Downstream Investment and its legal framework


The economic development of India has witnessed a significant boom by infusion of foreign direct investments from all across the world. Foreign direct investment is said to be undertaken when an entity registered out of the borders of the country invests in India. The Government of India had formulated the Foreign Direct Investment policy (“FDI Policy”) to regulate the various foreign direct investments in India. With foreign investments gradually occurring in debt instruments and non-debt instruments, there was a requirement for a proper regulatory structure with respect to investments specifically in non-debt instruments, for instance investments in equity instruments in incorporated entities, LLP capital participation, investments in alternative investment funds, instruments notified under the FDI Policy[1]. Further, foreign direct investments in India may further be undertaken indirectly by different foreign entities, by channelizing the investments through an entity established within India. Therefore, the complex nature of such investments necessitates a robust legal framework to ensure compliance with regulations and safeguard the interests of all stakeholders involved. In order to govern both direct and indirect foreign investment in India and further enforce the conditions and/or restrictions in the FDI Policy, the Central Government promulgated the non-debt instruments rules (“NDI Rules”) under the Foreign Exchange Management Act, 1999 (“FEMA”).

Under the NDI Rules, indirect foreign investment refers to downstream investment received by an Indian entity from another Indian entity which has received foreign investment and (i) the Indian entity is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India; or 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, however, a person resident in India cannot receive indirect foreign investment. For the purpose of the NDI Rules, “FOCC” or foreign owned and/or controlled companies are referred to as Indian subsidiaries of non-resident/foreign or multinational companies.

Foreign direct investment (“FDI”) is permitted through automatic and government route; automatic route signifying that a person resident outside India does not require Central Government’s prior approval for such foreign investment and under the approval route, an approval from the Government of India is required to be taken by the person resident outside India for such foreign investment through the Government route, however through the automatic route. Under the automatic route, an Indian entity is permitted to make a downstream investment in another Indian entity which operates in sectors where FDI is permitted.


The legal framework for the downstream investments entailed under the NDI Rules must be read along with the FDI Policy, 2020 (as amended from time to time) effective from October 15, 2020. The Central Government made the NDI Rules to regulate the issuance and transfer of securities, including equity and debt instruments by Indian companies in FDI.

The NDI Rules also imposes certain restrictions on the repatriation of funds from downstream investments. Indian companies are not allowed to repatriate funds from their overseas subsidiaries or joint ventures unless they have obtained prior approval from the Reserve Bank of India (“RBI”). The RBI may grant approval if the repatriation is necessary for the business operations of the Indian company or if it is in the national interest.

The NDI Rules also require Indian entities, having foreign investments, to comply with certain pricing guidelines when making downstream investments to another Indian entity thereby ensuring that the investments are made at a fair price. The pricing guidelines apply to both direct and indirect investments.

Downstream investments made by eligible Indian entities/LLPs under Paragraph[2] will be required to make necessary reporting of such downstream investment to relevant authorities in Form DI as mentioned hereinbelow. Further, such downstream investment in an existing Indian company mandatorily requires support of a board resolution and a shareholder’s agreement (if any). Further, it is to be noted that such issuance or transfer or the pricing or valuation of the capital needs to be in consonance with the applicable laws, including the regulations/rules under FEMA and/or guidelines by the Securities Exchange Board of India.

As per the FDI Policy the Indian entities which makes the downstream investment is mandated to get investment amounts from outside of India and not domestically available funds. However, the downstream investments may further be made through internal accruals, wherein internal accruals refer to the profits which are transferred to the reserve account after the payment of taxes.


Under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (“NDI Regulations”)[3] which are to be read with the NDI Rules, mentions the reporting requirements for a person resident outside India shall have to report any investment in India. With specific emphasis on the downstream investments, an Indian entity/investment vehicle which makes the downstream investment in another Indian entity, which is the indirect foreign investment for the investee Indian entity as per the NDI Rules, shall notify the Secretariat for Industrial Assistance, Department for Promotion of Industry and Internal Trade (DPIIT) of such investment within 30 (thirty) days from such investment. It is noted that such notification is required under the NDI Regulations in circumstances wherein the equity instruments have not been allotted along with modality of investment in new or existing ventures.

Further, another reporting requirement under the NDI Regulations for the Indian entity/investment vehicle which makes the downstream investment under the NDI Rules shall be required to file Form ‘DI’ with the RBI within a period of 30 (thirty) days from the equity instruments allotment date. However, in the event the Indian entity which is responsible for the filing of reports provided under Regulation 4 of the NDI Regulations doesn’t complete the reporting requirements, a late submission fee (amount as decided by the RBI in consultation with the Central Government) shall be payable by such person/entity.


Downstream investment is certainly a common business strategy in India. While the FDI Policy prescribes restrictions including entry points, sectoral caps, pricing guidelines, and other ancillary requirements, which would apply to downstream investments, the NDI Rules present this legal configuration and levy certain constraints and reporting requirements on Indian companies making downstream investments. To ensure a smooth and successful downstream investment strategy, Indian companies must adhere to the regulatory guidelines and restrictions to avoid any legal complications. However, it is crucial to establish a comprehensive legal framework that provides clear provisions regarding the treatment of FOCC, pricing regulations, and reporting obligations upon the FOCC entity making foreign investment in another Indian entity. The Central Government and RBI have formulated a robust structure which was initially intended to control such foreign investments being completed indirectly and routed through other Indian entities, however the NDI Rules read with the FDI Policy regularly require clarifications to facilitate a transparent and efficient downstream investment ecosystem.

Ahlawat & Associates
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