NishithDesai-解码下游投资-更新的常见问题解答汇编（英）-2025.8_23页_2mb

Summary of "Decoding Downstream Investment" (August 2025)

Introduction

This document provides an updated compilation of Frequently Asked Questions (FAQs) on downstream investment in India, replacing the previous version from November 2024. It reflects the latest regulatory changes introduced by the Reserve Bank of India (RBI) on January 20, 2025, through amendments to the Master Direction – Foreign Investment in India. These amendments clarify that downstream investments, made by Indian entities that are foreign owned or controlled (FOCCs), are subject to the same rules and regulations as direct foreign investment (FDI), with a focus on ensuring compliance with Rule 23 of the NDI Rules.

Core Content

What is Downstream Investment?

Downstream investment refers to an investment made by an Indian entity (including investment vehicles) that has total foreign investment in it, into the equity instruments or capital of another Indian entity. This includes investments made by a FOCC into another Indian company or LLP. It is a subset of FDI and is treated as indirect foreign investment.

Regulatory and Governing Framework

• Downstream investment is governed by Rule 23 of the NDI Rules.
• FOCCs are Indian entities that are owned or controlled by non-residents.
• These entities are subject to stricter compliance and reporting requirements.

Benefits of Downstream Investment

• Allows foreign investors to expand operations or diversify investments through Indian subsidiaries.
• Reduces compliance burden compared to direct FDI.
• Enables efficient use of surplus funds of Indian subsidiaries.

Definition of FOCC

• An Indian entity is considered a FOCC if it is not owned and controlled by resident Indian citizens, or if it is owned or controlled by non-residents.
• Ownership is defined as holding more than 50% of equity instruments in a company or 50% of total capital and majority profit share in an LLP.

Indirect Foreign Investment

• Refers to downstream investment received by an Indian entity from another Indian entity or investment vehicle that is a FOCC.
• It is not applicable to entities other than companies or LLPs (such as partnership firms, trusts, etc.).
• Investments made by NRIs or OCIs on a non-repatriation basis are not counted for indirect foreign investment.

Differences Between Downstream Investment and Indirect Foreign Investment

• Downstream Investment is an investment by a FOCC into another Indian entity.
• Indirect Foreign Investment (IFI) is the downstream investment received by an Indian entity from a FOCC.
• IFI is a result of downstream investment and is subject to the same rules as direct FDI.

Key Conditions for Receiving Indirect Foreign Investment

• Must follow the same entry route, sectoral caps, pricing guidelines, and reporting requirements as FDI.
• FOCC-LLPs can only make downstream investments in sectors where 100% FDI is permitted under the automatic route and there are no FDI-linked performance conditions.

Conditions for Downstream Investment to Qualify as Indirect FDI

• Requires board and shareholder approval.
• Funds must come from FDI proceeds or internal accruals, not from borrowed funds.

Guidelines to Compute Total Foreign Investment

• Includes equity holdings from non-residents resulting from debt conversion.
• Excludes FCCBs and DRs with underlying debt instruments.
• Calculated at every stage of investment in Indian companies.
• The portfolio investment of the FOCC in the previous financial year is considered for computing total foreign investment.
• Indirect foreign investment in a wholly owned subsidiary is limited to the total foreign investment of the parent company.

Downstream Investment Through LLP

• A FOCC-LLP can make downstream investments in companies or LLPs.
• Only in sectors where 100% FDI is permitted under the automatic route and no performance conditions are imposed.

Compliance Responsibility

• The FOCC is responsible for ensuring compliance with the NDI Rules.
• Annual statutory auditor's certificate and director's report must be submitted.
• In case of a qualified report, the FOCC must inform the RBI regional office and obtain acknowledgement.

Pricing Norms for Downstream Investment

• Primary investment by FOCC must be at or above FMV.
• Secondary investment by FOCC:
  • From resident party: Price must be at or above FMV.
  • From non-resident party: Price must be at or below FMV.
  • From other FOCC: No pricing norms apply.

Reporting Obligations

• Form DI must be filed with the RBI within 30 days of equity instrument allotment.
• Form FC-TRS must be filed within 60 days of transfer or remittance, whichever is earlier.
• DPIIT Intimation is required within 30 days of investment.
• In case of sale by FOCC, Form FC-TRS is required for non-resident buyers.
• For resident buyers, no specific reporting is required, but the Indian investee company may need to correct its EMF.

Instruments Qualifying as Downstream Investment

• Includes equity shares, fully and compulsorily convertible debentures (CCD), fully and compulsorily convertible preference shares (CCPS), and share warrants.
• The term "capital instruments" was previously used but has been replaced by "equity instruments" in the NDI Rules.

Non-Equity Instruments

• FOCCs are not permitted to invest in non-equity instruments without specific guidance from the RBI and AD Bank.

Consideration Other Than Cash

• FOCCs can make downstream investments for consideration other than cash, such as swap of shares or equity instruments.
• Must comply with Rule 23(4)(b) and not use borrowed funds.

Swap of Shares

• FOCCs are permitted to make downstream investments through swap of equity instruments or equity capital of a foreign entity, as clarified in the Master Direction.

Deferred Payment Arrangements

• Permitted under Rule 9(6) of the NDI Rules.
• Deferred amount must not exceed 25% of total consideration.
• Must be paid within 18 months of the transfer agreement.

Press Note 3 (2020) Restriction

• The restriction on receiving FDI from land-bordering countries does not apply to downstream investments.

Recent RBI Amendments

• Clarified that downstream investments are subject to the same rules as direct FDI.
• Introduced strict adherence to Rule 23 for all downstream investments.
• Made explicit use of "equity instruments" in the context of downstream investment.
• Permitted swap mechanisms for downstream investment as long as they comply with the NDI Rules.

Treatment of Pre-Existing Investment

• If an Indian entity becomes a FOCC after an existing investment, the pre-existing investment should be treated as indirect foreign investment.
• Reporting is required for such changes.

Key Takeaways

• Downstream investment is a form of indirect FDI.
• FOCCs must comply with NDI Rules and reporting obligations.
• Pricing norms are strictly enforced and depend on the direction of transaction.
• Reporting procedures are standardized and require the use of FIRMS Portal.
• Use of non-cash consideration and swap mechanisms is permitted under certain conditions.
• Deferred payment arrangements are allowed up to 25% of total consideration, with a 18-month payment window.
• The RBI has made significant clarifications to align downstream investment with direct FDI rules.