Rule 18 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 18 of the Foreign Exchange Management (Overseas Investment) Rules, 2022 lets a person resident in India who has made overseas direct investment (ODI) allow the foreign entity to restructure its balance sheet when it has been making losses. The rule caps how much the Indian investor's outstanding dues can be reduced, and adds a valuer's or accountant's certificate for larger cases. This article reads the rule, its two provisos and the definition of "last audited balance sheet".
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. When a restructuring leads to a write-off or a change in the investor's position, the filing follows; our annual performance report filing for ODI service covers the annual and event-based filings.
A person resident in India who has made ODI in a foreign entity that has been incurring losses for the previous two years, as shown by its last audited balance sheets, may permit restructuring of the balance sheet, if reporting and documentation requirements are met and the diminution in the total value of the outstanding dues (equity and debt) does not exceed the proportionate amount of the accumulated losses. Where the original investment is more than USD 10 million, or the diminution exceeds twenty per cent of the total outstanding dues, it must be certified at arm's length by a registered valuer or equivalent. The certificate must be dated not more than six months before the transaction.
The rule in its parts
Rule 18, as notified, says a person resident in India who has made ODI in a foreign entity "may permit restructuring of the balance sheet by such foreign entity, which has been incurring losses for the previous two years as evidenced by its last audited balance sheets, subject to ensuring compliance with reporting, documentation requirements and subject to the diminution in the total value of the outstanding dues towards such person resident in India on account of investment in equity and debt, after such restructuring not exceeding the proportionate amount of the accumulated losses".
| Element | What the text requires |
|---|---|
| Who | A person resident in India that has made ODI in the foreign entity |
| Entity condition | The foreign entity has been incurring losses for the previous two years, as evidenced by its last audited balance sheets |
| Compliance | Reporting and documentation requirements |
| Cap | The diminution in the total value of outstanding dues (investment in equity and debt) after restructuring must not exceed the proportionate amount of the accumulated losses |
"Last audited balance sheet" has its own definition in rule 2(1)(l): an audited balance sheet as on a date not exceeding eighteen months preceding the date of the transaction. The rule speaks of "balance sheets" in the plural, to evidence two years of losses. The Rules do not define the "proportionate amount" beyond that phrase; the Reserve Bank's Master Direction supplies a method, noted below.
First proviso: the certificate threshold
Where the diminution is such that either of two things is true:
- the corresponding original investment is more than USD 10 million; or
- the diminution exceeds twenty per cent of the total value of the outstanding dues towards the Indian entity or investor,
the diminution in value must be "duly certified on an arm's length basis by a registered valuer as per the Companies Act, 2013 or corresponding valuer registered with the regulatory authority or certified public accountant in the host jurisdiction". For the Companies Act valuer see our article on section 247 of the Companies Act, 2013 on registered valuers.
Second proviso: freshness of the certificate
The certificate dated not more than six months before the date of the transaction shall be submitted to the designated AD bank.
What the Master Direction adds
The Master Direction - Overseas Investment, updated as on April 01, 2026, restates rule 18 for banks in paragraph 14. These are the Reserve Bank's statements to banks and not text of the Rules:
- The aggregate investment in both the equity and debt of the foreign entity is taken into consideration for computing the proportionate amount of accumulated losses. If the restructuring involves only equity, investment only in the equity of the foreign entity may be taken into consideration.
- The certificate required under rule 18 shall mention: the amount of accumulated losses as per the audited balance sheet of the foreign entity; the proportionate amount of accumulated losses based on the share of the Indian entity or investor; the amount of diminution in the value of the outstanding dues towards the Indian entity or investor after the restructuring; and that the diminution does not exceed the proportionate amount of accumulated losses.
- The provisions shall not be used where assets are simply revalued in the books of the Indian entity without any restructuring of the balance sheet of the foreign entity.
Reading the two thresholds together
The two thresholds in the first proviso are alternatives. The proviso uses "or": the certificate is required if the original investment is more than USD 10 million, or if the diminution exceeds twenty per cent of the total outstanding dues. A small investment with a large proportionate reduction therefore still needs the certificate, and a large investment with a small reduction needs it too, on the plain words of the proviso.
| Case | Certificate under the first proviso? |
|---|---|
| Original investment above USD 10 million | Yes |
| Diminution above twenty per cent of total outstanding dues | Yes |
| Neither threshold crossed | The proviso does not require it; the Master Direction states what the certificate should contain wherever rule 18 requires one |
How rule 18 fits with disinvestment
A restructuring that reduces the Indian investor's dues is not a disinvestment in the sense of rule 17, but both rules turn on the investor's equity and debt. The conditions for sale, including the one-year hold and the clearance of dues, are in our article on pricing, transfer and liquidation under rules 16 and 17. The investor's financial commitment, which includes debt, is explained in our article on ODI, OPI, financial commitment and control.
A worked example
Pennant Tooling Private Limited, an Indian company, holds equity and debt in a foreign subsidiary. The subsidiary's last two audited balance sheets show losses. Pennant's proportionate share of the accumulated losses comes to 40, its total outstanding dues are 100, and the restructuring would reduce those dues by 35. The diminution does not exceed the proportionate accumulated losses, so the cap is met. Because 35 is more than twenty per cent of the total outstanding dues, the diminution must be certified on an arm's length basis by a registered valuer, and the certificate, dated within six months before the transaction, goes to Pennant's designated AD bank. The figures are invented and carry no unit; the names are invented too.
Need help with a restructuring of a foreign subsidiary?
The certificate content, the two-year loss evidence and the filings after the restructuring have to match each other. Our APR and ODI filing team can check the numbers against rule 18 and the Master Direction before the restructuring is recorded.
Key takeaways
- Rule 18 applies to ODI in a foreign entity that has incurred losses for the previous two years, shown by its last audited balance sheets.
- The diminution in outstanding dues (equity and debt) must not exceed the proportionate amount of accumulated losses.
- A valuer's or equivalent certificate is needed if the original investment exceeds USD 10 million or the diminution exceeds twenty per cent of outstanding dues.
- The certificate must be dated not more than six months before the transaction and submitted to the designated AD bank.
- Simple revaluation in the Indian entity's books is not restructuring (Master Direction).
Read next
- Pricing, transfer and liquidation: rules 16 and 17
- Restrictions on real estate, startups and layers: rule 19
- Financial commitment limit: Schedule I, paragraph 3
- Annual performance report and FLA return: regulation 10
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.