Foreign Direct Investment (FDI) is a significant avenue for entering the Indian market. While foreign investors can opt for direct investment, another route involves investing indirectly through an Indian entity. This form of foreign investment is commonly referred to as downstream investment or Indirect Foreign Direct Investment (FDI).

Under the existing Foreign Exchange Management Act, 1999 (FEMA) and its regulations, an Indian entity that receives indirect foreign investment must adhere to entry routes, sectoral caps, pricing guidelines, and other relevant conditions applicable to foreign investment.

Compliances for Downstream Investment

The FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 stipulate specific compliances for Indian entities making downstream investments into other Indian entities, considered as indirect foreign investment:

1. The Indian entity undertaking downstream investment must notify the Secretariat for Industrial Assistance, Department for Promotion of Industry and Internal Trade (DPIIT) within 30 days of such investment.
2. An Indian entity or investment vehicle involved in downstream investment, deemed as indirect foreign investment for the recipient Indian entity according to FEMA NDI Rules, must file Form DI with the Reserve Bank of India (RBI) within 30 days from the date of equity instrument allotment.

Apart from the mentioned compliances, downstream investment must also adhere to entry routes, sectoral caps, pricing guidelines, and other conditions applicable to foreign investment. The term “other attendant conditions as applicable for foreign investment” remains broad and lacks a specific definition in FEMA NDI Rules.

Deferral Payment Condition under Rule 9(6)

The term “other attendant conditions” is partly covered by the deferral payment condition outlined in Rule 9(6) of FEMA NDI Rules. This rule addresses deferred consideration and indemnity payable by Foreign Owned or Controlled Companies (FOCCs). According to this rule, deferred consideration should not exceed 25% of the total sale consideration, and the deferral period should not exceed 18 months from the date of the transfer agreement.

It’s crucial to note that Rule 9(6) pertains to the transfer of equity instruments of an Indian company between a resident and a non-resident. Given that an Indian entity, even if FOCC, is considered a “person resident in India,” Rule 9(6) may not apply to transactions between two residents in India.

Conclusion

The application of Rule 9(6) of FEMA NDI Rules, focusing on deferred payment considerations, seems limited to transfers between a resident seller and a non-resident buyer. For transactions between two residents in India, even if one is an FOCC, Rule 9(6) may not be applicable.

In summary, a harmonious reading of FEMA provisions suggests that Rule 9(6) dealing with deferred payment considerations may not apply to the transfer of equity shares between a resident seller and a person resident in India, even if the latter is an FOCC. Understanding and navigating these regulatory nuances are crucial for entities engaged in downstream investment.