Schedule III 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.
Paragraphs 2 and 3 of Schedule III to the Foreign Exchange Management (Overseas Investment) Rules, 2022 deal with two situations that do not involve buying shares in the ordinary way. A resident individual may receive foreign securities by inheritance or by gift, and a resident employee or director of an Indian arm of an overseas entity may receive shares or interest under an employee stock ownership plan, an employee benefits scheme or as sweat equity. This article reads both paragraphs, the definition of sweat equity shares in rule 2(1)(za) and the Master Direction's related directions.
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 advice on employee plans of a foreign parent or on a foreign inheritance, our FEMA advisory service can help.
A resident individual may acquire foreign securities without any limit by inheritance from a resident holding them lawfully or from a person resident outside India, and by gift from a resident relative holding them lawfully. A gift from a person resident outside India must follow the Foreign Contribution (Regulation) Act, 2010 and its rules and regulations. An employee or director of an Indian office, branch or subsidiary of an overseas entity may acquire shares or interest under an ESOP, employee benefits scheme or sweat equity offered by that overseas entity, without limit, if the offer is made globally on a uniform basis.
Paragraph 2: acquisition by gift or inheritance
| Sub-paragraph | Source | Terms as printed |
|---|---|---|
| (1) Inheritance | A person resident in India who holds the securities in accordance with the Act, or a person resident outside India | The resident individual may acquire foreign securities "without any limit" |
| (2) Gift from a resident | A person resident in India who is a relative and holds the securities in accordance with the Act | The resident individual, "without any limit", may acquire foreign securities |
| (3) Gift from a non-resident | A person resident outside India | In accordance with the Foreign Contribution (Regulation) Act, 2010 and the rules and regulations made under it |
"Relative" has the meaning in clause (77) of section 2 of the Companies Act, 2013 (rule 2(1)(t)). The Foreign Contribution (Regulation) Act, 2010 is named as printed and nothing is explained about it here.
Two points from the words:
- In sub-paragraph (2) the donor must be a resident in India who is a relative and who holds the securities in accordance with the Act. A gift from a resident who is not a relative is not covered by this sub-paragraph.
- Sub-paragraph (1) covers inheritance from either a resident or a non-resident; sub-paragraph (3) covers only gifts from a non-resident, and only in accordance with the 2010 Act.
The Master Direction - Overseas Investment, updated as on April 01, 2026, adds in paragraph 22(4), as its own direction, that resident individuals are not permitted to transfer any overseas investment by way of gift to a person resident outside India. Its paragraph 17(4) adds that acquisition of foreign securities by inheritance or gift under paragraph 2 of Schedule III is not reckoned towards the Liberalised Remittance Scheme limit and need not be reported under the Scheme. The Rules do not print either point. The Rules' classification of such acquisitions as ODI or OPI follows from paragraph 1(2)(iii)(d) and (e), explained in our article on overseas investment by resident individuals: Schedule III, paragraph 1.
Paragraph 3: ESOP, employee benefits and sweat equity
Sub-paragraph (1)
A resident individual who is an employee or a director of:
- an office in India or branch of an overseas entity; or
- a subsidiary in India of an overseas entity; or
- an Indian entity in which the overseas entity has direct or indirect equity holding,
"may acquire, without limit, shares or interest under Employee Stock Ownership Plan or Employee Benefits Scheme or sweat equity shares offered by such overseas entity", provided that the issue of the plan or scheme is "offered by the issuing overseas entity globally on a uniform basis".
The Explanation gives two definitions for this paragraph:
| Term | Meaning as printed |
|---|---|
| Indirect equity holding | Indirect foreign equity holding through a special purpose vehicle or step down subsidiary |
| Employee Benefit Scheme | Any compensation or incentive given to the directors or employees of any entity which gives such directors or employees ownership interest in an overseas entity through ESOP or any similar scheme |
Rule 2(1)(za) defines "sweat equity shares" as equity shares issued by an overseas entity to its directors or employees at a discount or for consideration other than cash, for providing their know-how or making available rights like intellectual property rights or value additions, by whatever name called.
Sub-paragraph (2)
"Notwithstanding anything contained in these rules, a resident individual may acquire Employee Stock Ownership Plans under any scheme of the Central Government." The Rules do not name any scheme.
The Master Direction on employee plans
The Master Direction's paragraph 22 adds these directions to banks, which are not text of the Rules:
- Paragraph 22(5): AD banks may allow remittances to acquire shares or interest in an overseas entity under the scheme offered directly by the issuing entity or indirectly through a special purpose vehicle or step down subsidiary. Where the investment qualifies as OPI, the employer reports in Form OPI under regulation 10(3) of the Regulations; where it qualifies as ODI, the resident individual reports in Form FC.
- Paragraph 22(6): Foreign entities may repurchase shares issued to residents in India under an ESOP scheme if the shares were issued in accordance with the rules and regulations under FEMA, the shares are repurchased in terms of the initial offer document, and necessary reporting is done through the AD bank.
- Paragraph 22(7): Though there is no limit on the amount of remittance towards acquiring shares or interest under an ESOP or Employee Benefits Scheme or sweat equity shares, such remittances shall be reckoned towards the Liberalised Remittance Scheme limit of the person concerned.
The Rules say "without limit" for these acquisitions; the Master Direction's third point ties remittances to the Scheme limit. The Rules do not print that link, and the Scheme's amount is not stated here. See our article on the Liberalised Remittance Scheme. For the reporting forms, see our live article on Form FC, disinvestment and OPI reporting under regulation 10. Tax on employee plan shares is covered in our income-tax guides.
A worked example
Tessa Quinn is a director of the Indian subsidiary of an overseas technology group. The group offers an employee stock ownership plan globally on a uniform basis. Paragraph 3(1) lets her acquire shares under the plan without limit. If her holding is less than ten per cent of the group's equity capital and she has no control, it is treated as OPI under the second proviso to paragraph 1(2), and the employer reports it in Form OPI. Separately, her father, a resident who holds shares of a foreign company in accordance with the Act, gifts some to her; as a relative, he can do so under paragraph 2(2). If an uncle abroad wanted to gift shares to her, paragraph 2(3) would send the gift to the Foreign Contribution (Regulation) Act, 2010. The names are invented.
Need help with foreign employee plans or inherited foreign shares?
Which form is filed, who reports and how the Scheme ceiling interacts with an employee plan are the questions that usually go unanswered until a notice. Our FEMA advisory team can map the plan or inheritance against paragraphs 2 and 3 and the Master Direction.
Key takeaways
- Inheritance of foreign securities from a resident or a non-resident is allowed without limit.
- Gift from a resident relative is allowed without limit; gift from a non-resident follows the Foreign Contribution (Regulation) Act, 2010.
- Employees and directors of Indian offices, branches and subsidiaries of an overseas entity may acquire ESOP, employee benefit scheme or sweat equity shares without limit if offered globally on a uniform basis.
- Per the Master Direction, residents cannot gift overseas investment to non-residents, and ESOP remittances count towards the Scheme limit.
- Repurchase by the foreign entity is allowed on three conditions (Master Direction).
Read next
- Overseas investment by resident individuals: Schedule III, paragraph 1
- Immovable property outside India: rule 21
- Overseas investment by resident individuals: paragraph 22 of the Master Direction
- Employee stock options (ESOPs): private companies 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.