 2026: ED Headquarters, Delhi, searched the premises of Shri Kapil Aggarwal and Smt. Sangeeta Aggarwal¹¹, who had jointly acquired 10 immovable properties in Dubai for a total consideration of AED 1,94,03,975 (approximately Rs. 34.14 crore) without any corresponding outward remittance from India through authorised banking channels.
• ED Press Release, 4 February 2026: ED Headquarters, Delhi, searched the premises of S. Bhattacharya¹², who had acquired immovable properties outside India without any corresponding outward remittance through authorised banking channels.

PRIs investing in property abroad also neglect to keep substantial documentation. Given the LRS limit of USD 250,000, it is not possible for PRIs to buy high-value property outside India (except in cases of family consolidation). A well-drafted purchase agreement between the developer or seller and the PRI should set out the terms of the investment, covering both the foreign law and FEMA. Such an agreement is very important for a PRI to substantiate the transaction before the authorities. Often the transaction is bona fide and remitted through the correct LRS channel, but a lack of documents fails to substantiate its commercials.

8. Other common lapses

• Non-filing of Form APR and Form FLA with the RBI
• Non-submission of share certificates to the AD Bank within the prescribed timelines after making ODI remittances
• Use of ODI and OPI sale proceeds to buy immovable property outside India without first repatriating them
• A PRI gifting OI to a Person Resident Outside India¹³
• Non-compliance with pricing guidelines when a PRI acquires or transfers OI from or to PRIs or non-residents
• Non-disclosure of foreign assets and foreign incomes by PRIs in Schedule FA (Foreign Assets) of their Income Tax Return ("ITR"), which has serious ramifications under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act)
• Omission by PRIs to offer foreign incomes to tax in their ITR, which also has serious ramifications under the Black Money Act
• For PRIs receiving shares of foreign companies under a stock option plan, FEMA reporting is the responsibility of the Indian company on whose payroll the employee works; reporting in the individual's ITR is the employee's responsibility

Conclusion

This discussion does not cover every aspect of OI, but addresses issues that are commonly observed and dealt with regularly. A PRI must ensure that regulatory compliances and reporting are duly adhered to while undertaking OI; otherwise the resulting violation may lead the ED or RBI to investigate further. A lack of patience among investors sometimes leads them to bypass the regulatory process, which can create serious issues later.