This Article is written by Adv Nishit Paul. In this article, he discusses the procedure and the guidelines for direct and indirect foreign investment through Indian Companies and policy which is implemented thereof.

The FDI policy creates a framework by which foreign funds are allowed in the Indian economy. The Directorate of Industrial Policy or Promotion (DIPP) consolidated FDI policy describes the way foreign fund can be invested through other channels which come in the category of foreign investment by nature. It is generally understood Investment by any foreign Entity or by an Entity which is not a Resident of India, any funds coming into through these Entities are considered as a Foreign Investment. Whereas situation arises when an Entity which is resident in India does invest in other companies or subsidiaries, such that, this investment becomes a foreign origin from that investing company. This situation has been dealt with in the FDI policy.

Under the DIPP policy, the foreign investment by an Indian Company can be made through two methods that are by an Indian Company which does the business of investing into other Indian Companies and by downstream investment method. Both these methods can revolve foreign funds indirectly into different Indian Companies. The method of foreign investment can be categorized as direct or indirect Investment. Also, an investment vehicle is another way by which foreign funds are used to make an indirect foreign investment. 

How An Indian Company Can Be Indulged Into A Foreign Investment?

Indian Companies can have investment from foreign sources and these investments can help the business of the Indian Company to expand in different segments. Whereas if an Indian Company with a Foreign Investment does investment into other Indian Companies the question arises what will be the criteria to term it as a foreign Investment as per the FDI policy. It has been categorized into two ways by which it is termed as Foreign Investment.

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  1. Indian Company engaged in the activity of Investment in other Indian Companies.
  2. By Downstream Investment.

Indian Companies Engaged In The Activity Of Investment In Other Indian Companies

An Indian company that uses foreign investments into the activity of investing in other Indian Companies has to require prior Government approval for the amount or the extent of foreign investment. These are also termed as Core Investment Companies (CIC) that has to follow RBI’s Regulatory Framework for CICs. Where the Investment activity is going through the automatic route the foreign investment made by an Indian Company which does not have any operations and also does not have any downstream investments are permitted to have an infusion of foreign investment under the automatic route. Whereas approval is required in those companies which are under the Government route regardless of the amount or extent of foreign investment. To know about automatic and government Route of Foreign Investment. Further, if such Indian company commences business or makes a downstream investment it will have to comply with the relevant sectoral conditions on entry route, conditions and caps.

How foreign Investment Is Done By Downstream Investment?

Downstream Investment is another method by which an Indian Company makes foreign Investment in other Indian Companies. Where an Indian entity, which is not owned or controlled by a resident Entity (having foreign ownership) makes an Investment into an Indian company with all the necessary compliance with the relevant sectoral conditions on the entry route, conditions and caps of the investment this will be termed as a Downstream Investment.

Though in a Downstream investment by eligible Indian entities following conditions have to be complied with by the Indian Company :

  1. Such entity has to notify RBI and Foreign Investment Facilitation Portal of its downstream investment within 30 days of such investment, even if capital has not been allotted along with the modality of investment in new or existing ventures.
  2. Downstream investment by way of induction of foreign investment in an existing Indian Company to be duly supported by a resolution of the Board of Directors as also a shareholders agreement
  3. The Issue of transfer pricing and valuation of capital shall be in accordance with applicable SEBI or RBI guidelines.
  4. For the purpose of downstream investment, the eligible Indian entities making the downstream investments would have to bring in requisite funds from abroad and not leveraged funds from the domestic market. Though it does not bind the company from taking leveraged funds from the domestic market.
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When Foreign Investment Is Calculated As A Direct Or Indirect Investment?

For a Foreign Entity which is presumably a non-resident entity who makes an investment in an Indian Company is termed as a direct foreign investment. Whereas in case of an Indirect Foreign investment a resident Indian entity having such Foreign Investment in it makes such further investment then it can be described either as a resident or as a non-resident investment. This could be so in the case where the investor is an Indian entity which further invests in a resident Indian Entity but this Investor Indian Entity has foreign investment in it thus it comes under the category of indirect foreign investment. This could be understood by followings points :

In the case of Direct Foreign Investment

All Investment directly by a non-resident entity into an Indian company would be counted towards foreign investment.

In the case of Indirect foreign Investment

In the case of Indirect Foreign Investment it can be categorized where the Investing company (Acquiring Company) is owned or controlled by ‘non-resident entity’ and the entire investment by the Investing Company is going into another Indian Company then it would be considered as an indirect foreign Investment, provided that, with an exception where the target Indian Company is a 100% owned subsidiary of the Acquiring Company. The exception is made because the investment of a 100% owned subsidiary of the holding company is akin to an Investment made by the holding company and the downstream investment, becomes a mirror image of the holding company. This exception, however, is strictly for those cases where the entire capital of the downstream subsidiary is owned by the holding company.

Exceptions to the above rule:

  1. Where the foreign fund in an Investing Indian Company would not be considered for calculation of the indirect foreign investment when Investing Indian Company is owned and controlled by resident Indian citizens. Also that, Exception to this rule when the Downstream investment by an Investment vehicle shall be regarded as a foreign investment if either the Sponsor or the Manager or the Investment Manager is not Indian ‘owned and controlled’ as defined in Regulation 14 RBI Notification no.362.2015-RB dated Feb 15,2016.
  1. In an Indirect Foreign Investment, the investment into a 100% owned subsidiary of the holding company (Investing Indian Company) is akin to an Investment made by the holding company and the downstream investment becomes a mirror image of the holding company. This exception, however, is strictly for those cases where the entire capital of the downstream subsidiary is owned by the holding company.

Illustration For Calculation For Foreign Investment In An Indian Company

It can be understood by the following illustration where a Company X which has investment through an investing Company Y and having foreign investment, this will be the method of calculation 

  1. Where Company Y has foreign Investment less than 50% – Company X would not be taken as having any indirect foreign investment through Company Y.
  2. Where Company Y has a foreign investment of say 75% and:

(I) Invests 26% in Company X, the entire 26% investment by Company Y would be treated as indirect foreign investment in Company X;

(II)Invests 80% in Company X, the indirect foreign investment in Company X would be taken as 80%;

(III) where Company X is a wholly owned subsidiary of Company Y (i.e. Company Y owns 100% shares of Company X), then only 75 % would be reacted as indirect foreign equity of non-resident origin and the balance 25% would be treated as resident held equity, The indirect foreign equity in Company X would be computed in the ratio of 75:25 in the total investment of Company Y in Company X.

The Total Foreign Investment would be the sum total of direct and indirect foreign Investment. The above methodology of calculation would apply at every stage of investment in Indian companies and thus to each and every Indian company.

Some Additional Conditions For Calculating Total Foreign Investment

The above-mentioned policy would be applicable for determining the total foreign investment in all sectors, except in sectors where it is specified in a statute or by any rule. The above method for determining direct and indirect foreign investment, therefore, does not apply to the Insurance sector which will continue to be governed by the relevant Regulations. Similarly, the above methodology will also not apply to downstream investments by an Investment Vehicle. The conditions for non-application in downstream investment by Investment Vehicles are

  1. Downstream investment by an Investment Vehicle shall be regarded as foreign investment if either the Sponsor or the Manager or the Investment Manager is not Indian ‘owned and controlled’ as defined in Regulation 14 of the principal Regulations as defined in RBI Notification No. 362/2015-RB dated February 15, 2016.
  2. Provided that for sponsors or managers or investment managers organized in a form other than companies or LLPs, SEBI shall determine whether the sponsor or manager or investment manager is foreign owned and controlled.
  3. Explanation 1: Ownership and control are clearly determined as per the extant of FDI policy. AIF is a pooled investment vehicle. ‘Control’ of the AIF should be in the hands of ‘sponsors’ and ‘managers/investment managers’, with the general exclusion of others. In case of the ‘sponsors’ and ‘managers/investment managers’ of the AIF are individuals, for the treatment of downstream investment by such AIF as domestic, ‘sponsors’ and ‘managers/investment managers’ should be resident Indian citizens.
  4. Explanation 2: The extent of foreign investment in the corpus of the Investment Vehicle will not be a factor to determine as to whether the downstream investment of the Investment Vehicle concerned is foreign investment or not.
  5. Downstream investment by an Investment Vehicle that is reckoned as foreign investment shall have to conform to the sectoral caps and conditions/restrictions if any, as applicable to the company in which the downstream investment is made as per the FDI Policy.
  6. Downstream investment in an LLP by an Investment Vehicle that is reckoned as foreign investment has to conform to the provisions of Schedule 9 of the principal FEMA Regulations as well as the extant FDI policy for foreign investment in LLPs.
  7. An Alternative Investment Fund Category III with foreign investment shall make portfolio investment in only those securities or instruments in which a Registered Foreign Portfolio Investor is allowed to invest under the principal Regulations.
  8. The Investment Vehicle receiving foreign investment shall be required to make such report and in such format to Reserve Bank of India or to SEBI as may be prescribed by them from time to time.


In the phase of growth and creation of wealth in the economy, the FDI policy has rightly demonstrated the procedure in the flow of foreign funds and its other methods into the new Indian Companies and Enterprises. It will be more ardent for our economy that limited restriction in the foreign funds would help boost the amount of capital inflow within the economy and prepare a new generation of wealth creation that would dominate the global exposure of entrepreneurship and professionals in India. The Government of India with this FDI policy in foreign Investment shall make a better scope of Foreign Investment and a perfect check on the Investment routes as well as growth.


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