A downstream investment is not always indirect foreign investment
Under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules), a downstream investment is an investment in the equity instruments or capital of another Indian entity by an Indian entity that has received foreign investment, or by an investment vehicle. For the recipient, determine separately whether that investment counts as indirect foreign investment. Indian incorporation of the investor does not decide the result.
| Test | What to check |
|---|---|
| Indian investor with foreign investment | Apply the Rule 23 definitions: the Indian investor is not owned and not controlled by resident Indian citizens, or is owned or controlled by persons resident outside India. Trace ultimate ownership and the actual control rights; do not reduce the test to a single headline share percentage. |
| Ownership | For a company, the test uses more than 50% beneficial ownership of the relevant capital. For an LLP, review more than 50% contribution together with a majority profit share under the applicable definition. |
| Control | For a company, review the right to appoint a majority of directors or control management or policy decisions, including by agreement or voting arrangements. Evaluate reserved matters in context; a particular veto is not automatically control. For an LLP review appointment and powers of the majority designated partners. |
| Investment vehicle | Apply the separate sponsor, manager or investment-manager test. Where the relevant party is organised in a form other than a company or LLP, check SEBI’s role under the rule. |
| Exceptions and changes | Check the deemed domestic treatment of eligible non-repatriation investment, any banking exception, and whether later changes in the investing entity’s ownership or control change the downstream classification. |
Apply the investee’s sector rules and the funding restriction
- Check the investee’s actual activities against Schedule I and applicable sectoral rules. Apply the entry route, caps, pricing and other conditions to the investee’s total foreign investment. Obtain applicable approval before proceeding.
- Screen prohibited activities such as lottery, gambling and betting, chit funds, Nidhi companies, trading in transferable development rights, the specified tobacco products and prohibited real estate business or farmhouse construction. Apply the notified scope and exclusions; regulated construction development is not necessarily prohibited real estate business.
- Record board approval and any applicable shareholders’ agreement and Companies Act requirements. Do not use domestic borrowing or leverage to fund a covered downstream investment. Trace qualifying funds from abroad or qualifying internal accruals, which are post-tax profits transferred to reserves. Mere cash on hand is not enough.
- The RBI direction distinguishes subscription by non-residents to an Indian company’s non-convertible debentures from domestic borrowing. This does not displace applicable debt and use restrictions. Check other applicable funding routes, restrictions and conditions on the actual facts.
Calculate the statutory holding at each tier
The normal rule for an investment that counts as indirect foreign investment is to include the investing entity’s entire qualifying holding in the investee. Recompute at each tier on a fully diluted basis and add applicable direct foreign investment. If a qualifying company that is 60% foreign invested buys 40% of a non-wholly-owned target, the target’s indirect percentage from that holding is 40%, not the 24% obtained by multiplying the two figures. For a wholly owned subsidiary, apply the special rule limiting indirect foreign investment to the total foreign investment received by the investing company.
Record the two filing clocks and the annual check
| Obligation | Responsible party and timing |
|---|---|
| Form DI | The investing Indian entity or investment vehicle files with RBI under regulation 4(11) through the applicable FIRMS and authorised dealer process. The period is 30 days from allotment. Match the applicant and investee records, transaction evidence, funding, valuation and approvals to the form instructions. |
| DPIIT notice | The investing entity or vehicle notifies the Secretariat for Industrial Assistance, DPIIT, within 30 days of investment, even where instruments have not yet been allotted. Retain a separate acknowledgement. |
| Annual statutory auditor certificate | The first-level investing Indian company is responsible for compliance through the downstream tiers and obtains its statutory auditor’s certificate annually. Mention compliance in the Directors’ Report. Immediately report a qualified report to the RBI regional office for the registered office and obtain acknowledgement. The corresponding instructions apply to LLPs as provided in the RBI direction. |
| Annual FLA reporting | Check FLA applicability separately under the reporting regulations and RBI guidance. Where required, use FLAIR and the applicable annual deadline, ordinarily 15 July. Do not infer a separate FLA filing obligation for every downstream recipient from Form DI alone. |
Seven worked examples
These hypothetical examples illustrate the regulatory checks. A submitted form or an illustrative number does not establish approval.
1. A retail and wholesale group considers a ₹150 crore investment
Assume the Indian investor is wholly foreign owned and proposes a 100% interest in a multi-brand retailer. On these assumptions the full holding counts, exceeding the Schedule I 51% Government route cap by 49 percentage points. The notified multi-brand route also has conditions, including USD 100 million minimum FDI and a specified 30% sourcing requirement for covered manufactured or processed products; check the full sourcing, infrastructure and location rules. A distinct wholesale or cash-and-carry business may be eligible for up to 100% automatic foreign investment under the applicable conditions. Classify the actual operations, including any e-commerce, and do not infer clearance merely because activities are separated.
2. Domestic cash credit funds part of a ₹45 crore acquisition
A 72% foreign-owned fintech investor proposes to buy 30% of an insurance technology company. Verify the actual regulated activity and sector conditions. Of the ₹45 crore payment, ₹25 crore is assumed to be qualifying retained post-tax profits and ₹20 crore is drawn from an ₹80 crore domestic cash credit facility. The funding gap is ₹20 crore and, on the assumptions, the domestic borrowing is not an eligible source for the downstream investment.
USD 2.50 million at an illustrative ₹83.20 per dollar is ₹20.80 crore. Repaying the ₹20 crore leaves ₹0.80 crore before charges and other uses. A later compliant inflow does not by itself undo the original funding breach. Disclose the chronology, verify required corrective action and assess compounding under its own rules.
3. Solar subsidiary: keep investment and allotment dates separate
An 80% foreign-invested Indian company invests ₹85 crore for a wholly owned solar subsidiary. Assume it invests and receives allotment on 10 May 2024 and there is no additional foreign holding. The special wholly owned subsidiary rule limits the indirect holding to 80%. The two 30-day clocks both end on 9 June on the assumed dates. Form DI on 28 May is day 18, DPIIT notice on 30 May is day 20 and an assumed AD acknowledgement on 4 June is day 25. Preserve the allotment record, each filing and the separate annual certificate. Those filing dates alone do not demonstrate substantive clearance.
4. Form DI filed nine months after its due date
Assume ₹4 crore was invested and allotted on 15 January 2023. The reporting deadline is 14 February. Filing on 14 November is 273 days late, or nine months. For an eligible delay under the RBI’s September 2022 matrix, n is 0.75 years. The fee is ₹7,500 plus 0.025% × ₹4 crore × 0.75, or ₹15,000 after applicable rounding. Check the separate DPIIT filing and do not use the fee to cure an underlying breach.
5. A downstream investment in an LLP
An Indian technology company with 60% foreign ownership invests ₹10 crore for a 50% capital interest in an AI research LLP. Confirm the actual activity is in a sector open to 100% foreign investment on the automatic route with no FDI-linked performance conditions, and verify the LLP agreement, profit share, valuation and eligible funding. The capital percentage does not by itself tell you who controls the LLP or how its profit share is allocated. Apply the authorised dealer’s current Form DI workflow.
6. Three-tier holdings require a separate calculation at each tier
Assume the foreign investor owns 100% of Tier 1, Tier 1 owns 60% of Tier 2 and Tier 2 owns 50% of Tier 3. Assume no other relevant holdings and that the statutory tests are met at each investing tier. Tier 2 has 60% indirect foreign investment from Tier 1. Tier 3 counts the entire 50% held by Tier 2 for regulatory purposes, subject to the applicable rules. A simple economic multiplication yields 30%, but it does not set the regulatory percentage. Tier 2, as investor in Tier 3, handles the applicable filing for that investment.
7. Missing annual compliance evidence
A first-level Indian manufacturer with 51% foreign equity has invested ₹18 crore across four downstream entities and lacks annual certificates for two years. Reconstruct the actual amounts, dates, ownership, approvals, funding and filings by entity and year. Do not infer four equal investments or that a particular audit opinion or CARO clause automatically follows. If the statutory auditor gives a qualified report on downstream compliance, apply the RBI notification and acknowledgement requirement. Any corrective action and audit consequence depend on the findings.
Closing checks before funding or filing
- Keep the ownership chart and voting rights, sector and approval analysis, and fully diluted calculations at each tier.
- Reconcile funds to the bank and reserves, and retain valuation, resolutions, agreements and allotment evidence.
- Track both filing clocks and follow up the acknowledgement and annual auditor certificate. Reassess the structure if control, activity, funding or timing changes.
Frequently asked questions
1. Can a 49% foreign shareholder control the company?
Yes, depending on rights to appoint directors or control management or policy. A share percentage alone does not settle control.
2. Can we draw domestic working capital for the covered equity investment?
The general downstream rule prohibits using domestic borrowing or leverage for the investment. Verify the source used and any applicable special provision.
3. Who files Form DI and when?
The investing Indian entity or investment vehicle files within 30 days of allotment for a covered investment. Check the applicable process for a late filing.
4. Does the DPIIT deadline wait for allotment?
No. It is measured from investment and can run before allotment.
5. Can an unincorporated concern receive indirect foreign investment under Rule 23?
Rule 23 does not allow a person resident in India other than an Indian entity to receive indirect foreign investment. Check separate regimes for any other type of foreign contribution rather than treating them as downstream investment.
6. What should a review file show?
It should link control and sector evidence, funding, filings and annual auditor review. The records support review; they do not guarantee approval.
Sources
- Foreign Exchange Management (Non-debt Instruments) Rules, 2019: Rule 23 and Schedules I and VI
- RBI Master Direction: Foreign Investment in India, updated June 2026
- RBI Mode of Payment and Reporting of Non-Debt Instruments Regulations, regulation 4
- RBI late submission fee circular, 30 September 2022
- DPIIT Consolidated FDI Policy, read with later amendments
- RBI FIRMS portal
- RBI July 2026 FAQ on the FLA annual return