The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) and the Consolidated FDI Policy effective from October 15, 2020 (FDI Policy) set out elaborate rules for foreign investment, both direct foreign investment and indirect foreign investment in Indian entities.
Investments by non – residents directly into an Indian entity is referred to as direct foreign investment. An Indian entity can also have indirect foreign investment i.e. if such resident Indian entity receives investment from another Indian entity which has foreign investment and is not owned and controlled (directly or indirectly) by Indian resident citizens, or is owned or controlled by persons resident outside India.
Therefore, Total Foreign Investment in an Indian entity is calculated as total of direct foreign investment and indirect foreign investment received by such an Indian entity (to be reckoned on a fully diluted basis).
Downstream investment typically refers to investments made by an Indian entity into another Indian entity. Further, where the investing Indian entity is not owned and controlled (directly or indirectly) by Indian resident citizens, or is owned or controlled by persons resident outside India, the investment received by the Indian investee entity is categorised as indirect foreign investment.
An Indian entity receiving indirect foreign investment is required to comply with the various rules in relation to entry route, sectoral caps, pricing guidelines and other attendant conditions, as applicable, for foreign investments.
For the purpose of computation of indirect foreign investment in an Indian entity, foreign investment in an investing Indian entity means investments made by persons resident outside India on a repatriable basis such as FDI, FPI, NRIs investments etc.
Investment by Non-resident Indians (NRIs):
As per Rule 12 of NDI Rules, a NRI can invest in India either on repatriation basis (typically in listed companies) or non-repatriation basis subject to conditions stipulated thereunder. Para 1 (b), Schedule IV of NDI Rules states that all investments made by NRIs, or companies, trusts, and partnership firms incorporated abroad and owned and controlled by NRIs, on a non-repatriation basis, are deemed to be domestic investments at par with the investment made by residents.
Position under Press Note 1 (2021) (PN1) and Conclusion:
The Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, has issued PN1 on March 19, 2021 to clarify that any investments made by an Indian entity that is owned and controlled by NRIs, on a non-repatriation basis, shall not be considered towards calculation of indirect foreign investment, where such Indian entity is investing in another India entity This PN1 will come into effect when notified under the Foreign Exchange Management Act, 1999 (FEMA) / as an amendment to the NDI Rules.
Therefore, an investment made by an Indian entity that is owned and controlled by NRIs, on a non-repatriation basis, will not be required to comply with the NDI Rules in relation to entry route, sectoral caps, pricing guidelines and other attendant conditions, as applicable, for foreign investments.
This is a timely clarification as it very clearly lays out the legal position in relation to downstream investment by Indian entities which have direct or indirect NRI shareholding. Further, this settles the questions around the regulatory intent of treating NRI investments on a non-repatriation basis at par with domestic investments.
This note summarizes the legal development and is not intended as legal advice. Should you require further clarifications in this regard, we will be happy to help. Algo Legal has deep expertise in advising clients on Foreign Investment transactions and the FDI Policy.
Authored by Abhinav Bhalaik, Partner – M&A, PE and Securities Law Practice; and Siddharth Prasad, Partner – M&A, PE and VC Practice
- NRI or Non Resident Indian means an individual resident outside India who is a citizen of India. ↑
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