Downstream Investment Not to Result in Indirect Foreign Investment

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

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.

Recently, on March 19, 2021[3] Department of Promotion of Industry and Internal Trade (DPIIT) issued a press note clarifying on downstream investment in case of companies with investment from Non-Resident Indians (NRIs) on non-repatriation basis. The press note will become effective from the date of FEMA notification amending NDI Rules, that is pending as on date.

This article covers the concepts relating to downstream investment, investment on non-repatriation basis along with analysis of the press note.

Repatriation and Non-Repatriation Basis

Investment on repatriation basis means an investment, sale or maturity proceeds of which are net of taxes, eligible to be repatriated out of India. For an investment to be regarded as foreign investment, it should be made on a repatriation basis in the equity instruments of a company.

Where the investments are made on non-repatriation basis, the same is regarded as domestic investment and are considered on par with investments made by residents.. Schedule IV to NDI Rules provides conditions for investment by NRIs on non-repatriation basis.

Downstream Investment

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 and are owned or controlled by persons resident outside India. Such companies are referred as Foreign Owned and Controlled Companies (FOCC). Any investment by an FOCC in the equity instruments of another Indian entity results in indirect foreign investment and entails certain compliances as detailed hereunder:

  • Approval of Board of Directors and shareholder’s agreement, if any;
  • Source of funds for downstream investment cannot be borrowed in domestic market. It may either be brought from abroad or internal accruals[4] may be used;
  • Report the investment in Form DI with the Reserve Bank of India within a period of 30 days from date of allotment of the equity instruments;
  • Obtaining certificate from Statutory auditors in relation to compliance with the conditions and providing a confirmation to that effect in the Director’s report.

Clarification vide Press Note

Though the investment made by an NRI on a non-repatriation basis was considered at par with resident investments and were treated like domestic investments, the investment made by Indian entities, owned and controlled by NRIs being persons resident outside India, 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.

The press note clarifies that downstream investment by such an entity will not result in indirect foreign investment.

Suitable insertion in Rule 23 of NDI Rules dealing with downstream investment in awaited.





[4] profits transferred to reserve account after payment of taxes.


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