Indirect FDI: A Further Press Note

Continuing with the series of press notes on the issue of indirect foreign direct investment (FDI), the Government has issued Press Note 4 of 2009 that clarifies the position on downstream investment by Indian companies.

Here are some quick thoughts on the new Press Note:

1. The Press Note divides downstream investments into three categories:

a. Only operating companies: Here, the usual foreign investment rules apply, as there is no downstream investment involved.

b. Operating-cum-investment company: Here, the usual foreign investment rules apply depending on the relevant sectors in which the company is operating. As regards downstream investments by such investing companies, that would also “have to company with the relevant sectoral conditions on entry route, conditionalities and caps” in respect of the sectors in which the downstream Indian company is operating.

c. Investing companies: Foreign investment in such companies will require prior FIPB approval. Further, downstream investments would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps.

2. There is also an additional fourth category, which is non-operative and non-investment companies: This appears to refer to foreign investment in special purpose acquisition companies or “blank check” companies (for a previous discussion of such companies on this Blog, please see here). This requires prior FIPB approval, and as and when business or investment commences, such company has to comply with relevant conditions on entry route, conditionalities and caps.

3. The Press Note deals with downstream investments by Indian companies that may have foreign investment. Although the language of the Press Note is not entirely clear as regards its scope, the first paragraph refers to the ‘guiding principle’, which is “that downstream investment by companies ‘owned’ or ‘controlled’ by non-resident entities would require to follow the same norms as a direct foreign investment’. In other words, it applies only to Indian investing companies that may be either owned (more than 50%) or otherwise controlled by foreign companies. However, where Indian investing companies carry foreign investment to an extent that is less than 50% and where control is with the Indian owners, then these guidelines do not apply. In that sense, where both ownership (in excess of 50%) and control is with the Indian owners, then investment by that company will be treated as domestic investment. Hence, Indian investing companies with minority foreign ownership may be able to invest in sectors that are otherwise not open for foreign investment, such as the multi-brand retail sector.

4. This Press Note repeals Para 11 of Press Note 3 of 1997 and Press Note 9 of 1999. The latter press note was referenced by the FIPB in the past to require its approval to be obtained in all cases where there was a downstream investment by a company in which there was foreign ownership. This will likely put an end to that practice.

Although Press Note 4 clarifies some of the outstanding points from recent series of guidelines from the Government on indirect FDI, there still appears to be some grey areas as commentators have pointed out. For some of the recent comments and analysis on Press Notes 2, 3 and 4, please see the following:

FDI rules: press notes bring up new issues – column in The Mint
Fresh set of clarifications on FDI norms in The Mint
Press Note 4: Legal Implications in the VC Circle

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • dear mr. umakanth,

    just wanted to add that the non-operating non-investment category also seems to intend to capture franchisee /ip holding companies, which have no other purpose that sub-assigning franchisees/ ip (which in turn has been assigned by a foreign parent). The purpose of such a structure being to dividend out (to the foreign parent) royalties received in excess of what they are permitted to receive from a direct assignment to an Indian entity.

    Also just wanted to point out a typo in the post, ‘blank check’ as against ,black check’.

  • Sir,
    Due to the addition of the fourth category of companies by Press Note 4, would foreign investment in a shell company owned and controlled by Indian residents require FIPB approval?

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