Rule 23 - Downstream investment - Foreign Exchange Management (Non-debt Instruments) Rules, 2019

23. Downstream investment - (1) Indian entity which has received indirect foreign investment shall comply with the entry route, sectoral caps, pricing guidelines and other attendant conditions as applicable for foreign investment. Explanation : Downstream investment by an LLP not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India is allowed in an Indian company operating in sectors where foreign investment up to one hundred percent is permitted under automatic route and there are no FDI linked performance conditions. (2) With effect from the 31st day of July, 2012, downstream investment(s) made under Corporate Debt Restructuring (CDR), or other loan restructuring mechanism, or in trading book, or for acquisition of shares due to defaults in loans, by a banking company, as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 ( 10 of 1949) incorporated in India, which is not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India, shall not count towards indirect foreign investment, however, their strategic downstream investment shall be counted towards indirect foreign investment for the company in which such investment is being made. (3) Guidelines for calculating total foreign investment in Indian companies are as follows ,- (a) any 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; (b) FCCBs and DRs having underlying of instruments in the nature of debt shall not be reckoned for total foreign investment; (c) the methodology for calculating total foreign investment shall apply at every stage of investment in Indian companies and thus in each and every Indian company; (d) for the purpose of downstream investment, the portfolio investment held as on 31st March of the previous financial year in the Indian company making the downstream investment shall be considered for computing its total foreign investment; (e) indirect foreign investment received by a wholly owned subsidiary of an Indian company shall be limited to the total foreign investment received by the company making the downstream investment. (4) Downstream investment that is treated as indirect foreign investment for the investee entity shall be subject to the following conditions, namely :- (a) downstream investment shall have the approval of the Board of Directors as also a shareholders Agreement, if any; (b) for the purpose of downstream investment, the Indian entity making the downstream investment shall bring in requisite funds from abroad and not use funds borrowed in the domestic markets and the downstream investments may be made through internal accruals and for this purpose, internal accruals shall mean profits transferred to reserve account after payment of taxes. Further raising of debt and its utilisation shall be in compliance with the Act, rules or regulations made thereunder. (5) Equity instrument of an Indian company held by another Indian company which has received foreign investment and is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India may be transferred to- (a) a person resident outside India, subject to the reporting requirements as specified by the Reserve Bank. (b) a person resident in India subject to adherence to pricing guidelines; (c) an Indian company which has received foreign investment and is not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India. (6) The first level Indian company making downstream investment shall be responsible for ensuring compliance with the provisions of these rules for the downstream investment made by it at second level and so on and so forth and such first level company shall obtain a certificate to this effect from its statutory auditor on an annual basis and such compliance of these rules shall be mentioned in the Director s report in the Annual Report of the Indian company. In case statutory auditor has given a qualified report, the same shall be immediately brought to the notice of the regional office of the Reserve Bank in whose jurisdiction the Registered Office of the company is located and shall also obtain acknowledgement from the Registered Office. (7) The provisions (5) and (6) of rule 23 shall apply mutatis mutandis to a LLP. Note: Downstream investment that is treated as indirect foreign investment for the investee entity made in accordance with the guidelines in existence prior to the 13th February, 2009 shall not require any modification to conform to these rules and all such investments, after the said date, shall come under the ambit of these rules. Downstream investment that is treated as indirect foreign investment for the investee entity made between the 13th February,2009 and 21st June 2013 which is not in conformity with these rules shall have to be intimated to the Reserve Bank by 3rd October,2013 for treating such cases as compliant with these Rules. Explanation .- For the purposes of this rule,- (a) ownership of an Indian company shall mean beneficial holding of more than fifty percent of the equity instruments of such company and ownership of an LLP shall mean contribution of more than fifty percent in its capital and having majority profit share; (b) company owned by resident Indian citizens shall mean an Indian company where ownership is vested in resident Indian citizens and/ or Indian companies, which are ultimately owned and controlled by resident Indian citizens and LLP owned by resident Indian citizens shall mean an LLP where ownership is vested in resident Indian citizens and/ or Indian entities, which are ultimately owned and controlled by resident Indian citizens; (c) company owned by persons resident outside India shall mean an Indian company that is owned by persons resident outside India and LLP owned by persons resident outside India shall mean an LLP that is owned by persons resident outside India; 2 [****] (e) company controlled by resident Indian citizens means an Indian company, the control of which is vested in resident Indian citizens and/ or Indian companies which are ultimately owned and controlled by resident Indian citizens and LLP controlled by resident Indian citizens shall mean an LLP, the control of which is vested in resident Indian citizens and/ or Indian entities, which are ultimately owned and controlled by resident Indian citizens; (f) company controlled by persons resident outside India shall mean an Indian company that is controlled by persons resident outside India and LLP controlled by persons resident outside India shall mean an LLP that is controlled by persons resident outside India; (g) downstream investment shall mean investment made by an Indian entity which has total foreign investment in it, or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity; (h) holding company shall have the same meaning as assigned to it under Companies Act, 2013; (i) indirect foreign investment means downstream investment received by an Indian entity from,- (A) 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 (B) 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 that no person resident in India other than an Indian entity can receive Indirect Foreign Investment; 3 [Explanation . 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. ] (j) total foreign investment means the total of foreign investment and indirect foreign investment and the same will be reckoned on a fully diluted basis; (k) strategic downstream investment means investment by banking companies incorporated in India in their subsidiaries, joint ventures and associates. ************ NOTES:- 1. Inserted Vide Notification No. S.O. 3206(E) dated 06-08-2021 2. Omitted vide Notification No. S.O. 3492(E) dated 16-08-2024 before it was read as, (d) 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 and 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; 3. Substituted vide Notification No. S.O. 3492(E) dated 16-08-2024 before it was read as, 1 [Explanation : An investment made by an Indian entity which is owned and controlled by NRI(s), on a non-repatriation basis, shall not be considered for calculation of indirect foreign investment. ]