Foreign Direct Investment (FDI) serves as a crucial pathway for foreign investors to enter the Indian market. This investment can be executed either directly or indirectly through an existing Indian entity, the latter being termed as “downstream investment” or “Indirect Foreign Direct Investment (IFDI).” In this article, we explore the nuances of downstream investment and the compliance requirements set forth by the Foreign Exchange Management Act, 1999 (FEMA).

Indirect Foreign Direct Investment – An Overview:

When a foreign investor chooses to invest in India through an Indian entity, it falls under the category of downstream investment or IFDI. FEMA governs these investments and mandates that Indian entities receiving IFDI must adhere to specific conditions, including entry routes, sectoral caps, and pricing guidelines.

Compliances Under FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019:

To ensure transparency and regulatory adherence, the Indian entity making downstream investment into another Indian entity must follow certain compliances:

1. Notification to DPIIT: The investing Indian entity needs to notify the Secretariat for Industrial Assistance, Department for Promotion of Industry and Internal Trade (DPIIT) within 30 days of the investment.
2. Form DI Filing with RBI: Additionally, the Indian entity or investment vehicle making downstream investment must file Form DI with the Reserve Bank of India (RBI) within 30 days from the date of allotment of equity instruments.

Understanding “Other Attendant Conditions”:

The term “other attendant conditions as applicable for foreign investment” remains broad and undefined in FEMA NDI Rules. However, Rule 9(6) of FEMA NDI Rules, dealing with deferred consideration and indemnity payable by Foreign Owned or Controlled Companies (FOCCs), sheds light on the concept. It specifies that deferred consideration should not exceed 25% of the total sale consideration, with a period not exceeding 18 months from the date of the transfer agreement.

Applicability of Rule 9(6) in the Context of Downstream Investment:

Rule 9(6) appears to be pertinent to the transfer of equity instruments between a person resident in India and a person resident outside India, focusing on the deferral payment condition. Notably, an Indian entity, even if foreign-owned or Controlled, is considered a “person resident in India” under FEMA NDI Rules.

Consequently, Rule 9(6) may not apply to the transfer of equity shares between resident sellers and FOCC, as both parties are considered residents in India. This interpretation aligns with the reporting requirements outlined in Form FC-TRS, which is not mandatory for transfers between two Indian residents.

In conclusion, a harmonious reading of FEMA provisions suggests that Rule 9(6) may not apply to the transfer of equity shares from a resident seller to a person resident in India, even if the latter is a FOCC.