External Commercial Borrowings (ECB) Framework
– Heta Mehta, Senior Executive | corplaw@vinodkothari.com
Watch our video here: https://youtu.be/XaS6Eh3Ekd4
See our other resources:
Open but Guarded Gates: Relaxations for Border-Country Investments
Vinita Nair, Joint Managing Partner and Ankit Singh Mehar, Assistant Manager | corplaw@vinodkothari.com
Updated on May 4, 2026
A 15th March 2026 Press Note from Department for Promotion of Industry and Internal Trade (DPIIT) implements the cabinet decision to align investments from land-border countries (LBCs) with “beneficial owner” definition of PMLA. Accordingly, where investments come from a non-LBC, where beneficial ownership traces back to LBC, either to a citizen of LBC or an entity set up there, the investments will be allowed only in approval mode. In our view, even if there are multiple such citizens or entities, the amendment requires an aggregation of the investments of all LBC citizens or entities.
The 15th March DPIIT Press note 2 (‘PN2’) was preceded by a decision of Central Government, on March 10, 2026 (‘CG press release’) relaxing the restrictions placed in 2020 on FDI from countries sharing land-border with India (LBC) by (a) prescribing a strict approval timeline of 60 days in case of specified sectors/activities of manufacturing in capital goods, electronic capital goods, electronic components etc and (b) by allowing certain investments under automatic route where the investors have non-controlling LBC Beneficial Ownership of up to 10%. The objective is to facilitate ease of doing business and attract FDI inflows especially in critical sectors.
Effective date of amendment
DPIIT issued Press Note 2 of 2026 dated March 15, 2026 (PN2) amending the Consolidated FDI Policy with respect to eligible investors (Para 3.1.1). PN2 shall take effect from the date of notification of amendment in NDI Rules. A corresponding amendment in Rule 6 of the FEMA (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’) was notified and published in gazette on May 2, 2026. Accordingly, the amendment takes effect from May 2, 2026.
Background
Since April 2020, in terms of rule 6 of NDI Rules and FDI Policy, prior approval of the government is required for any investment made by an entity from LBC or where the beneficial owner of an investment into India (a) – is situated in LBC; or (b) is a citizen of such LBC. Likewise, any transfer of ownership of existing or future FDI that results in the beneficial ownership of the investment shifting to a person who is a citizen of, or situated in, a LBC also requires prior government approval.
These requirements were notified pursuant to Press Note No 3 dated April 17, 2020 and subsequent notification of FEMA (Non Debt Instruments) Amendment Rules, 2020. Refer to our earlier write-up titled India seals its borders to corporate acquisitions dealing with the said press note. Our earlier you-tube video covering the overview of FDI can be accessed here.
In order to meet the objectives of Aatmanirbhar Bharat and increase FDI inflows, India has decided to revisit the restrictions placed during Covid pandemic to curb opportunistic takeovers/acquisitions by Chinese companies. In this article we discuss the changes approved and notified by way of PN2 and amendments made in NDI Rules effective May 2, 2026.
- Investments received from LBC
Prior approval of the government is now required for any investment made by an entity or citizen from LBC. The approval requirement also extends to investments made in India where the beneficial owner of an investment into India is a citizen of LBC.
The restriction arising on account of being ‘situated in LBC’ has been deleted. This relaxes the requirement for individuals of different nationalities situated in LBC investing in India or receiving ESOPs from Indian companies, as they will no longer require government approval.
Accordingly, the amended position is as under:
- Investments received from non – LBC with BO of investments based in LBC
Prior approval of the government is now required for any investment by PROI from non-LBC, where the beneficial owner of an investment into India is a citizen/entity of LBC.
Meaning of ‘beneficial owner of an investment into India’:
Let us first understand the meaning of “investor entity”.
It means the beneficial owner(s) of the investor entity incorporated or registered in a country other than LBC. Manner of identifying the beneficial owner(s) of the investor entity will be as discussed below in Clause 4.
- Applicability in case of transfer of ownership
Prior approval is required for any direct or indirect transfer of ownership of existing or future FDI in an Indian entity that results in the beneficial ownership of the investment into India shifting to an entity or a citizen of LBC.
- Scope of ‘beneficial owner’ (BO)
As per PN 2 and NDI Rules, the manner of identifying BO is aligned with Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 read with Rule 9 (3) of Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PML Rules). The reference to PML rules is mainly for the thresholds (refer below).
BO will be construed as vested with the LBC if the citizen(s) of LBC or entity (ies) incorporated/ registered with LBC has/ have the ability to hold rights/ entitlements in excess of thresholds under PML rules or exercise control over the investor entity or ultimate control over the investee i.e the Indian entity in any manner:
- directly or indirectly,
- individually or cumulatively,
- independently or collectively,
- whether acting together or otherwise.
Whether holdings by different citizens or entities of LBC to be aggregated?
In our view, yes. The intent is to allow investments from entities where the investors from LBC hold a non-controlling interest. Therefore, one will have to consider all investments put together. The approval requirements have been further clarified by way of following illustrations:
Illustration 1
Illustration 2
Illustration 3
Illustration 4
One might argue that if neither of the persons referred above i.e. Mr. X or Mr. Y or Entity incorporated in LBC, are qualifying as ‘beneficial owners’ under PMLA Rules on a standalone basis, then why do we need to aggregate their shareholding?
Here, reference needs to be made to the language of the proviso to Para 3.1.1.(c) of the FDI Policy and Explanation 2 to NDI Rules, which requires considering the rights/entitlements held – directly or indirectly, individually or cumulatively, independently or collectively, whether acting together or otherwise. The language seems to indicate that aggregation needs to be done irrespective of whether the person in question is acting independently or collectively or whether they are acting together or otherwise. Hence, in our view, one has to consider if investors of the Non-LBC with BO from LBC cumulatively hold in excess of the prescribed thresholds.
- Ambit of ‘beneficial owner’under PMLA
- Investments with non-controlling stake permitted under Automatic route
As per Para 3.1.1(d) of the amended FDI Policy, investments from an investor entity having any direct or indirect ownership by a citizen or an entity of LBC not requiring prior government approval shall be subject to reporting requirements as per the SOP laid down by DPIIT and prescribed by RBI.
- Investments by Multilateral Bank or Fund of which India is a member
The amended proviso to Rule 6 (a) of the NDI Rules clarifies that any Multilateral Bank (like World Bank, Asian Development Bank, Asian Infrastructure Investment Bank, New Development Bank etc.) or Fund (like International Monetary Fund, International Fund for Agricultural Development etc) of which India is a member shall not be treated as an entity of a particular country, nor any country would be treated as beneficial owner of any investments made by such Bank/Fund in India. This was not provided in PN2 and clarified vide amendment in NDI Rules.
- Other proposals approved in the CG press release pending notification
Fixed 60 days timeline for government approval for critical sectors
Presently, the timeline for obtaining government approval for FDI ranges between 12–14 weeks.
Source: Annexure V of SOP for Processing FDI Proposals
In cases where the investee entities are engaged in the specified sectors / activities concerning manufacturing of Capital goods, Electronic capital goods, Electronic components, Polysilicon and ingot-wafer etc. a timeline of 60 days shall be adhered to for government approval, in view of the criticality. The list will be provided by DPIIT. The majority shareholding and control of such Investee entities should be with the residents.
The Government will continue to assess the proposals on a case to case basis and accord approval. Recently, an electronics manufacturer company received MEITY approval for receiving investment of 26% in a joint venture from a Chinese investor.
Way forward
As discussed in the CG press release, the existing restrictions to cases where LBC investors only have non-strategic, non-controlling interests were seen as adversely affecting investment flows from investors including global funds such as PE/ VC funds. By loosening the said restrictions cautiously, greater FDI inflows and speedier fundraising can be encouraged, particularly into startups and deep techs while protecting the nation’s security interests. The relaxed norms aim to increase access to technology, facilitate ease of doing business for Indian entities and strengthen India’s position as an attractive destination for investment and manufacturing.
Refer our other resources on FDI here
Relaxing FEMA reforms to boost global trade
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Open in new tab SWAGAT to foreign branches or offices in India: RBI proposes draft regulations on such establishments
– Team Corplaw | Corplaw@vinodkothari.com
As a part of its efforts to rationalise the regulations for establishment of a place of business in India by overseas entities[1], RBI has issued Draft Foreign Exchange Management (Establishment in India of a branch or office) Regulations, 2025. The proposals primarily aim to enable delegation of more powers to AD banks and reduction of compliance burden, thereby further enhancing the ease of doing business in India.
As against the extant Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016, as updated in Master Direction – Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any other place of business in India by foreign entities, the classification of foreign establishments have been limited to (a) branch and (b) office.
Read more →ECBs become Easy: RBI liberalises norms for external commercial borrowings
– Vinita Nair, Joint Managing Partner and Heta Mehta, Senior Executive | corplaw@vinodkothari.com
Updated as on 19th February, 2026
Permits acquisition finance, enhances limits to 3x of net worth, removes cost ceilings, all PROIs become eligible lenders and many more.
RBI significantly relaxed the framework for External Commercial Borrowings (ECBs) effective February 16, 2026, permitting entities to borrow from any person resident outside India (PROI), enhancing the ECB limit from USD 750 mn to higher of USD 1 bn / 300% of net worth, relaxing it for financial sector regulated entities, removing the absolute restrictions on all-in cost, penal interest on all ECBs etc. Necessary amendments have been notified in FEMA (Borrowing and Lending) Regulations, 2018 pursuant to which the RBI Master Directions on ECB also stands modified. ECB norms are now governed by Schedule 1 of these regulations. These measures are expected to further strengthen cross-border fundraising avenues for Indian corporates.
As per RBI data, ECB inflows rose sharply from approximately USD 8 billion in FY 2022–23 to USD 26.5 billion in FY 2023–24, and further to over USD 61 billion in FY 2024–25. In FY 2025–26, around USD 27.6 billion has been mobilised up to December, indicating continued access to offshore funds, though at a moderate pace compared to the previous year’s peak. The present amendment will provide further impetus to entities to avail ECBs.
RBI rationalises Guarantee regulations
Introduces principle-based regulatory approach and reporting requirements
– Vinita Nair & Harshita Malik | corplaw@vinodkothari.com
– Updated on January 13, 2026
Effective January 10, 2026, FEMA (Guarantees) Regulations, 2026 (‘Regulations, 2026’) came into force repealing the 26-year-old FEMA (Guarantees) Regulations, 2000 (‘Erstwhile Regulations’), moving to principle based requirements and introducing comprehensive reporting of all requirements for all guarantees . Regulations, 2026 apply to guarantee arrangements involving a surety (person who gives the guarantee), a principal debtor (a person in respect of whose default the guarantee is given) and a creditor (means a person to whom the guarantee is given) where the Person Resident In India (‘PRII’) provides/ avails guarantee to/ from a Person Resident Outside India (‘PROI’). The meaning of guarantee1 includes counter guarantees and (based on stakeholders feedback) also a guarantee for securing a portfolio of debt, obligations or other liabilities.
Regulations, 2026 comprises of 8 regulations covering the general Prohibition (Reg 3), Exemptions for certain transactions by AD Bank and (based on stakeholders feedback) guarantees extended in terms of overseas investment regulations (Reg 4), Permission to act as a surety or a principal debtor (Reg 5), Permission to obtain a guarantee as a creditor (Reg 6), Reporting Requirements (Reg 7) and Late Submission fee for delayed reporting (Reg.8). These have been notified based on the feedback received on the Draft FEMA (Guarantees) Regulations, 2025 (‘Draft Regulations’) issued in August 2025.
Onus of compliance [Reg. 3]
The Erstwhile Regulations placed the onus on the PRII giving a guarantee or a surety in relation to a debt, obligation or other liability owed to or undertaken by PROI. Regulations, 2026 additionally extends the onus even to a PRII who is the party to a guarantee (surety or creditor or a principal debtor) where any of the other party is a PROI.
Exemptions under Regulations, 2026 [ Reg 4]
- Guarantees by AD Bank’s branch outside India or in IFSC (based on stakeholders feedback), unless any of the other parties to guarantee is a PRII;
- Guarantees by AD Bank in the nature of Irrevocable Payment Commitment (IPC) issued as a custodian bank for a registered FPI on behalf of an authorised central counterparty in India, considering the same is treated as a financial guarantee in terms of RBI prudential norms for commercial banks.
- Guarantees provided in accordance with FEMA (Overseas Investment) Regulations 2022 (based on stakeholders feedback) – considering those are governed and reported under a separate framework altogether.
Conditions to act as Surety/ Principal Debtor [Reg. 5]
A PRII can give a guarantee or be the principal debtor if the following two conditions are met:
- Condition 1: The underlying transaction for which the guarantee is being given or arranged is NOT prohibited under FEMA; and
- Condition 2: Surety and principal debtor must be eligible to lend to and borrow from each other under FEMA (Borrowing & Lending) Regulations, 2018 (clause earlier referred to ‘resultant transaction’ and has been modified based on stakeholders feedback). It is intended that at the time of issuance of guarantee itself, the surety and the principal debtor shall ensure that they are eligible to lend and borrow to each other as per Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. Compliance with other attendant conditions, such as cost, maturity, etc. for borrowing and lending is not envisaged.
However, Condition 2 provides for three exceptions (listed below in the table):
| Nature of guarantee | Given by | In favor of | Condition for exemption |
|---|---|---|---|
| Guarantees by AD bank backed by counter guarantee or collateral (based on stakeholders feedback) | AD Bank | PROI | Covered by counter-guarantee OR 100% cash collateral in the form of deposit from PROI |
| Guarantee by agents of foreign Shipping/Airline company | Agent in India | Foreign Shipping/Airline Co. | In connection with its obligation/ liability owed to statutory/Government authority in India |
| Both Indian Parties | PRII | PRII | Both surety & principal debtor are PRIIs |
Further, the prohibition added in the Draft Regulations in line with RBI Circular of March 13, 2018 disallowing AD Bank from giving a Letter of Comfort or a Letter of Undertaking is not expressly covered in Regulations, 2026. However, the circular of March 2018 does not seem to have been repealed by RBI either. Accordingly, the prohibition seems to continue.
Permission to obtain guarantee as a creditor [Reg. 6]
Explicit permission given to PRII creditors to obtain guarantees in its favor where both principal debtor and surety are PROIs, where the underlying transaction is not prohibited under the FEMA.
Reporting requirements [Reg. 7 and 8]
The Erstwhile Regulations did not provide for any reporting requirements. Guarantees provided as part of ECB or in favor of overseas subsidiaries were covered under the reporting made under respective regulations. Regulations, 2026 provide for detailed reporting requirements, with RBI having the right to put the information in public domain.
Who is to report: Regulations, 2026 mandate reporting of guarantees through the AD Banks. Reporting is required to be made by the
a) Resident surety; or
b) Principal debtor who arranged the guarantee, where surety is PROI; or
c) Creditor – where both surety and principal debtor are PROI or where the creditor has arranged the guarantee.
In case of more than one surety/ principal debtor/ creditor to the same guarantee, any of them can be designated to report that guarantee (based on stakeholders feedback).
To whom: To the AD Bank
What is to be reported: Guarantees covered in Regulations, 2026 – (a) issuance of guarantee, (b) any subsequent change in guarantee terms, namely – guarantee amount, extension of period or pre-closure, and (c) invocation of guarantee, if any,
Format: Form GRN (format provided at Annex to the Regulations, 2026).
One of the instructions for filing form GRN states that change of guarantees issued prior to coming into effect of these regulations i.e. January 10, 2026 shall be reported as a fresh issuance of guarantee from the date of modification. This seems to indicate that guarantees outstanding as on January 10, 2026 need not be reported unless there is a modification. In that case, an invocation of an existing guarantee may also not be required to be reported unless there is any modification which has been reported to the AD Bank under Regulations, 2026.
Further, quarterly reporting on issuance of guarantee for Trade Credit is being discontinued from quarter ending March 2026.
Periodicity and timeline: On a quarterly basis, within 15 days from the end of the respective quarter (revised to periodic basis from ‘as and when basis’ based on stakeholders feedback). Draft regulations provided for reporting within7 days from the date of issuance/ aforementioned change/ invocation of such guarantee
Further, AD Bank to onward report to RBI within 30 days from end of quarter.
Late Submission fee: Rs. 7,500 + (0.025% × A × n) rounded up to nearest hundred, where:
- A = amount involved in the delayed reporting in INR; and
- n = years of delay rounded-upwards to the nearest month and expressed up to 2 decimal points.
Amendments to ECB Master Directions
Deletion of Para 17.2 of the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations (ECB Master Directions) dealing with the quarterly reporting requirement on data on bank guarantees for trade credits furnished by AD Bank.
Deletion of guarantee related provisions in Part III dealing with Structured Obligations: Para 19 dealing with terms and conditions for Non-resident guarantee for domestic fund based and non-fund based facilities and Para 20 dealing with terms and conditions for Facility of Credit Enhancement by eligible non-resident entities to domestic debt raised through issue of capital market instruments.
Amendments to other Master Directions
Master Directions – Export of Goods and Services, Master Directions – Import of Goods and Services , Master Direction – Other Remittance Facilities – Deletion of provision relating to issue of various guarantee in relation to export, import transactions covered under Erstwhile Regulations as Regulations, 2026 move to a principal based regime.
Master Direction – Reporting under Foreign Exchange Management Act, 1999 inserting Form GRN in relation to reporting of guarantees .
Conclusion
The Regulations, 2026 is certainly a welcome change, introducing principle-driven framework, expanded scope (counter-guarantees, portfolio guarantees), and simplified quarterly reporting. Specific requirements provided under ECB norms, ODI rules, Borrowing and lending regulations etc. shall continue to be complied while undertaking the transaction and the existing arrangements should be reviewed for new quarterly reporting obligations in case of modifications.
You may read more at our Resource centre on FEMA
- including a ‘counter guarantee’ means a contract, by whatever name called, to perform the promise, or discharge a debt, obligation or other liability (including a portfolio of debts, obligations or other liabilities), in case of default by the principal debtor ↩︎
RBI amends FEMA norms to promote usage of INR in global markets
February 03, 2025
-Prapti Kanakia, Manager & Anjali Singh, Executive | corplaw@vinodkothari.com
Read More:
FEMA facilitates acquisition of foreign entity by Indian companies through cross border swaps
RBI revamps Master Directions on Compounding under FEMA
Powers of RBI Officers enhanced for compounding FEMA offences
Downstream investment to be treated at par with FDIs
Introduction
The Master Direction on Foreign Investment in India, recently updated on January 20, 2025, goes beyond a mere consolidation of the recent amendments in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Rules’), providing clarifications in several areas of legislative silence. One of the key areas of clarification include the rules around downstream investments.
In this note, we have discussed downstream investment through stock deals and other significant clarifications provided in the Master Direction.
Background
Rule 6(a) of the NDI Rules deals with the investment by a person resident outside India (‘PROI’) in the equity instruments of an Indian company. The said rule refers to Schedule I, which, amongst others, specifies the modes of payment of consideration. Prior to the FEM (Non-Debt Instruments) (Fourth Amendment), Rules, 2024 dated August 16, 2024 (“Fourth Amendment Rules”), the Schedule contained an enabling provision for Indian companies to issue its equity instruments to PROI by way of swap of equity instruments. Since the term “equity instruments”, as defined under Rule 2(k) of Principal NDI Rules, means equity shares, convertible debentures, preference shares and share warrants issued by an Indian company, the provision permitting share swaps was read narrowly to refer to swap of shares of an Indian company against that of another Indian company only.
However, pursuant to the Fourth Amendment Rules, the Schedule was further amended to expressly provide for the swap of equity capital, as defined under rule 2(1)(e) of Foreign Exchange Management (Overseas Investment) Rules, 2022. The same is defined as “equity shares or perpetual capital or instruments that are irredeemable or contribution to non-debt capital of a foreign entity in the nature of fully and compulsorily convertible instruments.”
Downstream investment, on the other hand, is governed by the provisions of Rule 23 of the NDI Rules. While the said rule specified certain requirements to be complied with in the context of downstream investment, including the sources through which funds can be brought in for the purpose of such investments, the rule neither explicitly provided for the share swaps as a permitted mode of payment, nor contained any reference to Schedule I of the NDI Rules. As a result there was uncertainty among industry stakeholders on permissibility of share swaps as a form of consideration in case of downstream investment.
Meaning of Downstream Investment
The explanation to Rule 23 (also contained in Para 9.1.13 of the Master Direction) states that:
Downstream Investment is an investment made by an Indian entity which has received foreign investment or an Investment Vehicle in the equity instruments or the capital, as the case may be, of another Indian entity.
In other words, when an Indian entity owned or controlled by PROI [commonly referred to as a Foreign Owned and Controlled Entity (FOCC)] makes investments in the equity instruments/ capital of an Indian entity, such an investment will be considered as downstream investment for the PROI. Such arrangements enable PROI to hold investment in other Indian entities indirectly, thus, considered as an indirect foreign investment. As a result, the restrictions, prohibitions and limitations as applicable to direct foreign investments will be applicable at the time of downstream investment as well. For better understanding, refer to the figure below:
Guiding principle on downstream investment: what cannot be done directly, shall not be done indirectly
The recent updates in the Master Directions provide for the guiding principles of downstream investments, thereby clarifying that all permissions and prohibitions vis-à-vis direct foreign investment under the NDI Rules will be applicable to indirect foreign investment (i.e. downstream investment) as well.
Para 9 of the Recent Master Direction reads as below:
“The guiding principle of the downstream investment guidelines is that “what cannot be done directly, shall not be done indirectly”. Accordingly, downstream investments which are treated as indirect foreign investment are subject to the entry routes, sectoral caps or the investment limits, as the case may be, pricing guidelines, and the attendant conditionalities for such investment as laid down in the NDI Rules.”
Giving reference to above guiding principles, the Master Directions explicitly refers to the permissibility of the arrangements which are available for direct investment such as investment by way of swap of equity instruments/equity capital, payment arrangements/mechanism as per Rule 9(6) of the Rules etc, for the purpose of downstream investment as well.
Implication of above clarification
The above clarification has paved a way for Foreign Owned or Controlled entities (FOCC) to make further investments in Indian entities by way of swapping equity capital of foreign companies held by it in addition to other sources as already available. This arrangement of swapping of securities is known as a stock deal.
Previously, for making downstream investment, an FOCC was allowed to raise fresh funds from abroad by way of issue of securities including non-convertible debentures or by utilising internal accruals such as profits after tax. For more clarity refer to the table below:
| Sources of making investment by FOCC in another Indian entity | Position prior to the clarification | After clarification |
|---|---|---|
| Internal accruals (i.e., profits transferred to reserve account after payment of taxes) | Allowed | Allowed |
| Fresh funds from abroad including issue of NCD | Allowed | Allowed |
| Swap of equity instruments/ capital | No express provision | Allowed |
| Using funds borrowed in the domestic markets | Not allowed | Not allowed |
Other conditions w.r.t downstream investment in light of the guiding principle
As per the guiding principle on downstream investments as discussed above, an Indian entity which has received indirect foreign investment is subject to permissions and prohibitions as applicable to direct foreign investment under NDI Rules. Further, the onus of ensuring such compliances are on the FOCC making such investments, and not on the Indian investee entity receiving such indirect FDI.
- Investment from land border sharing countries
In order to curb opportunistic takeovers/ acquisitions of Indian companies due to COVID-19 pandemic, the Government of India restricted investment from countries sharing land borders with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, by way of issue of Press Note-3. As a result, any foreign direct investment from such countries would be permitted with prior approval of the Government of India in permissible sectors.
This will be applicable in case of investment by FOCC as well, where such FOCC, in turn, has received investment from such countries as discussed above.
- Deferred payment arrangements
Similarly, the facility of making deferred payment of up to 25% in case of transfer of equity instruments between PROI and Person Resident in India (PRI) will also be applicable in case of downstream investment. This is, subject to the compliance with the conditions as laid down in Rule 9(6) of the NDI Rules.
The Master Directions further state that a transaction intended to be undertaken using above arrangement(s) shall require the share purchase/transfer agreement to contain the respective clause and related conditions for such arrangement.
- Subsequent classification as downstream investment
Where an Indian entity (i.e., investor) at the time of making further investment in another Indian entity (i.e., investee) was not an FOCC at the time of investment, but subsequently becomes an FOCC, then such investment in another Indian entity would need to be reclassified as downstream investment from the date when investor entity becomes FOCC. Consequently, such downstream investment shall be in compliance with the applicable entry route and sectoral cap compliances and shall be required to be reported by the investor entity within 30 days from the date of such reclassification in form DI.
- Valuation requirement
As per para 8.4 of the Recent Master Direction, in case of swap of equity instruments, irrespective of the amount, valuation will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
- Downstream Investment by NRI/OCI on non-repat. basis to be treated as domestic investment
The investments made by NRIs/OCIs on non-repatriation basis is treated as deemed domestic investment. Accordingly, an investment made by an Indian entity which is owned and controlled by a Non-Resident Indian or an Overseas Citizen of India including a company, a trust and a partnership firm incorporated outside India and owned and controlled by a Non-Resident Indian or an Overseas Citizen of India, on a non-repatriation basis in compliance with Schedule IV of these rules, shall not be considered for calculation of indirect foreign investment.
To know more about foreign investment, check out our YouTube repository on:
- Overview of Foreign Direct Investment
- Understanding the Downstream Investment
- Overview of Overseas Investment Rules
RBI & SEBI roll out process for reclassification of FPI’s holding to FDI
– Vinita Nair, Senior Partner & Prapti Kanakia, Manager | corplaw@vinodkothari.com | November 15, 2024
Classification of foreign investments as Foreign Direct Investment (‘FDI’) or foreign portfolio investment is critical for determining the compliance applicable. A person resident outside India may hold foreign investment either as FDI or as foreign portfolio investment in any particular Indian company. Investments by Foreign Portfolio Investors (‘FPIs’) registered with SEBI is mainly governed by the investment restrictions and thresholds provided in SEBI (FPIs) Regulations, 2019 and Part C of SEBI Master Circular for FPIs. Pursuant to Reg. 20 (7) of SEBI regulations, a single FPI (including its investor group[1]) can invest upto 10% of the total paid- up equity capital on a fully diluted basis of the company. In case of breach of this threshold, the FPIs get 5 trading days from the date of settlement of the trades resulting in the breach to correct the position, in terms of the SEBI Regulations as well as Rule 10(1) of FEM (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’), failing which the entire investment is considered as FDI and procedure prescribed by SEBI in Para 17 of Part C of the SEBI Master Circular is required to be followed i.e.:
- Follow extant FEMA rules & RBI prescribed norms in this regard;
- No further foreign portfolio investment in that company;
- FPI to inform respective custodians of the choice who in turn will report this to SEBI, depositories and the issuer;
- Sale of these securities permitted only through the route they were acquired & LEC reporting by custodian.