India and Australia share a growing economic relationship underpinned by the landmark ECTA (Economic Cooperation and Trade Agreement) and a long-standing Double Taxation Avoidance Agreement (DTAA). For Indian companies looking to establish a presence in Australia — whether a subsidiary, branch office, or a joint venture — the Foreign Exchange Management Act (FEMA) and the Reserve Bank of India's (RBI) Overseas Direct Investment (ODI) framework govern every rupee that moves across borders.
1. What Is FEMA ODI and Why Does It Apply to You?
FEMA (Foreign Exchange Management Act, 1999) is administered by the Reserve Bank of India (RBI) and governs any transaction involving foreign exchange by an Indian resident. When an Indian company invests in a foreign entity — including registering an Australian Pty Ltd or purchasing shares in one — it qualifies as Overseas Direct Investment (ODI).
ODI is distinct from portfolio investment. It involves acquiring 10% or more equity in a foreign entity, or establishing a subsidiary or joint venture abroad.
2. The Automatic Route vs the Approval Route
Under the revised Foreign Exchange Management (Overseas Investment) Rules, 2022, Indian entities investing abroad can do so either through the Automatic Route (no prior RBI approval needed) or the Government Approval Route.
Automatic Route
- Total ODI must not exceed 400% of the Indian company's net worth (as per the last audited balance sheet).
- The Indian entity must be profitable in the immediately preceding three financial years.
- No default under FEMA or with any bank/financial institution.
- The foreign entity must be in a bona fide business activity — real estate and banking activities by non-bank entities are restricted.
- Transaction must be routed through an Authorised Dealer (AD) Bank in India.
Government / RBI Approval Route
Required when:
- The proposed investment exceeds the 400% net worth limit.
- The Indian entity is in a financial services business (regulated by SEBI, RBI, IRDAI, etc.) and wants to invest in a foreign financial services entity.
- Investment is in a country that is on the FATF list of non-cooperative jurisdictions (Australia is not on this list — it is a FATF member).
- The Indian entity itself is under investigation or has a pending default.
3. Permitted Structures for Investing in Australia
| Structure | FEMA Category | Common Use Case |
|---|---|---|
| Wholly-Owned Subsidiary (Pty Ltd) | ODI — Automatic Route (within limits) | Full operational control, billing in AUD |
| Joint Venture (JV) | ODI — Automatic Route (within limits) | Shared risk, local partner's existing clients |
| Branch Office | ODI — Generally Automatic | Extension of Indian parent, no separate legal entity |
| Liaison / Representative Office | ODI — Prior RBI/AD Bank approval often required | Market research only — no commercial activity |
4. Reporting and Ongoing Compliance Under FEMA
FEMA compliance does not end at the point of investment. There are ongoing reporting obligations that Indian parent companies must fulfill:
- Form ODI (Part I): Filed with the AD Bank before remitting funds for the first ODI transaction and for subsequent tranches.
- Annual Performance Report (APR): Filed annually by 31 December, reporting the financial performance of the Australian entity. Failure attracts compounding penalties.
- Share Certificate / Proof of Investment: Must be submitted to the AD Bank within 6 months of the date of investment (share allotment in Australia).
- Disinvestment / Winding Up: Full remittance proceeds must be repatriated to India and reported within 90 days of receipt.
5. The DTAA Between India and Australia
India and Australia have a Double Taxation Avoidance Agreement (DTAA) that ensures income earned in Australia is not taxed twice — once in Australia and once in India. Key provisions relevant to Indian businesses investing in Australia:
- Dividends: Withholding tax on dividends paid by an Australian subsidiary to its Indian parent is capped (generally 15% under DTAA vs 30% default ATO rate).
- Royalties and Fees for Technical Services: Capped withholding rates protect software and IP-intensive businesses.
- Permanent Establishment (PE): Carefully structure your branch activities to avoid inadvertently creating a PE in Australia, which would subject Indian-source profits to Australian tax.
6. Step-by-Step: The Legal Pathway
- Board Resolution: Indian parent passes a board resolution approving the investment, specifying amount, structure, and purpose.
- FEMA Pre-check: Confirm the investment falls under the automatic route (net worth check, profitability, sector eligibility).
- AD Bank Filing: Lodge Form ODI with your designated AD Bank (any scheduled commercial bank in India). The bank verifies FEMA eligibility before permitting the outward remittance.
- Remittance: Funds are remitted in AUD via your AD Bank's correspondent banking relationship.
- ASIC Registration: Register the Australian Pty Ltd (or other structure) with ASIC. A registered office address and at least one director resident in Australia are required.
- Share Allotment & Share Certificate: Submit evidence of share allotment to AD Bank within 6 months.
- Annual APR: File the Annual Performance Report every December going forward.
7. Recent RBI Updates: What Changed in 2025–2026
The regulatory landscape for outward investment from India has continued to evolve. Key developments that Indian companies investing in Australia must be aware of include:
Liberalised Remittance Scheme (LRS) vs ODI — Know the Difference
Many Indian individuals (as opposed to companies) confuse the Liberalised Remittance Scheme (LRS) with ODI. LRS allows resident individuals to remit up to USD 250,000 per financial year for permitted current and capital account transactions — including purchasing shares in foreign listed companies. However, LRS is for individuals only. Indian companies investing in Australian entities must use the ODI route, regardless of the amount. Attempting to use LRS for a corporate investment is a FEMA violation.
RBI Master Direction on Overseas Investment (August 2022)
The RBI's Master Direction — Overseas Investment, 2022, consolidated and replaced multiple earlier circulars. Key changes that remain relevant in 2026:
- Overseas Portfolio Investment (OPI) vs ODI: The 2022 framework introduced a cleaner distinction. If your Australian investment is less than 10% of the target entity's paid-up capital and you have no board representation, it may qualify as OPI (more flexible) rather than ODI.
- Step-down subsidiary rules: If your Australian Pty Ltd itself wants to invest in a third country, it is treated as a "step-down subsidiary." The RBI now requires the Indian entity to seek the AD Bank's confirmation before such downstream investments are made.
- Pledge of overseas assets: Indian entities can now pledge their Australian shares/assets as security for borrowings in India, subject to conditions. This opens up new working capital financing options for Indian parents with Australian subsidiaries.
- Write-off of overseas investment: If an Australian subsidiary fails and needs to be wound up, the Indian parent must follow the write-off procedure under the ODI framework and cannot simply abandon the investment without FEMA compliance.
8. FEMA Compliance Checklist Before You Remit
Before your AD Bank processes an outward remittance for an ODI transaction, they will verify the following checklist. Preparing this documentation in advance avoids delays:
| # | Document / Requirement | Status Check |
|---|---|---|
| 1 | Board resolution approving the ODI transaction | Required before remittance |
| 2 | Audited balance sheets for the last 3 financial years (showing profitability) | Required for automatic route |
| 3 | Net worth certificate from CA confirming ODI is within 400% limit | Required for automatic route |
| 4 | Valuation certificate (for acquisitions of existing Australian entities) | Required if acquiring existing company |
| 5 | No-default declaration (no outstanding loans/penalties with RBI or banks) | Self-declaration + bank confirmation |
| 6 | ASIC registration / incorporation documents for the Australian entity (or draft constitution if not yet incorporated) | Required by AD Bank |
| 7 | Form ODI (Part I) duly completed and signed | Lodged with AD Bank before remittance |
| 8 | Tax clearance (Form 15CA/15CB from CA) | Required for the outward remittance |
9. Common FEMA Violations and How to Avoid Them
FEMA violations related to ODI are more common than most Indian businesses realise. The most frequent violations we see, and how to avoid them:
1. Missing the Annual Performance Report (APR) Deadline
The APR must be filed every year by 31 December via the AD Bank, reporting the financial performance of the Australian subsidiary. Many companies — especially those that set up an Australian Pty Ltd and then moved on without engaging a compliance firm — simply forget this obligation. FEMA compounding (a negotiated penalty settlement) for missed APRs can cost INR 5,000 to INR 1,00,000 per violation, plus interest. The longer the delay, the higher the compounding amount.
Fix: Set a calendar reminder in October each year. Your Australian accountant can prepare the required financials by November, giving you time to file before the December 31 deadline.
2. Failing to Submit Share Certificates to the AD Bank Within 6 Months
Once the Australian Pty Ltd issues shares to the Indian parent, the share certificate or evidence of allotment must be submitted to the AD Bank within 6 months of allotment. This is often missed, especially when the Indian parent's finance team is not closely involved in the Australian setup.
Fix: When registering the Australian Pty Ltd with ASIC, schedule the share allotment for Day 1 and immediately courier or email the share certificate to your AD Bank relationship manager.
3. Sending Funds Without Prior Form ODI Filing
Some companies remit funds first and file Form ODI afterwards — this is a violation. Form ODI Part I must be lodged and the AD Bank must approve the remittance before the funds leave India.
4. Investing in Restricted Sectors Without Approval
Investment in real estate (other than for business purposes) and banking (by non-banking Indian entities) requires government/RBI approval even if the 400% net worth limit is not exceeded. Always check the sector restrictions before investing.
5. Not Repatriating Dividends Within a Reasonable Period
While FEMA does not prescribe a fixed deadline for dividend repatriation, the RBI expects dividends to be repatriated within a reasonable period (generally taken to be 60–90 days of declaration). Accumulating large undistributed profits in Australia without repatriation can attract RBI scrutiny.
10. Frequently Asked Questions
Can an Indian partnership firm or LLP invest in an Australian Pty Ltd?
Yes, with certain conditions. A registered partnership firm or LLP can make an ODI through the automatic route, subject to the same net worth and profitability conditions. However, the AD Bank may request additional documentation regarding the firm's registration and the partners' identities. LLP investments in foreign entities received explicit RBI guidance under the 2022 Master Direction.
Can an Indian company invest in Australia if it has a PAN-linked tax demand outstanding?
Outstanding tax demands do not automatically disqualify an Indian company from ODI, but any outstanding defaults with a bank or financial institution do. Ensure all EMIs, overdraft limits, and loan covenants are current before approaching your AD Bank for Form ODI approval.
What happens if the Australian subsidiary runs at a loss in its first few years?
Operating losses in the Australian subsidiary are reported in the APR. There is no FEMA penalty for a subsidiary running at a loss. However, if the subsidiary cannot sustain operations and needs additional capital from the Indian parent, each new tranche of remittance must be separately reported and the updated ODI form filed. If the subsidiary is wound up, the write-off procedure must be followed.
Do I need a separate RBI approval to open a bank account in Australia?
No. Opening a bank account in Australia for your Australian-registered entity is part of the normal business operations of that entity and does not require separate RBI/AD Bank approval. The remittance of funds into that account for business operations is covered by the initial ODI approval.
Can the Australian Pty Ltd hire local Australian employees without additional FEMA filings?
Yes. Employment decisions of the Australian subsidiary are domestic Australian matters governed by the Fair Work Act 2009. FEMA is only concerned with cross-border capital flows. Wages paid to Australian employees from the Australian subsidiary's locally-held funds do not constitute a FEMA transaction.
11. Industry-Specific FEMA Considerations
While the FEMA ODI framework applies broadly to all sectors, certain industries face additional or different compliance requirements when investing in Australia:
Information Technology and Software Services
Indian IT companies are among the most frequent users of the ODI automatic route for Australian investment. Key considerations: (a) the Australian subsidiary often acts as a contract agent for the Indian parent's clients — ensuring the transfer pricing between parent and subsidiary reflects arm's-length rates is both an ATO and FEMA concern; (b) seconded Indian employees working in Australia may create a FEMA "remittance" issue if their salaries are paid in India but they work exclusively in Australia — the ATO also has PAYG withholding obligations for Australian-sourced employment income; (c) IP developed jointly by the Indian parent and Australian subsidiary must have a clearly documented ownership and licensing arrangement to avoid transfer pricing disputes and FEMA complications on royalty repatriation.
Manufacturing and Trading Companies
Indian manufacturers investing in Australian distribution or trading entities face additional complexity around goods transfer pricing (the price at which goods move from the Indian manufacturer to the Australian distributor) and the treatment of inventory as part of the Australian subsidiary's net assets for FEMA reporting purposes. The Annual Performance Report must accurately reflect the inventory position of the Australian entity.
Professional Services Firms
Indian chartered accounting, law, and consulting firms establishing Australian operations face the additional consideration of professional licensing requirements (CA Australia, Australian legal practitioner licensing) which are separate from ASIC and FEMA obligations. The FEMA ODI approval covers the corporate investment — it does not substitute for Australian professional body registration.
Healthcare and Pharmaceuticals
Investments by Indian pharmaceutical companies in Australian entities — for distribution, clinical trials, or local manufacturing — may trigger both FIRB screening (depending on the value) and the Therapeutic Goods Administration (TGA) licensing requirements. FEMA applies to the capital flow; TGA licensing governs the operational activity. Both must be in place before commercial operations commence.
Conclusion
FEMA compliance is not optional — violations can result in penalties of up to three times the amount involved, seizure of assets, and directorial disqualification. But with the right structure and professional guidance, the pathway from India to Australia is clearly defined and well-trodden. The key is engaging both an Indian FEMA advisor and an Australian corporate compliance firm from the outset — not after the fact. At CorpArray, we have guided dozens of Indian businesses through this process, ensuring full FEMA compliance while getting them operational in Australia in the shortest possible time. Our dual expertise in both RBI/FEMA frameworks and ASIC compliance makes us uniquely positioned to handle the full journey — from initial structure planning through to ongoing annual reporting on both sides of the border.
