Taking an Indian business to the US: the overseas investment rules to get right first

For many Indian companies the United States is the next market: closer to customers, investors and talent. The US side of the move gets most of the attention, from choosing a Delaware corporation to opening a bank account. The Indian side often gets less, until the bank asks for documents the company does not have. India's overseas investment rules decide how the US entity can be funded, how much can go, and what must be reported every year after.

The framework in brief

Since August 2022, outbound investment from India has been governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022, the Reserve Bank's Overseas Investment Regulations, 2022 and the Reserve Bank's directions to authorised dealer banks. The framework replaced the older joint venture and wholly owned subsidiary regime and moved most routine investments to the automatic route, handled through the company's bank rather than by prior approval.

Five decisions to make before the first remittance

1. Is it overseas direct investment at all?

Investment in an unlisted foreign company, or ten per cent or more of a listed one, or any investment that gives control, is overseas direct investment. Smaller listed stakes without control are portfolio investment, with different rules. A US subsidiary set up to trade is almost always direct investment.

2. How much can be committed under the automatic route?

An Indian company's total financial commitment to its foreign entities, which counts equity, loans and guarantees together, may generally go up to 400 per cent of its net worth under the last audited balance sheet without prior approval. Growing companies with thin balance sheets reach this limit sooner than expected, so the funding plan for the next two to three years should be tested against it.

3. Equity, loan or guarantee?

Equity is simplest to set up but hardest to bring back. Loans allow interest and repayment, but must be priced at arm's length and documented, and they interact with US tax rules on interest deductions. Guarantees for the subsidiary's borrowing count towards the financial commitment limit too. Most groups use a mix, and the choice has tax consequences in both countries.

4. How many layers?

Structures that invest back into India are restricted to two layers of subsidiaries. An Indian company that owns a US holding company, which in turn owns an operating company that later invests in an Indian entity, can breach this without anyone noticing. Draw the structure for the next five years, not just today, and check the layer count before committing.

5. What will the bank need?

The authorised dealer bank reports the investment and obtains a unique identification number for the foreign entity. Expect to provide board approvals, valuation support where shares are acquired, the foreign entity's incorporation documents, and evidence that the investment is in a genuine business. Regulators have been looking more closely at whether outbound investments are tied to real operations, so a clear business rationale matters.

After the investment: the annual calendar

• An annual performance report for each foreign entity, due by 31 December each year until the investment is fully exited, whether or not the entity made a profit.
• Reporting of further investments, loans, guarantees, restructuring and disinvestment within the prescribed timelines.
• Transfer pricing documentation in India for transactions with the US entity, and corresponding documentation and filings in the US.
• Board-level review of the financial commitment headroom before each new round of funding.

Late reporting is not fatal, but it is expensive and distracting: late submission fees apply, and repeated or serious lapses can lead to compounding proceedings. A shared calendar owned by one person in finance prevents almost all of it.

The US side, briefly

The US entity brings its own obligations: federal and state tax registrations, annual tax filings, information returns for transactions with its foreign owner, and payroll obligations once it hires. The two sides need to agree. Intercompany agreements, pricing and the accounting for each transaction should be identical in both sets of books, because tax authorities in both countries will compare them.

The bottom line

Expanding to the US is a commercial decision; funding it from India is a regulatory one. Boards that settle the structure, funding mix, layer count and reporting calendar before the first remittance avoid the costly clean-ups we most often see: unreported loans, structures that breach layering limits, and annual reports filed years late. Plan both sides of the corridor together, and the US entity can focus on growth.

Sources

• Foreign Exchange Management (Overseas Investment) Rules, 2022 and Regulations, 2022 (notified 22 August 2022)
• Reserve Bank of India, Master Direction on Overseas Investment; Form APR
• Commentary: Taxmann, Key highlights of the Overseas Investment Rules 2022; SCC Online, Changes in India's overseas investment framework and round-tripping (2023)
• Reports on RBI scrutiny of outbound investment, FY2026

This article reflects the position at the time of writing and is general information, not advice. Limits and procedures should be confirmed with your bank and advisors before investing.