FEMA, FDI and ODI rules for foreign money

1. The core idea#

Money crossing a border brings a second rulebook with it. For Indian startups that rulebook is the Foreign Exchange Management Act, 1999 (FEMA) and the rules under it:

• FDI (foreign direct investment): money coming into an Indian company from abroad, from a foreign VC, an angel, an accelerator or a foreign parent after a flip.
• ODI (overseas direct investment) and OPI (overseas portfolio investment): money or shares going out, when Indian residents, including founders, hold shares in a foreign company, such as a Delaware parent or a Singapore holding company.
• ECB (external commercial borrowing): debt from abroad, including venture debt and optionally convertible instruments.

The rules are mostly permissive. Most deeptech sectors allow 100% foreign investment without prior government approval. But they are procedural: instruments must be the right type, prices must meet valuation rules, money must come through the bank properly, and filings must be made within short deadlines. Errors don't usually stop a deal; they produce late fees, compounding applications and diligence delays at the next round, sometimes years later.

The US and UK have their own version of this, aimed at national security rather than currency control: CFIUS reviews foreign investment into some US businesses, and the UK's National Security and Investment Act (NSIA) requires approval before some investments in 17 sensitive sectors close. Deeptech companies sit squarely in those sectors.

Who this is for: Indian startups raising from foreign investors; founders who have flipped or plan to (4.03); Indian residents investing in or holding shares of foreign startups; US or UK startups taking money from foreign investors in sensitive technologies.

Pairs with: 4.03 (flips and reverse flips), 4.16 (export controls), 4.18 (compliance calendar) and 4.08 (cap table).

2. What the rules say now#

Inbound: FDI into an Indian company

• Route. Most sectors, including most manufacturing, software, electronics, deeptech R&D and services, allow 100% FDI under the automatic route, with no prior approval. Some sectors are capped or need government approval: defence (automatic up to 74%), space (by segment, under the 2024 liberalisation), telecom, insurance, media and a few others. Check your sector in the Consolidated FDI Policy.

• Instruments. FDI must be in equity shares, compulsorily convertible preference shares (CCPS) or compulsorily convertible debentures, or share warrants. Optionally convertible or redeemable instruments are treated as debt under the ECB rules. DPIIT-recognised startups can also issue convertible notes to non-residents: at least ₹25 lakh in a single tranche, convertible or repayable within 10 years.

• Pricing. Shares issued to a non-resident must be priced at or above fair value, determined by an internationally accepted method (usually DCF) and certified by a chartered accountant, SEBI-registered merchant banker or cost accountant. Transfers from residents to non-residents must also be at or above fair value; from non-residents to residents at or below it. Convertible instruments must fix the conversion price or formula up front, at or above fair value at the time of issue.
• Land-border countries (Press Note 3 of 2020). Investment from a country sharing a land border with India, including China and Hong Kong, or where the beneficial owner is in one, needs government approval. In March 2026 the Cabinet approved a relaxation, implemented by Press Note 2 (2026) and FEMA amendments in May–June 2026: investment can now use the automatic route where land-border beneficial ownership is below 10% and non-controlling. This mainly helps global funds with minor Chinese limited partners. Above that, approval is still required, with fasttracking for some manufacturing proposals.
• Angel tax is gone. The Finance Act 2024 abolished the tax on share premiums above fair value (old s.56(2)(viib)) from FY 2024–25, for residents and non-residents alike. FEMA pricing rules still apply to foreign investors.
• Deadlines. Shares must be allotted within 60 days of receiving the money, or the money returned within 15 days after that. Report the allotment on the RBI's FIRMS portal in Form FC-GPR within 30 days of allotment. Report share transfers between residents and non-residents in Form FC-TRS within 60 days. File the annual FLA return by 15 July. Late reporting attracts a late submission fee, and serious lapses need compounding.

Outbound: ODI and OPI by Indian residents#

The Overseas Investment Rules and Regulations of 2022 govern Indian residents investing abroad.

• ODI vs OPI. A stake of 10% or more in a foreign unlisted company, or any stake with control, is generally ODI; smaller passive stakes can be OPI.
• Individuals invest under the Liberalised Remittance Scheme limit of $250,000 per person per year. They may make ODI only in a foreign operating entity not engaged in financial services, and where the individual has control, that foreign entity may not itself have a subsidiary or step-down subsidiary. This rule catches many founder-held foreign holding structures.
• Round-tripping limits. An Indian resident may not make an ODI in a foreign entity that has invested back into India in a way that creates more than two layers of subsidiaries. This is central to flip structures (4.03), where Indian founders hold a foreign parent that owns the Indian company.
• ESOPs and sweat equity in a foreign parent can be acquired by Indian resident employees and directors under the overseas investment rules, as OPI, with reporting by the Indian entity.
• Reporting. ODI investments are reported through an authorised dealer bank (Form ODI), with an Annual Performance Report each year. Late filings attract late submission fees and can block further investments until regularised.

US: CFIUS#

The Committee on Foreign Investment in the United States reviews foreign investments in US businesses. Mandatory filings apply to some investments in businesses producing critical technologies (broadly, items that would need an export licence for the investor's country, 4.16), and to some investments by foreign governments. Most passive minority VC investments, without control, board seats, access to non-public technical information or involvement in decisions, fall outside mandatory filing. A US company with Indian founders is not itself a problem; what matters is what rights foreign investors get. Separately, the US outbound investment rules, in force since January 2025, restrict US persons investing in Chinese businesses in semiconductors, quantum and some AI.

UK: National Security and Investment Act#

Acquisitions of more than 25%, 50% or 75% of shares or votes, or rights to block resolutions, in companies active in 17 sensitive sectors, including quantum, AI, advanced materials, advanced robotics, computing hardware, cryptographic authentication, defence, energy, satellite and space, and synthetic biology, need approval before completion. Deals completed without approval are void. In March 2026 the government

confirmed reforms taking the sectors to 19 (adding water, and making critical minerals and semiconductors standalone sectors) and narrowing some definitions, with secondary legislation expected later in 2026. Initial review usually takes up to 30 working days after acceptance.

3. The method: taking foreign money into an Indian company#

Step 1: Check the route before the term sheet#

• Is your sector under the automatic route, and at what cap? (Defence, space, telecom and a few others have limits or approval requirements.)
• Who are the investors' beneficial owners ? Ask every foreign fund to confirm in writing whether any beneficial owner is in a land-border country, and at what percentage. Under 10% and non-controlling now uses the automatic route; above that, budget months for approval.
• Will any investor get rights that need approval elsewhere, such as CFIUS-relevant rights in a US parent, or NSIA thresholds in a UK company?

Step 2: Choose the instrument#

A US-style SAFE issued directly by an Indian company does not fit FEMA's instrument list. Indian companies use CCPS-based versions instead.

Step 3: Get the valuation report#

Commission a fair-value report (usually DCF) from a chartered accountant or SEBIregistered merchant banker, dated close to the allotment, ideally within 90 days. The issue price must be at or above it. Keep the report for diligence.

Step 4: Receive the money properly#

The investor wires from its own account abroad through normal banking channels into your company's account. Your bank issues a Foreign Inward Remittance Certificate and a KYC report on the investor. Make sure the remittance purpose code says investment in shares.

Step 5: Allot and file#

• Board and shareholder approvals; allot within 60 days of receipt.
• PAS-3 to the Registrar within 15 days of allotment (4.18).
• FC-GPR on FIRMS within 30 days of allotment, with the valuation report, FIRC, KYC and a company secretary's certificate.
• Update the cap table and registers (4.08).
• Add the investment to the FLA return by 15 July.

Step 6: Handle later events#

• Secondary sales between residents and non-residents: FC-TRS within 60 days, at fair value.
• Conversion of CCPS or notes: report the conversion.
• Downstream investment: if your company is foreign-owned or controlled and invests in another Indian company, that is indirect foreign investment with its own reporting (Form DI within 30 days).
• Flip or reverse flip: share swaps between Indian residents and a foreign company involve both FDI and ODI rules, plus tax (4.03).

Worked example#

OptiCore, a Pune-based photonics startup (DPIIT-recognised), raises ₹15 crore from a Singapore VC fund and ₹2 crore from a US angel.

1. Route check. Photonics components are under the automatic route. The Singapore fund's side letter confirms that limited partners from Hong Kong hold 6% of the fund with no control rights, so the round uses the automatic route under the 2026 relaxation.
2. Instruments. The fund takes Series Seed CCPS. The US angel, who arrived late, takes a convertible note of ₹2 crore, above the ₹25 lakh minimum.
3. Valuation. A merchant banker values the equity at ₹180 per share by DCF; the CCPS are issued at ₹200, above fair value, and the note's conversion formula is fixed with a floor at ₹180.
4. Money and filings. Both remittances arrive with correct purpose codes; shares are allotted 21 days later; PAS-3 is filed on day 9 and FC-GPR on day 24 after allotment. The note is reported as FDI within 30 days of receipt.
5. Two years later. At Series A, the lead's diligence checks every FC-GPR acknowledgement and the valuation reports. All are in order, so FEMA is a one-page section of the legal report rather than a list of compounding items.

4. Country notes and special cases#

India: points that trip founders up#

• Convertible notes are reported in Form CN on FIRMS within 30 days of receipt, separately from FC-GPR at conversion.
• Shares to foreign founders or employees (for example a co-founder living abroad) count as FDI and need fair-value pricing and FC-GPR, even for small amounts. Sweat equity and ESOPs to non-residents have their own reporting.
• Non-resident Indians (NRIs) investing on a non-repatriation basis are treated as domestic investment. Repatriable NRI investment is FDI.
• Gifts of shares from residents to non-residents need RBI approval above set limits. Debt from abroad (venture debt, intercompany loans from a foreign parent, optionally convertible instruments) falls under the ECB framework, which the RBI rebuilt in February 2026. Check eligibility, maturity and cost limits before signing.
• Lapses can be regularised by paying a late submission fee (for reporting delays) or by compounding with the RBI (for substantive contraventions). Compounding takes time and can delay a round.

India: founders and flips#

• Founders holding shares in a foreign parent must report their investment as ODI or OPI, within limits.
• Flipping by share swap, where founders exchange Indian shares for foreign parent shares, involves FDI on the Indian side and ODI on the founders' side. It is usually taxable for founders in India. Plan with tax counsel (4.03).
• Reverse flips (moving the holding company back to India) have been made easier: the fast-track merger route under Rule 25A(5) of the Compromises Rules since 17 September 2024, and a FEMA amendment in May 2026. Exit tax in the foreign jurisdiction can be large.

US: CFIUS in practice#

• For a US startup taking foreign money: investors from allied countries taking passive minority stakes are usually fine. Mandatory filing becomes likely if the company produces critical technology that would need an export licence for the investor's home country and the investor gets control, a board seat or observer seat, access to material non-public technical information, or involvement in substantive decisions.
• Protect yourself in the term sheet: limit information rights for foreign investors to financial information; avoid board seats for investors who would trigger filings; ask investors to confirm their nationality and government links.
• Penalties for a missed mandatory filing can reach the value of the transaction, and CFIUS can review non-notified deals after closing.

UK: NSIA in practice#

• The test is the target's activities, not the investor's nationality: UK investors acquiring more than 25% of a UK quantum startup still need to notify.
• Typical startup triggers: a lead investor acquiring more than 25%, a founder buy-out, a corporate investor taking a large stake, or an acquisition. Most seed rounds don't reach 25% for any single investor, but some do.
• Timing: acceptance of a notification averaged about 11 working days in 2025–26, then a 30-working-day review. Build this into closing timelines.
• Consequences of not notifying: the transaction is legally void, and penalties include fines of up to 5% of worldwide turnover or £10 million, whichever is higher, and criminal sanctions.
• Voluntary notification is possible where a deal is outside the mandatory sectors but may raise concerns, which gives certainty.

5. Scripts, mistakes, related playbooks, sources#

Scripts

Asking a foreign fund for beneficial ownership:

"For our FEMA compliance, could you confirm in writing whether any beneficial owner of the fund, directly or indirectly, is resident in or a citizen of a country sharing a land border with India, and if so, their aggregate percentage and whether they have any control rights? We need this before we can confirm the investment route."

Explaining FEMA timing to a foreign investor:

"Under Indian rules, we allot shares within 60 days of receiving funds and report to the RBI within 30 days of allotment. Please wire from your own account with the purpose code for equity investment; we'll need your KYC through your bank. We'll send you the allotment confirmation and the RBI acknowledgement."

Briefing a CA or company secretary before a foreign round:

"We're raising [amount] from [investors, countries] by [instrument]. Please confirm the route, prepare the valuation brief, and set up the FC-GPR (or Form CN) timeline. We want acknowledgements for every filing in the data room."

Common mistakes#

1. Issuing a US-style SAFE or an optionally convertible instrument from an Indian company.
2. Pricing below fair value for a foreign investor, or using an out-of-date valuation.
3. Missing the 60-day allotment or 30-day FC-GPR deadline.
4. Not checking beneficial ownership for land-border investors.
5. Forgetting the FLA return, even in years with no new investment.
6. Founders holding foreign parent shares without ODI or OPI reporting.
7. Treating intercompany loans from a foreign parent as informal, when they are ECB.
8. Giving a foreign investor rights that trigger CFIUS or NSIA without realising it.
9. Closing a UK deal in a mandatory sector before approval, making it void.
10. Leaving lapses to diligence, when compounding takes months.

Related playbooks#

• 4.02 Choosing an entity: Indian Pvt Ltd vs LLP; US Delaware C-corp
• 4.03 Flipping to a Delaware holding company, and reverse-flipping back to India
• 4.04 DPIIT recognition and Startup India benefits
• 4.08 Setting up the cap table and choosing a tool
• 4.16 Export controls: ITAR, EAR, SCOMET
• 4.18 Compliance calendar: ROC filings, annual returns, Delaware franchise tax

Sources#

• India: Foreign Exchange Management Act 1999; FEMA (Non-Debt Instruments) Rules 2019, as amended in 2026; FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations 2019; Foreign Exchange Management (Overseas Investment) Rules and Regulations 2022; Consolidated FDI Policy 2020 and later Press Notes; RBI Master Directions on Foreign Investment in India and on Overseas Investment.
• Press Note 3 (2020) relaxation: Cabinet approval 10 March 2026 and Press Note 2 (2026) (Ebizfiling, CalcGuru, Sansa Legal on the Third Amendment Rules 2026); results reported by PIB via Drishti.
• ECB framework: FEMA 3(R)(5)/2026-RB (9 February 2026), via TaxGuru.
• US: 31 CFR Parts 800–802 (CFIUS); 31 CFR Part 850 (outbound investment).
• UK: National Security and Investment Act 2021 and Notifiable Acquisition Regulations; government response of 12 March 2026 (Freshfields, Akin); Ashurst on the 2025–26 annual report.