Rules 2 and 5 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 2 of the Foreign Exchange Management (Overseas Investment) Rules, 2022 holds more than the headline definitions of ODI and OPI. Its other clauses say who is an "Indian entity", how "net worth" and the "last audited balance sheet" are measured, what a "strategic sector" is, and what words like "relative", "trust" and "sweat equity shares" mean. Rule 5 then lists which instruments are debt and which are non-debt. This article takes those clauses and rule 5.
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, and rule 5 records that the debt and non-debt instruments are as determined by the Central Government under sub-section (7) of section 6 of the Act; see our articles on section 46 and section 6. The headline definitions are in our article on ODI, OPI, financial commitment and control. If you are checking whether an investor qualifies, our overseas direct investment reporting service can help.
An Indian entity is a company under the Companies Act, 2013, a body corporate incorporated by any law, an LLP, or a registered partnership firm. Net worth follows the Companies Act definition, with a special measure for firms and LLPs. The last audited balance sheet must be as on a date not exceeding eighteen months before the transaction. A strategic sector includes energy and natural resources such as oil, gas, coal, mineral ores, submarine cable system and start-ups, and any other sector the Central Government deems necessary. Rule 5 lists five debt instruments and nine non-debt instruments.
The defined terms in rule 2(1)
| Clause | Term | As printed (in substance) |
|---|---|---|
| (b) | AD bank | A person authorised under sub-section (1) of section 10 of the Act; for the Rules, only the domestic branches of such AD bank |
| (g) | Financial service regulator | A financial service regulator established under any law in force in India, including the Reserve Bank, SEBI, IRDAI and PFRDA (as named in the text) |
| (j) | Indian entity | (i) a company defined under the Companies Act, 2013; (ii) a body corporate incorporated by any law for the time being in force; (iii) an LLP formed and incorporated under the Limited Liability Partnership Act, 2008; and (iv) a partnership firm registered under the Indian Partnership Act, 1932 |
| (k) | IFSC | The meaning in clause (g) of section 3 of the International Financial Services Centres Authority Act, 2019 |
| (l) | Last audited balance sheet | Audited balance sheet as on a date not exceeding eighteen months preceding the date of the transaction |
| (n) | Listed Indian company | An Indian company with equity shares or any of its fully and compulsorily convertible instruments listed on a recognised stock exchange in India; "unlisted Indian company" is construed accordingly |
| (o) | Mutual fund | Any fund registered as such with SEBI |
| (p) | Net worth | The meaning in clause (57) of section 2 of the Companies Act, 2013, with an Explanation for firms and LLPs |
| (t) | Relative | The meaning in clause (77) of section 2 of the Companies Act, 2013 |
| (u) | Resident individual | A person resident in India who is a natural person |
| (v) | RFC Account | The meaning in the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015 |
| (w) | SEBI | The Securities and Exchange Board of India under section 3 of the SEBI Act, 1992 |
| (x) | Society | A society registered under the Societies Registration Act, 1860 |
| (z) | Strategic sector | Includes energy and natural resources sectors such as oil, gas, coal, mineral ores, submarine cable system and start-ups, and any other sector or sub-sector as deemed necessary by the Central Government |
| (za) | Sweat equity shares | Equity shares issued by an overseas entity to its directors or employees at a discount or for consideration other than cash, for providing know-how or making available rights like intellectual property rights or value additions, by whatever name called |
| (zb) | Trust | A trust registered under the "Indian Trust Act, 1882" |
| (zc) | Venture Capital Fund | A fund registered as such with SEBI |
Clause (zb) prints "Indian Trust Act, 1882". The text is quoted as printed; check the title of the statute against the official text.
Indian entity and the Master Direction
The Master Direction - Overseas Investment, updated as on April 01, 2026, explains in paragraph 1(iv) that the old concept of an "Indian party", where all Indian investors in a foreign entity were counted together, has been replaced by "Indian entity", where each investor is separately considered. That is the Reserve Bank's own explanation and is not in the Rules. The Rules separately provide for resident individuals (rule 13) and for residents who are neither Indian entities nor individuals (rule 14); see our article on the scope of the Rules for the map.
Net worth
Clause (p) takes "net worth" from clause (57) of section 2 of the Companies Act, 2013. Its Explanation says that for a registered partnership firm or LLP, "net worth" is the sum of the capital contribution of partners and undistributed profits of the partners after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the last audited balance sheet. The net worth measure feeds the limit on financial commitment; see our article on Schedule I, paragraph 3.
Last audited balance sheet
Clause (l) fixes the age of the balance sheet. It must be audited and "as on date not exceeding eighteen months preceding the date of the transaction". The date for comparison is the date of the transaction, not the date of the application.
Strategic sector
Clause (z) is an inclusive list. It names energy and natural resources sectors such as oil, gas, coal, mineral ores and submarine cable system, and start-ups, and then says "any other sector or sub-sector as deemed necessary by the Central Government". The Master Direction (paragraph 1(ii)) says, as its own statement, that the limited-liability condition for the foreign entity is not mandatory for strategic-sector entities, so ODI may be made in unincorporated entities there; the Rules' own provision is the proviso to clause (h), explained in our article on the headline definitions. Clause (z) names no list of sub-sectors beyond those words, and none is given here.
Rule 2(2): undefined words
Sub-rule (2) says words and expressions used but not defined in the Rules have the meanings assigned to them in the Act or the rules or regulations made under it.
Rule 5: debt instruments and non-debt instruments
Rule 5 says the following are the debt and non-debt instruments "as determined by the Central Government under sub-section (7) of section 6 of the Act".
| Group | Items |
|---|---|
| (A) Debt instruments | (i) Government bonds; (ii) corporate bonds; (iii) all tranches of securitisation structure which are not equity tranche; (iv) borrowings by firms through loans; and (v) depository receipts whose underlying securities are debt securities |
| (B) Non-debt instruments | (i) all investments in equity in incorporated entities (public, private, listed and unlisted); (ii) capital participation in Limited Liability Partnerships; (iii) all instruments of investment as recognised in the Foreign Direct Investment policy from time to time; (iv) investment in units of Alternative Investment Funds and Real Estate Investment Trusts and Infrastructure Investment Trusts; (v) investment in units of mutual funds and Exchange-Traded Fund which invest more than fifty per cent in equity; (vi) the junior-most layer (equity tranche) of securitisation structure; (vii) acquisition, sale or dealing directly in immovable property; (viii) contribution to trusts; and (ix) depository receipts issued against equity instruments |
The debt list matters because rule 2(1)(s) uses clause (A) of rule 5 to say which instruments an OPI may not include when they are unlisted. The non-debt list is the same set as in the Non-debt Instruments Rules, 2019; see our article on equity instruments, convertible notes and units defined. "The Foreign Direct Investment policy" is issued by the Department for Promotion of Industry and Internal Trade, and the policy itself is not in the texts consulted.
A worked example
Tobin & Hale LLP, registered under the Limited Liability Partnership Act, 2008, plans to buy shares in an unlisted foreign entity. It is an Indian entity under clause (j)(iii). To compute its net worth it uses the sum of the partners' capital contributions and undistributed profits, less accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the last audited balance sheet. The balance sheet it uses is as on a date seventeen months before the transaction, which is within eighteen months; one dated nineteen months back would not be. The names are invented.
Need help with eligibility under the Overseas Investment Rules?
Whether the investor is an Indian entity, which balance sheet counts and whether the foreign activity is a strategic sector are checked before the first remittance. Our overseas direct investment reporting team can review those points with you.
Key takeaways
- Indian entity: company, body corporate under any law, LLP, or registered partnership firm.
- Net worth follows the Companies Act, with a firm and LLP measure in the Explanation.
- The last audited balance sheet must be as on a date not exceeding eighteen months before the transaction.
- Strategic sector includes energy and natural resources, submarine cable system and start-ups, and any sector the Central Government deems necessary.
- Rule 5 lists five debt and nine non-debt instruments.
Read next
- ODI, OPI, financial commitment and control defined: rule 2
- Bona fide business activity and approval powers: rules 7 and 9
- Financial commitment limit: Schedule I, paragraph 3
- Overseas direct investment: 2022 rules, limits, Form FC and the APR
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.