The Regulations of Downstream Investments by FDI Controlled Companies (FOCC)

Written by Sankalp Mirani, Paralegal at SageBridge Legal and Paridhi Mishra a 2nd year law student currently pursuing BA.LLB (Hons.) from MNLU Mumbai.

INTRODUCTION 

As India becomes a leading destination for foreign capital, understanding the rules governing indirect foreign investment has become increasingly relevant. Downstream investment is understood as an investment by an Indian company, particularly a foreign-owned or controlled one, into another Indian entity. These foreign transactions, though domestic in nature, are considered foreign investment because of the hidden foreign ownership or control and are regulated under the Foreign Direct Investment (FDI) policy regime. Though India's downstream investment legal framework has been laid down and even clarified through the latest notifications and clarifications of RBI, the paper finds that more clarity, streamlined procedures, and more efficient enforcement are needed to fill the still-existing gaps. With proper reforms, India can preserve a strong regulatory regime while continuing to promote high-quality foreign investment by way of both direct and indirect routes.

Foreign Direct Investments (FDIs) play an important role in attracting international capital for any country. In the recent years India has liberalized its policies in this sector, in order to gain more investments from abroad. Foreign Direct Investment means when a person/company/entity from one country invests in a business in another country.^[1] Through such investments the foreign body exerts certain control and/or ownership over the business in another country and aims to have a long-lasting relationship or a greater extent of reach or control in that nation. With the growing international trade and with India as one of the world’s fastest growing economies, it has become one of the powerful players in this field and with its rich bank of natural and human source it has become a favoured destination for investment by foreign nations. With this in mind, India has procured itself an established framework when it comes to the regulations of FDIs. 

While direct investments have a well-regulated rule book and guidelines for investors and investees to go by, Indirect investments by such investees into other entities/companies of India, which is also known as downstream investments still breathe in ambiguity. This brings in a unique legal challenge with respect to the regulations, compliance requirements involved and policy making of such investments made by Foreign Owned and Controlled Companies (FOCCs). 

CONCEPTUAL CLARITY

To get a better clarity of the concepts elucidated within this article, the key terms are explained herewith:

A  Foreign Direct Investment:

Foreign Direct Investment means when a person, resident outside India, invests in an equity instrument or capital of a company in India. This should not be confused with Foreign Portfolio Investment (FPI), which has been a more prevalent concept. FDI is a more long-term relationship in terms of interest and significant control and ownership over the investee company.  Foreign Direct Investments are regulated under the Foreign Exchange Management Act, 1999 (FEMA) and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules)^[2]. Foreign Direct Investment (FDI) in India is undertaken in accordance with the consolidated FDI Policy Circular (FDI Policy CircularF), which is formulated and announced by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (FDIPPF).^[3] 

B Foreign Owned and Controlled Companies (FOCC)

A Foreign Owned and Controlled Company is an Indian entity which has been invested in and is either (a) owned or/controlled by a person not resident in India;^[4] or (b) not owned and/or controlled by a person resident in India. An Indian entity essentially can mean either an Indian Company incorporated under the Companies Act, 2013 (CA 2013)^[5] or a Limited Liability Partnership (LLP) incorporated under the Limited Liability Partnership Act, 2008 (LLP Act)^[6].

The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 state that a business is foreign-owned if non-residents possess more than 50% of its stock. If non-residents possess the majority of an LLP's profits and contribute more than 50% of its capital, the business is considered foreign-owned. If non-residents have the authority to choose the majority of the directors or have the ability to influence important choices through agreements or voting power, the company is said to be foreign-controlled. Control in an LLP refers to the authority to select the majority of authorised partners who are solely responsible for overseeing the firm's rules. The Indian firm is eligible to be an FOCC and is required to abide by the FDI regulations that apply to foreign investors if either ownership or control is held by non-residents.

C Downstream Investment 

When an FOCC makes an investment into another Indian entity, it is known as Indirect investment or downstream investment. As learned before, FDI occurs when a foreign investor directly invests into an Indian entity while adhering to rules set forth under the FEMA Act and the NDI Rules. A subset of FDI is downstream investment, that is, when the foreign investor indirectly invests in the equity instrument of another Indian entity through an FOCC.^[7] Such FOCCs are also known as ‘investment vehicles’.^[8] “Investment vehicles may include- mutual funds, Real Estate Investment Trusts (REITs), Alternative Investment Funds (AIFs) and Infrastructure Investment Trusts (InvIts).”Downstream investments are regulated under Rule 23 of the NDI Rules.¹³ Under this the FOCCs are treated differently as compared to other Indian entities, with respect to their further downstream investments in India. 

REGULATORY FRAMEWORK

The regulatory framework for downstream investment is primarily governed by the Foreign Exchange Management Act (FEMA), and more importantly, Rule 23 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. Under this, Foreign Owned and Controlled Companies are differentiated from other Indian entities and regulated accordingly. FOCCs are Indian firms incorporated within India but controlled by a parent nation. An  FOCC refers to a firm in which foreign ownership is over 50%, or where foreigners have control through management rights or board seats. When an FOCC invests in equity instruments of another Indian firm or makes a contribution to the capital of an LLP, it is a downstream investment. Downstream investments are governed by all conditions of Foreign Direct Investment (FDI), that is, entry channels, sectoral limits, price norms, and other conditions related to it. The exchange control guidelines recognize FOCCs as residents for other objectives, resulting in regulatory discrepancies and operational problems owing to a lack of clear legal guidance. If an FOCC is looking to invest in a company or LLP, it is allowed to do so only if foreign investments up to 100% are permitted in that particular sector through the automatic route.^[9] 

Key Principles 

A.    Ownership and Control 

The primary distinction of the regulation of FOCCs hinges on the definitions of the terms ‘owned’ and ‘controlled’. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 states that a business is foreign-owned if non-residents possess more than 50% of its stock. If non-residents possess the majority of an LLP's profits and contribute more than 50% of its capital, the business is considered foreign-owned.

If non-residents have the authority to choose the majority of the directors or have the ability to influence important choices through agreements or voting power, the company is said to be foreign-controlled. Control in an LLP refers to the authority to select the majority of authorised partners who are solely responsible for overseeing the firm's rules.

B.    Assumed Residency Principle 

Under the FEMA Act, FOCCs are assumed to be resident Indian entities, even though they are ultimately owned and/or controlled by foreign individuals or non-residents of India, solely for the purpose of making investments. This legal phenomenon, known as the ‘Assumed Residency Principle’, is supposed to help streamline the process of investment. However, this comes with challenges regarding the determination of entry routes, evaluating sectoral caps, source of funds

etc.^[10]  While on paper, an FOCC may occur as an Indian under FEMA, but it operates as a foreign investor, which brings in ambiguity and inconsistencies with respect to its regulation under the Indian economy. This inconsistency becomes especially problematic in sensitive sectors or where layered ownership structures are involved.^[11] 

C.    Sectoral Caps and Entry Routes

Sectoral caps are types of limit on how much foreign investment can be allowed in different sectors of industries within the Indian economy. Such caps are as much applicable in indirect foreign investments as they are in direct foreign investments. For example in retail , the government may allow up to 51% of foreign investment while the percentage may differ in defence, banking, telecom etc.Entry routes tell us how a foreign investor can invest in different sectors of the Indian Economy.  There are namely two routes ; Automatic route  & Government route .

In an automatic route, one does not need prior government approval to make investments. You only need to follow certain guidelines as sectoral caps, pricing etc.  For Example, Some tech centres allow 100% of FDI via the automatic route. When an FOCC is looking for making an investment, the same rules apply there as well.  The government route, is one where the foreign investor has to take prior permission from the government of India to invest. Government route is needed generally for sectors which involve national interests, such as defence, satellite operations etc.  An FOCC cannot try to bypass the sectoral caps or limits applied to FDI by investing indirectly. This aligns with the principle that “what cannot be done directly, cannot be done indirectly”. 

D.   Pricing Norms and Fair Valuation Method (FVM)-

The NDI rules and RBI regulations prescribe certain pricing norms or limits which must be complied with by any FOCC looking to make downstream investments. Such norms are present to ensure that foreign investors are not able to acquire Indian assets at undervalued prices, neither directly nor indirectly.  As per ‘Rule 21 of the NDI rules, 2019’,^[12] the price of any equity instrument must not be less than its Fair Market Value (FVM), which is determined differently for listed and unlisted companies.

E.    Compliance and Procedural Forms- 

While making investments, FOCCs are required to comply with certain procedural requirements and reporting under the FEMA and RBI’s Master Direction. Such compliance ensures procedural transparency, helps in tracking foreign investments and keeps track of the economic activity of the nation. 

There are certain reporting mechanisms^[13] for different types of investments which FOCCs need to comply with-  

a.)   Primary investment made by the FOCC 

The FOCC must notify the Department for Promotion of Industry and Internal Trade's (DPIIT) Secretariat for Industrial Assistance of its primary investment within 30 days of the investment date, which is also the remittance date (DPIIT Intimation); additionally, the FOCC must fill out Form DI and submit it to the Reserve Bank of India (RBI) within 30 days of the date on which equity instruments were received.

b.)   Secondary investment made by the FOCC

The FOCC must submit Form FC-TRS within 60 days following the transfer of equity instruments or the receipt/remittance of cash, whichever comes first, in order to make a secondary investment from non-residents. Submit the Form DI within 30 days of the date of purchasing equity instruments (usually upon approval of Form FC-TRS). and (iii) make the DPIIT Intimation within 30 days of the investment. Purchase from a resident party: Within 30 days of the date of the equity instrument acquisition, the FOCC must submit Form DI; additionally, within 30 days of the investment, the FOCC must notify the DPIIT.

c.)   Disinvestment made by the FOCC:

 When equity instruments are sold to a non-resident, the FOCC is required to submit Form FCTRS within 60 days of the equity instrument transfer or the receipt/remittance of monies, whichever occurs first.

AMBIGUITY AND SUGGESTIONS

The Indian regulatory regime for downstream investments by Foreign Owned and Controlled Companies (FOCCs) has been subject to a number of ambiguities, especially with regard to pricing guidelines for FOCC transferees, investments against share swaps, and investments in non-capital instruments. They have tended to cause varying interpretations by Authorized Dealer (AD) Banks, resulting in uncertainty and practical difficulties for foreign investors. The liberal interpretation, or rather expansion, of Foreign attendant conditions and differential treatment of Limited Liability Partnerships (LLPs) likewise contributed to the complexity. Recently, the Reserve Bank of India (RBI) issued important clarifications,^[14] explicitly allowing share swaps and deferred payment structures for downstream investment. This is a welcome step towards simplifying the process. But to fully improve the ease of doing business, more clarity is required on uniform pricing guidelines for FOCC purchases, a better definition of Foreign attendant conditions,  and full elimination of LLP restrictions to place them at par with companies. Ongoing interaction among the RBI, the stakeholders, and the AD Banks, as well as the release of detailed guidance, will be critical to ensure a predictable and favorable investment climate for foreign capital in India. 

CONCLUSION

Downstream investment by Foreign Owned and Controlled Companies (FOCCs) is an essential part of India’s FDI framework. This paper examined key definitions and the legal regime under FEMA, the NDI Rules, and the FDI Policy. While the system ensures that foreign capital is regulated through sectoral caps, entry routes, and pricing norms, it also creates challenges— especially due to the assumed residency of FOCCs and layered ownership structures. Principles like “what cannot be done directly, cannot be done indirectly” maintain integrity but often lack clarity in practice. Ambiguities, such as imprecise definitions of ownership and control, procedural formalities, and the legal fiction of deemed residency, have also left ample space for uncertainty and questions of compliance. To improve effectiveness, India’s downstream FDI regulations would benefit from simplified procedures, clearer definitions, and stronger sector-specific guidelines to balance openness with regulatory control.

REFRENCE

^[1] James Chen, Foreign Direct Investment (FDI), Investopedia,libera,are,resources,,lised.

^[2] Nishith Desai Associates, FAQs — Downstream Investment (Nov. 2024).

^[3] Pratyush Khurana, Foreign Direct Investment Policy – Legal EdifCircular.ice, [2012] 18 taxmann.com 378 (Article).

^[4] Foreign Exchange Management Act, No. 42 of 1999, § 2(v), India Code (1999).

^[5] Companies Act, No. 18 of 2013, India Code (2013).

^[6] Limited Liability Partnership Act, No. 6 of 2009, India Code (2009).

^[7] NDA FAQs, supra note 6. 

^[8] Foreign Exchange Management (Non-debt Instruments) Rules, 2019, r. 2(ae), Gazette of India, Extraordinary, pt. II, sec. 3(i), S.O. 3732(E), Oct. 17, 2019 (India). ¹³ NDI Rules, r. 23,. FOCC ina an in.

^[9] 14 NDI Rules, r. 6(c).

^[10] Press Note No. 9 (2013 Series), Dep’t for Promotion of Indus. & Internal Trade, Ministry of Commerce &

Indus., Policy on Foreign Direct Investment – Definition of ‘Control’ (Aug. 20, 2013),

^[11] Reserve Bank of India, Master Direction – Foreign Investment into makesome,,he :,,,, ndustrylimits India (Jan. 4, 2018)investin,g

^[12] Foreign Exchange Management (Non-debt Instruments) Rules, 2019, r. 21, Gazette of India, Extraordinary, pt. II, sec. 3(i), S.O. 3732(E), Oct. 17, 2019 (India).

^[13] Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019,

Notification No. FEMA 395/2019-RB, Gazette of India, Extraordinary, pt. III, sec. 4, Oct. 17, 2019 (India) 

^[14] Reserve Bank of India, Master Direction – Foreign Investment in India, RBI/FED/2018–12, Jan. 4, 2018