Changes to FDI Policy – Part IV: Downstream Investments

Indirect foreign investment into Indian companies had been a subject matter of ambiguity in the FDI policy. For instance, if an Indian company (that has foreign investors) makes investments into another Indian company, would that downstream investment be treated as domestic investment or foreign investment? While rules govern such investment?
In order to streamline the policy, the Government had issued Press Notes 2, 3 and 4 of 2009 to clear the confusion on downstream investments. However, the policy continued to operate in a complex manner, particularly because there were differences based on the type of intermediate company: (i) operating company; (ii) operating-cum-investing company; and (iii) investing company.
To simplify the process further, the new Consolidated FDI Policy, Circular No. 1 of 2011 eliminates the differences regarding the type of intermediate company, and applies a common set of principles to so long as the Indian intermediate company is owned and/or controlled by non-resident entities. Investments by such an intermediate company would be considered a foreign investment for the purpose of sectoral caps and other conditionalities. The relevant part of the policy reads: Downstream investment by an Indian company, which is owned and/ or controlled by non-resident entity/ies, into another Indian company, would be in accordance/compliance with the relevant sectoral conditions on entry route, conditionalities and caps, with regard to the sectors in which the Indian company into which the downstream investment is being made, is operating.
However, some distinctions have been maintained to the policy regarding foreign investment into the intermediate company itself depending on its nature. For example, if that is an investing company, then foreign investment is allowed into it only under the approval route. The relevant policy states: Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian company/ies, will require prior Government/FIPB approval, regardless of the amount or extent of foreign investment. Foreign investment into Non-Banking Finance Companies (NBFCs), carrying on activities approved for FDI, will be subject to the conditions specified in paragraph 5.2.18 of this Circular. Those companies, which are Core Investment Companies (CICs), will have to additionally follow RBI’s Regulatory Framework for CICs.
Furthermore, if the intermediate company does not have any operations or investments yet (such as a blank check company), then again foreign investment in it is permissible only under the approval route.
While this set of changes regarding downstream investments simplifies the FDI guidelines in this otherwise complex area, it does not appear to make any substantive changes to the policy itself. 

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.

1 comment

  • Hi Umakanth,

    Pursuant to the changes brought about by the new Consolidated FDI Policy (effective from April 1, 2011)with respect to the catergorisation of companies as 'investing' or 'investing-cum-operating companies', and the only category that has been expressly dealt with is an 'investing company' (i.e. a company which only invests in other companies) and for FDI into such a company, prior FIPB approval is required, how does this impact:

    (i)FDI into an operating-cum-investing company (presuming that there are substantial operations);

    (ii) FDI into an operating-cum-investing company, which subsequent to a downstream investment/acquisition may fall under a Core Investment Company (possibly even a systemically important core investment company)?

    In relation to either of the two scenarios above, if the principal business test is satisfied and it is construed as an NBFC (but an operating-cum-investing NBFC, say a CIC -SI) – for FDI into such company, would one require prior FIPB approval? (the confusion arises since CIC does not appear in the list of 18 NBFC activities which are permitted under automatic route).

    There seem to be so many scenarios for which no clear answers are available in the policy. Your insight on the aforesaid would be invaluable.

    Many thanks and best regards,


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