Downstream Investment Not to Result in Indirect Foreign Investment

For entities owned and controlled NRIs investing on non-repatriation basis

Updated as on August 10, 2021

Shreya Masalia | Executive

Foreign investments in equity instruments by a person resident outside India (PROI) is governed by Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules)[1] and the Consolidated FDI Policy[2] as amended from time to time. Foreign investments can be made on a repatriation basis or non-repatriation basis.

Repatriation and Non-Repatriation Basis

When the proceeds on investments made in India by a PROI can be transferred abroad after the exclusion of all applicable taxes refers to investments made on a repatriable basis and are regarded as foreign direct investment (FDI) or foreign portfolio investment based on the thresholds and other conditions laid down under NDI Rules.

In case of Investments on a non-repatriable basis, the same is not eligible to be remitted outside India (rule 2(ad) of NDI Rules r.w. para 2.1.31. of the FDI Policy, 2020). Subject to the provisions of schedule IV to the NDI Rules, investments made by a Non-Resident Indian(NRI) on a non-repatriation basis are deemed to be domestic investments and are considered on par with investments made by residents.

Downstream Investments by NRIs

Downstream Investment’ means investments 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 that has received investment from abroad. It includes entities in which a foreign entity which owns or controls more than 50% of the voting power by virtue of its investments, shareholding, or has power to appoint management of the company. Such a foreign entity is referred to as a foreign-owned and controlled company (FOCC) (explanation to rule 23 of NDI Rules r.w. Annexure 4 of the FDI Policy).

Where the investment received from an Indian company from a foreign entity is utilized to invest in the capital instrument of any other Indian company, it will be regarded as indirect foreign investment and the investor company will have to report the same in Form DI with the Reserve Bank of India within a period of 30 days from date of allotment of the equity instruments[3] (para 12 of FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019).

Need for a clarification

Though the investment made by an NRI on a non-repatriation basis was considered as on par with resident investments and were treated like domestic investments, the investment made by Indian entities owned and controlled by NRIs had no specific carve-out for the same. No clarity existed as to whether such an investment would attract the reporting and other compliance requirements of downstream investments.

Regulatory Changes

To address the ambiguity mentioned above, DIPP had released a press release dated March 19, 2021[4] amending the FDI Policy to provide that any investment in Indian entities by Indian entities which are owned and controlled by NRIs shall not form part of the calculation for indirect foreign investment.

On the same lines, the Ministry of Finance, vide notification dated August 06, 2021[5] amended the NDI Rules with immediate effect and inserted a new explaination to section 23(7)(i)(A) which provides that an investment made by an Indian entity which is owned and controlled by NRI’s on non-repartriation basis shall not be considered for calculation of indirect foreign investment.

Accordingly, the investment in Indian entities by Indian entities owned and controlled by NRIs will be considered at par with resident investments.  Prior to the amendment, there was no clarity on whether what could be done directly under law was allowed indirectly too. The same has now been addressed.





[5] 228847.pdf (

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