Indian Companies Investing in GIFT IFSC: The Overseas Investment Framework

When an Indian company sets up a subsidiary in GIFT City, the investment is treated as an overseas investment under India’s foreign exchange framework. The fact that GIFT City is located in Gujarat does not change this position. The transaction is governed by the Foreign Exchange Management (Overseas Investment) Rules and Regulations, 2022, and the RBI’s Overseas Investment Directions, 2022, subject to specific relaxations for investments in an International Financial Services Centre (IFSC). These relaxations can make a significant difference to Indian companies planning to establish a subsidiary in GIFT IFSC.

Two Categories, Two Consequences

The overseas investment framework distinguishes:

• Overseas Direct Investment (ODI): broadly, investment in the equity capital of a foreign entity in a manner that confers control or exceeds the portfolio threshold, together with the financial commitment that accompanies it; and
• Overseas Portfolio Investment (OPI): investment in foreign securities other than ODI, with express exclusions, including unlisted debt instruments, securities issued by a person resident in India who is not in an IFSC, derivatives unless permitted, and commodities including bullion depository receipts.

The OPI exclusion repays attention. Securities issued by a person resident in India are ordinarily outside OPI; securities issued by a person resident in India in an IFSC are not excluded. That single carve-out is what allows Indian investors to treat IFSC instruments as overseas portfolio investments.

Paragraph 24 of the Directions then makes the position explicit for funds: investment, including sponsor contribution, in the units of an investment fund or vehicle set up in an IFSC is OPI, and, in addition to listed Indian companies and resident individuals, unlisted Indian entities may make such investment. Outside the IFSC, an unlisted Indian entity’s ability to make this kind of portfolio investment is considerably narrower.

The Financial-Services Question

For Indian companies considering overseas investment in GIFT IFSC, one of the key questions is whether the parent company can invest in a financial-services entity under the applicable regulatory conditions. The RBI’s Overseas Investment Directions, 2022, read with Schedules I and V of the Overseas Investment Rules, 2022, set out the relevant requirements.

Two IFSC-specific accommodations therefore exist: a deemed approval after 45 days for regulated Indian financial entities, and relief from the three-year profitability test for other Indian companies establishing a financial-services entity in the IFSC. For a loss-making or newly profitable Indian group setting up a fund management entity or finance company in GIFT IFSC, the second is often decisive.

The Directions also clarify when a foreign entity is “engaged in financial services activity”: it is so engaged if it undertakes an activity that, if carried out in India, would require registration with or regulation by an Indian financial sector regulator. Overseas investment by banks and non-banking financial institutions regulated by the RBI remains subject to conditions stipulated by the relevant RBI department.

Structural Limits that Apply Equally to the IFSC

Several general restrictions are not relaxed for GIFT IFSC and can defeat a structure.

The two-layer rule. Under rule 19(3) of the OI Rules, financial commitment by a person resident in India in a foreign entity that has invested, or later invests, into India, directly or indirectly, resulting in a structure with more than two layers of subsidiaries is not permitted. The Directions add that no further layer may be added to a structure already having two or more layers. “Subsidiary” here carries the OI Rules meaning, which includes an entity in which the foreign entity has control, defined to include a stake of 10% or more. Round-trip structures through an IFSC holding company therefore need careful layer-counting.

Products linked to the rupee. The Directions record the restriction in rule 19(1) concerning foreign entities dealing in financial products linked to the Indian rupee, clarifying that these include non-deliverable trades involving foreign currency-INR exchange rates and stock indices linked to the Indian market. Investment is not permitted in a foreign entity engaged in such activity without specific approval.

Size threshold. Financial commitment by an Indian entity exceeding USD 1 billion (or equivalent) in a financial year requires prior RBI approval, even where the entity is otherwise within the automatic-route limit.

Credit standing. A person resident in India whose account is classified as a non-performing asset, who is a wilful defaulter, or who is under investigation by a financial sector regulator or investigative agency must obtain a no-objection certificate under rule 10 before making a financial commitment or undertaking disinvestment.

Reporting, and the Cost of Getting it Wrong

All transactions relating to ODI or financial commitment are routed through a designated authorised dealer bank and reported in Form FC. Acquisitions through rights issues are reportable; bonus shares are not treated as fresh financial commitment. Deferred consideration is treated as a non-fund-based financial commitment and reported as such, with subsequent payments reported as conversion into equity.

The 2022 framework introduced a Late Submission Fee for reporting delays. It converts what was previously a compounding exposure into a priced administrative remedy for many delays, but it does not cure a substantive breach of the Rules.

A Checklist Before Incorporating in GIFT IFSC

Before incorporating in GIFT IFSC, Indian companies should assess the applicable overseas investment rules, identify any available IFSC-specific relaxations, and plan the required approvals and reporting. The following checklist highlights key compliance points to review before making the investment or remitting funds.

1. Classify the investment. Equity in an IFSC operating entity is usually ODI; units in an IFSC fund are OPI.
2. Test the financial-services conditions, including whether the Indian parent is itself a financial services entity, and whether the IFSC target’s activity would require Indian regulatory registration if carried on in India.
3. Use the IFSC relaxations where available, including the 45-day deemed approval and the relief from the three-year profitability condition.
4. Count the layers if the IFSC entity holds, or may hold, any investment back into India.
5. Check the USD 1 billion threshold at group level for the financial year.
6. Confirm no NOC trigger exists under rule 10.
7. Calendar the Form FC filings and designate the authorised dealer bank before the first remittance.

The Regulatory Step is Separate

Compliance with the overseas investment framework permits the money to move. It does not authorise the IFSC entity’s business. The entity must still obtain its SEZ Letter of Approval and its IFSCA registration for the activity concerned (Article 3), and IFSCA’s own frameworks, such as those for finance companies or fund management entities, impose their own capital and governance conditions. In practice, the two processes run together: IFSCA’s setting-up workflow contemplates capital infusion after in-principle approval.

As at 17 September 2026, the OI Rules, Regulations and Directions described above are in force. Because the Directions are amended by circular, the current consolidated version should be checked before a transaction.

FAQ

1. Can Indian companies invest in GIFT IFSC?

Yes. Indian companies can invest in eligible GIFT IFSC entities under the Overseas Investment Rules, 2022, subject to applicable regulatory conditions and approval requirements.

2. What is the difference between ODI and OPI in GIFT IFSC?

ODI generally covers qualifying investments involving equity and control, while OPI covers eligible overseas securities that do not qualify as ODI.

3. Is RBI approval required for overseas investment in GIFT IFSC?

Not always. Certain investments may qualify under the automatic route, while specific cases require regulatory approval.

4. Can an Indian company without three years of profits invest in an IFSC financial-services entity?

Yes. The framework provides a relaxation from the three-year profitability condition for certain ODI in financial-services entities in an IFSC.

5. Is IFSCA registration sufficient to establish a GIFT IFSC entity?

No. The entity must also comply with applicable SEZ requirements and obtain the relevant Letter of Approval, where required.

6. How is overseas investment reported?

ODI and financial commitments are reported through the designated authorised dealer bank using Form FC, as applicable.