Downstream Investments in India

by Akshata Srinath

Foreign investment coming into India comprises of both direct and indirect investments. These investments are from non-residents and resident Indian entities. A Downstream Investment1 means such investment which is indirect foreign investment by one Indian company into another Indian Company by acquisition of shares and way of subscription. The framework until 2009 depended upon the press release by the DIPP wherein prior permission was required to be taken from Foreign Investment Promotion Board (“FIPB”) or any other concerned authority. The complication further arose when there were investments made by foreign owned Indian holding companies where not only the prior permission was required, but pre-requisite conditions were to be fulfilled, which included to keep checks on the foreign equity levels and the time period to keep track of the transfer.2 To understand such investment structure, it is important to analyse the key issues involved wherein before due diligence initiates all the parties to the transaction need to understand the investment structure along with the other approvals required from the relevant authorities.

A Core Investment Companies (“CICs”) also known as a ‘shell company’ is the company which only exists in India for the purposes of investment in other Indian companies.3 A foreign owned Indian company which is a CIC requires to fulfillment of the conditions of the regulations framed by the Reserve Bank of India (“RBI”). CICs, as per the law, needs to be registered with the RBI and they need to obtain a Certificate of Registration. It is to be noted that neither the amount being invested nor the ownership or the control of the CICs is significant for acquiring the approvals. Furthermore, when such downstream investments are made through such companies, it will need to comply with other subsequent and relevant conditions on entry route, other caps and conditions. Also while allowing such foreign investments to come in India. FIPB approval along with the RBI approval is required.4 Furthermore, the guidelines also bring out the procedure for the calculation of foreign investment in Indian Companies, transfer of ownership and control of Indian Companies along with the downstream investment of the Indian Companies.

Consequently, after seeing into the foreign investment rules and regulation, it can be indicated that even if a company tries to bring in investment in India without any approval by the relevant authorities, the foreign owned Indian company needs to make a report/disclosure to the RBI at the end of the financial year, declaring the utilization of the said investment made. Moreover, for the purpose of downstream investment, the Indian companies making the downstream investments would have to bring in requisite funds from abroad. As the new policy steps in, funds from the domestic market cannot be used. However this does not preclude downstream operating companies, from raising debt in the domestic market. Downstream investments through internal accruals are permissible by an Indian company, subject to the provisions of clause 65 which proposes a suitable regulatory framework for the CICs to comply with the registration process with the RBI. The RBI has also made further clarification on when a downstream investment is made by an Indian company which is not owned and controlled by residents into another Indian company, this investment will be subjected to the sectoral norms on entry route, conditions and caps applicable to the sector in which latter company operates.6

When downstream investments are made by a CIC which is owned and controlled by a non resident entity, further notification needs to be made to the Department of Industrial Policy & Promotion (“DIPP”) and Secretariat for Industrial Assistance (“SIA”) along with FIPB and RBI.7 Also issue, transfer pricing and valuation of shares should be in accordance with the Securities and Exchange Board of India (“SEBI”).8 The Indian company needs to comply with the provisions of the Companies Act 1956 like investments by the way of induction of foreign equity needs to be backed up by a resolution of the Board of Directors and a shareholders’ agreement.9

Therefore, the parties before the commencement of the process of due diligence, should clarify any concerns with respect to the above mentioned laws, the suitability of the investment structure to bring in foreign investments in the company, clarity on whether certain approvals are applicable to them or not.

[1] The term ‘Downstream Investment’, is widely used in practice but it is not specifically defined. It only came into definition by the Press Note 4 [2009 Series] issued by the Department of Industrial Policy & Promotion, Government of India (DIPP) as indirect foreign investment by one Indian company into another Indian company by way of subscription or acquisition in terms of Press Note 2 of 2009.

[2] “Press Note No. 9 (1999 Series)” Government of India, online: <>.

[3] “Master Circular– Regulatory Framework for Core Investment Companies (CICs)” Reserve Bank of India, online: <>. It has to be understood that any such method in which investments enter in India, need approval from the RBI which includes declaration of the amount of investment coming into the company.

[4] “Foreign Investment in India – Guidelines for calculation of total foreign investment in Indian companies, transfer of ownership and control of Indian companies and downstream investment by Indian companies” Reserve Bank of India, online: <>.

[5] “Regulatory Framework for Core Investment Companies (CICs)” Reserve Bank of India, online: <>.

[6] Supra note 4.

[7] “Consolidated FDI Policy” Government of India (5 April 2013) online: <>, “Press Note No. 6 (2013 Series)” Government of India online: <>.

[8] “Foreign Investments in India” Reserve Bank of India, online: <>.

[9] Indian Companies Act, 1956, Act No. 1, s 31, s 40, and s 94 (1)