Downstream Investments are governed by Regulation 23 of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. As per regulation 23, Downstream Investment’ shall mean investment made by an Indian entity or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity.
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Foreign Investment means any Investment made by a person resident outside India on a repatriable basis in equity instruments of an Indian Company or to the capital of a LLP.
Indirect Foreign Investment’ means downstream investment received by an Indian entity from
another Indian entity (IE) which has received foreign investment and (i) the IE is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India; or
an investment vehicle whose sponsor or manager or investment manager (i) is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India.
Provided no person resident in India other than an Indian entity can receive Indirect Foreign Investment.
Control’ shall mean the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreement or voting agreement. For the purpose of LLP, ‘Control’ shall mean the right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of an LLP.
Indian Entity shall mean an Indian Company or LLP
In order to determine whether any investments made by Indian Entity into another Indian Entity would fall in Downstream Investment, is to apply with below checks:
Downstream Investment shall mean any Indian Entity which has received Foreign Investment (Owned and Controlled by Foreign Entity) makes further investment into another Indian Entity by subscribing to the capital instruments or Capital.
Illustrations for calculation of Indirect Foreign Investment
“Indian Company” which has investment through an Investing Company “Bharat Company” having foreign investment, the following would be the method of calculation:
Where Bharat Company has foreign investment less than 50%. Indian Company would not be taken as having any indirect foreign investment through Bharat Company.
Where Bharat Company has foreign investment of say 75% &
Invests 26% in Indian Company, the entire 26% investment by Bharat Company would be treated as Indirect Foreign Investment in Indian Company
Invests 80% in Indian Company, the Indirect Foreign Investment in Indian Company would be taken as 80%
Where Indian Company is a wholly owned subsidiary of Bharat Company (i.e. Bharat Company owns 100% shares of Indian Co.), then only 75% would be treated as Indirect foreign equity and the balance 25% would be treated as resident held equity.
equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned for total foreign investment;
The methodology for calculating total foreign investment would apply at every stage of investment in Indian companies and thus in each and every Indian company;
The Indian entity which has received Indirect Foreign Investment shall comply with entry route, sectoral caps, pricing guidelines and other conditions as applicable to foreign investment;
Approval of Board of Directors: Downstream Investment should have approval of Board of Directors as also Share Holders Agreement (if any).
Downstream Investments from Reserves & Surplus: Downstream investments can be made through internal accruals (profits transferred to reserve account after payment of taxes). The Indian entity making the downstream investment shall bring in requisite funds from abroad and not use funds borrowed in the domestic markets.
Liability of Compliance: The first level Indian company making downstream investment shall be responsible for ensuring compliance with the provisions of these regulations for the downstream investment made by it at second level and so on and so forth.
Statutory Auditors Certificate on Annual Basis: The first level Indian Entity shall obtain compliance certificate of these regulation on Annual Basis and the same shall be mentioned in Directors Report of Indian Company.
Downstream Investment in LLP
An Indian company or an LLP, having foreign investment, shall be permitted to make downstream investment in an LLP (not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India) engaged in sectors in which 100% FDI is allowed under the automatic route and there are no FDI linked performance conditions.
Onus of compliance shall be on the LLP accepting downstream investment to ensure compliance with the above conditions.
An Indian Entity making Downstream Investment in another Indian Company which is considered as Indirect Foreign Investment for the Investee Company, shall file Form DI within 30 days of such Investment along with following documents:
Readers can glance through our blog (linked below) on creation of Entity Master Form (EMF) and Single Master Form (SMF) on FIRMS portal for reporting of Downstream Investment.
An Indian Company making Downstream Investment in another Indian Company which is considered as Indirect Foreign Investment for the investee company, shall notify the Secretarial for Industrial Assistance, Department for Promotion of Industry and Internal Trade (DPIIT) at designated Foreign Investment Facilitation Portal (FIFP). Earlier DPIIT was named as ‘The Department of Industrial Policy and Promotion (DIPP). An Indian Company is required to register at FIFP portal and upload the required documents along with FIFP application Online.