RBI’s Foreign Exchange Management Regulations, 2021: A torchbearer for FEMA, 1999

[By Sanskriti Shrivastava

The author is a student at UPES, Dehradun. 


The Reserve Bank of India (hereinafter referred to as “RBI) has lately issued new draft rules on 9th August 2021, namely, Draft Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021 (hereinafter referred to as “Non-debt Instruments Rules) and Draft Foreign Exchange Management (Overseas Investment) Regulations, 2021 (hereinafter referred as “Overseas Investment Regulations”)[i].

These regulations are an attempt to regulate the overseas investment market and to facilitate foreign investments. Consequently,  they have been revised with an underlying view to foster ease of doing business.

The present article is an analysis of both these drafts. The article first provides an overview of the improvements/changes the non-debt Instrument Regulation and Overseas Investment Regulations try to make (1), which is followed by a critical analysis of the proposed drafts (2).

(1) Overview of the RBI Drafts:

Before critically analysing the two drafts proposed by RBI, it is pertinent to understand the issues this draft seeks to address, one by one.

(1.1) Non-debt Instrument Regulations-

The Non-debt Instrument Rules and the Overseas Investment Regulations are put forth to liberalize the existing framework concerning overseas investment and acquisition of (immovable) property by a resident of India when such property is situated outside India. The current regulations on the subject include the following two regulations, i.e.,

  • The Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, and
  • Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015.

The Non-debt Instruments Rules have put forth certain restrictions on overseas investments. In pursuance of them, a person who is a resident of India is prohibited from making Overseas Direct Investment in an entity belonging outside India that is engaged in the business of any of the following-

  • Real estate, or
  • Gambling (whatsoever form it may be), or
  • Offers financial products which are linked to Indian Rupee (an exception has been made for products offered through Indian Financial System Code)

Additionally, special restrictions have been posed over overseas investment in a foreign entity, when such entity is located in jurisdictions or countries outside the Financial Action Task Force (Financial Action Task Force stands for a list of binding standards which prevent misuse of the virtual assets concerning terrorist financing and money laundering) and the International Organization of Securities Commissions (This body is a global standard setter concerning matters of securities).

(1.2.) Overseas Investment Regulations-

Pursuant to this draft, an entity incorporated in India is allowed to lend or invest in any debt instrument which may be issued by any entity incorporated outside India, provided that, such loan or investment (whatever the case may be) is backed by clear agreement in that regard specifying the rate of interest, which must be charged on an arm’s length basis.

Critical Analysis upon the two drafts:

2.1 The Draft Rules attempt to clarify the concepts present in the existing legislature:

The existing legislation on the subject failed to define pertinent concepts and authorities which were significant in the application of the legislation. The definitions were either absent, (like, oversees direct investments) or were open-ended (like authorized dealer branches).[ii]. This can be substantiated as-

  • Previously, the “authorized dealer” includes an Authorized Dealer Category-I Bank as defined under Section 10 of the Foreign Exchange Management Act. The draft rules now clarify that t only the domestic branches of a such are included within its meaning[iii]. Meaning thereby, branches of authorized deals in IFSC are unqualified to be included within its ambit.
  • The new draft rules have made an attempt to define “control” which has far-reaching implications since it would wider the ambit of the applicability of these regulations.[iv]. The definition provides that “control” may exist where the entity or a person or a people acting in concert holds either control management, or controls policy decision, or holds the right to appoint the majority directors.
  • The rules also define “overseas direct investment” and lists certain types of investments that may be included within its ambit. As per the definition, overseas direct investment is said to include an investment made by way of acquisition of certain equity capital in a foreign entity which is not listed, or, where an entity or person subscribes to the memorandum of association of such entity, or where an Indian resident has acquired control in such foreign entity by way of his investment within it[v].
  • Doing away with the existing ambiguities with respect to the definition of “disinvestment”, the draft rules provide a much more inclusive definition and also includes transfer by way of liquidation[vi]. This inclusion will wider the interpretation of the extant ODI Regulations.
  1. Regarding rules on Prohibitions and restrictions on Investment:

  • The present rules provide for a comprehensive prohibitory clause. It includes both prohibitions on the transfer of foreign security by an Indian resident and a general clause for outbound investments, except when it is specifically allowed by law[vii].
  • The application of these rules provides that a foreign entity must change its structure within 6 months to come in compliance with the new definition.
  • Where the Indian residents are concerned, overseas investments (i.e. purchase and sale of Foreign Asset)which are made through Resident Foreign Currency account will be only be accepted within the limit prescribed under the Liberalised Remittance Scheme. Meaning thereby, all other conditions stipulated in the FEMA 120 will apply to the Indian Residents except the Liberalized Remittance Scheme (the scheme allows the residents to freely remit up to USD 2,50,000 per year for any transaction permissible by the RBI).
  • The restriction with respect to entities involved in the real estate business has remained intact in the new draft rules.
  • The restriction with respect to entities involved in the business of gambling and the entities which offer financial products linked to the Indian Rupee is newly introduced in the new draft rules[viii].
  • The draft rules provide for a more elaborative extant general permission clause for making an overseas investment:
  • The clause was not very elaborative in the existing legislature. It allowed investments to be made outside India, provided that they are done in accordance with the conditions laid down in the regulations.
  • The prior regulations had an additional carve-out for Overseas Direct Investment intended to be made in Pakistan by way of a prior-approval route. Now, the approval route has been merged into a general permission clause[ix]. Under the General Permission Clause, approval by the Central Government is required by an Indian entity before it makes an oversees investment,
  • Accordingly, under the draft rules, a general permission clause is specified subject to Bonafide business activity and the Central Government and RBI is specified as the designated authority to approve a certain route.
  • It is to be noted that bonafide business activity is never defined, neither in the draft rules nor in the prior regulation on the subject.
  • Nonetheless, these rules do not provide any operational guidelines on seeking approval from the respective authorities.
  1. The draft rules provide for an indicative list of ways through which Overseas Direct Investment can be made:

  • Para 2 of Regulation 6 indicates a list of modes through which overseas direct investment may take place[x].
  • Para 6 of the said regulation puts a limit of 400% of net worth as a limit for financial commitment an entity may make[xi]. However, it excludes the capitalization of retained earnings.
  • The previous regulation on the subject had an ambiguity with respect to the application of the given 400% limitation, i.e., whether it is to be applied annually or based on a particular transaction. This ambiguity is now cleared and this financial limitation has to be applied at the time of undertaking such financial commitment.
  • Further, the removal of percentage-based calculations has been net worth compliance much easier.
  • The regulations also provide guidance with respect to the accepted mode of payments for making such investments[xii].
  1. Requirement of “no objection certificate” has been done away within the new draft rules:

  • Before these draft rules, this threshold of seeking a no-objection certificate merely created a hurdle in the pathway of an Indian resident entity to make the overseas direct investment if such entity had its name over the RBI’s exporters caution list or was an established defaulter under the banking system.
  • The draft rules only list certain forms of banking defaults and it does not require the entity to obtain a “no objection certificate”[xiii].
  • Unlike previously, the party is not empowered to choose or not choose whether it should disclose its default, rather the agency or the relevant authority is now empowered to allow or disallow the applicant to undertake overseas direct investment.


It must be acknowledged that RBI has taken a proactive step to seek public comments upon its draft to ensure the purpose behind these draft regulations (i.e., to liberalize the ease of doing business) is truly achieved. Further, the draft regulations have significantly tried to resolve the ambiguities present in the prior legislation by clarifying multiple concepts like “control”, “step down subsidiary”, “relative” among various other definitions. Apart from the definitions, the regulations have been elaborative to provide the modes of overseas direct investment and overseas investment. Nonetheless, the implication of adding two more restricted lines of business- gambling and trading in financial products linked to the Indian Rupee will be interesting to watch and can only be commented upon after its implementation.

[i] Foreign Exchange Management (Overseas Investment) Regulations, 2021, https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=4023;Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021https://rbidocs.rbi.org.in/rdocs/Content/PDFs/FEMRULES750E1F9F46AE48DB8ED6AE6673BC88DC.PDF

[ii] Reg. 2, Foreign Exchange Management (Overseas Investment) Regulations, 2021; Rule 2(xxx), Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021; Rule 2(xxvi), Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021; Rule 2(xxv), Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021.

[iii] Rule 2(ii), Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021.

[iv] Rule 2(iii),Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021

[v] Rule 2(xvii), Foreign Exchange Management (Overseas Investment) Regulations, 2021.

[vi] Rule 2(iv), Foreign Exchange Management (Overseas Investment) Regulations, 2021.

[vii] Rule 3, Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021

[viii] Rule 6(1), Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021.

[ix] Rule 4, Foreign Exchange Management (Overseas Investment) Regulations, 2021.

[x] Paragraph 2, Schedule 1, Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021.

[xi] Paragraph 6, Schedule 1, Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021.

[xii] Reg. 5, Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021.

[xiii] Rule 4, Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021.


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