Downstream Investments & Regulations under FEMA 1999
You are aware that a non-resident as well as a resident person or entity can invest in an Indian company. Foreign Direct Investment (FDI) is any investment made in India by a non-resident and is governed by the RBI’s FDI Guidelines. The investment of a resident in Indian entities, on the other hand, may be classified into two categories: resident and non-resident. If an entity A Ltd. receives foreign investment while adhering to FDI policies and invests in B Ltd., then its investment in B Ltd. will be deemed indirect foreign investment. The term “downstream” refers to a flow that is directed toward or parallel to a stream.
FEMA (1999) defines downstream investment as an investment by an Indian entity with FDI into another Indian company. Foreign Direct Investment is the initial type of foreign investment, followed by Foreign Indirect Investment.
INDIRECT FOREIGN INVESTMENT – has been defined as follows in Regulation 14(1)(v) of FEMA Notification No. 20: “‘Indirect foreign investment’ means entire investment in other Indian companies by an Indian company (IC), having foreign investment in it provided; (a) Indian Company is not ‘owned and controlled’ by resident Indian citizens and/or Indian Companies which are owned and controlled by resident Indian citizens and/or
Indian Companies which are owned and controlled by resident Indian citizens and/or Indian Companies.
Indirect foreign investment in 100 percent owned subsidiaries of operating-cum-investing/investing firms, on the other hand, shall be limited to foreign investment in the operating-cum-investing/investing company.”
QUESTIONS AND ANSWERS FROM THE RESERVE BANK OF INDIA ON FOREIGN INV
Downstream investment is an investment made in the capital instruments or capital of another Indian business by an Indian entity with complete foreign investment in it or an Investment Vehicle. The investment shall constitute “Indirect Foreign Investment” for the investee firm if the investor company has 100% foreign investment and is not owned and controlled by resident Indian nationals or is owned or controlled by individuals located outside India.
Please note that an Indian firm (owned or controlled by individuals outside India or not owned and controlled by resident Indian citizens (FOCC)) investing in instruments other than capital instruments of another Indian company is not considered a downstream investment.
Downstream investments done before to February 13, 2009 would not require any changes to comply with these standards. All further investments made after that date will be subject to FEMA 20. (R). Downstream investments that were not in compliance with these laws between February 13, 2009 and June 21, 2013 should have been reported to the Reserve Bank by October 3, 2013, so that such situations might be treated as complying with these regulations.
The RBI issued Notification No. FEMA 278/2013-RB on June 7, 2013, which took effect on February 13, 2009, and amended the parameters for calculating indirect foreign investment.
If there is any foreign investment in company A Ltd., then every downstream investment made by A Ltd., further in Indian firm B Ltd., should be examined for the essential reporting, route, and other requirements that apply to it. It means that A Ltd.’s investment in B Ltd. should be subject to the same laws and regulations that apply to admitting FDI in India, and we must first determine if A Ltd. is a Foreign Owned or Controlled Company (FOCC).
The RBI issued Notification No. FEMA 278/2013-RB on June 7, 2013, which took effect on February 13, 2009, and amended the parameters for calculating indirect foreign investment. If there is any foreign investment in company A Ltd., then every downstream investment made by A Ltd., further in Indian firm B Ltd., should be examined for the essential reporting, route, and other requirements that apply to it. It means that A Ltd.’s investment in B Ltd. should be subject to the same laws and regulations that apply to admitting FDI in India, and we must first determine if A Ltd. is a Foreign Owned or Controlled Company (FOCC).
If there is any foreign investment in company A Ltd., then every downstream investment made by A Ltd., further in Indian firm B Ltd., should be examined for the essential reporting, route, and other requirements that apply to it. It means that A Ltd.’s investment in B Ltd. should be subject to the same laws and regulations that apply to admitting FDI in India, and we must first determine if A Ltd. is a Foreign Owned or Controlled Company (FOCC).
Note that Indian firm (Controlled by individuals outside India or not owned and controlled by resident Indian citizens (FOCC)) investing in instruments other than capital instruments of another Indian company is not considered a downstream investment.
A corporation is regarded ‘Held’ by resident Indian citizens if more than half of its capital is beneficially owned by resident Indian citizens and/or Indian companies that are ultimately owned and managed by resident Indian residents. If resident Indian citizens and/or entities contribute more than 50% of the investment in an LLP that is ultimately ‘owned and controlled by resident Indian citizens,’ and such resident Indian citizens and entities have the majority of the profit, the LLP is considered to be owned by resident Indian citizens. A firm owned and controlled by non-residents is an Indian corporation in which non-residents beneficially possess more than 50% of the capital.
DIRECT AND INDIRECT FOREIGN INVESTMENTS; Direct Investment- All investments made directly into an Indian company by a non-resident entity would be recognised as foreign investment. It refers to any investments made by non-resident entities in an Indian company, regardless of whether the investments were made under various schedules of the Notification No. FEMA. 20/2000-RB dated 3rd May, 2000, as revised from time to time. Indirect Foreign Investment- Foreign investment made via an Indian company that is owned and managed by resident Indian citizens would not be counted in the computation of indirect foreign investment.
When determining indirect foreign investment, only those Indian enterprises that are ‘owned and controlled’ by non-residents and have received FDI are taken into account. The total investment by an Indian investing business that is “owned and managed” by a non-resident into another Indian company is referred to as “indirect foreign investment.” Please note that, with the exception of 100% owned subsidiaries of operating cum investing/investing firms, indirect foreign investment shall be confined to foreign investment in the operating cum investing/investing company. The exemption is only possible in circumstances when investment business holds the full capital of the downstream company. It indicates that the downstream company must be a wholly owned subsidiary of the investment firm.
