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June 05, 2013

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Downstream Investments By Indian Companies


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IDFC

Downstream investment means indirect into another Indian company by way of subscription or acquisition.

The guidelines for calculation of total foreign investment, both direct and indirect in an Indian company, at every stage of investment, including downstream investment, have been detailed in the consolidated Foreign Direct Investment Policy, issued by the Department of Policy and Promotion, Ministry of Commerce and India, Government of India, 2011 (referred to as the "FDI Policy") which enables determination of total foreign investment in any/all Indian companies.

Guiding Principle


The 'guiding principle' is that downstream investment by companies 'owned' or controlled' by non resident entities would require to follow the same norms as a direct foreign investment i.e. only as much can be done by way of indirect foreign investment through downstream investment as per the FDI Policy as can be done through direct foreign investment and what can be done directly can be done indirectly under same norms.

The term owned and controlled as per the FDI Policy are as below:


A company is said to be "owned" by resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, if more than 50% of the equity interest in it is beneficially owned by resident Indian citizens and Indian companies, which are owned and controlled ultimately by resident Indian citizens.

It is said to be "controlled" by resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, if the resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors.

Conversely, an Indian company may be taken as being "owned" by "non resident entities if more than 50 percent of the equity interest in it is beneficially owned by non-residents "controlled" by "non resident entities", if non-residents have the power to appoint a majority of its directors. Thus, in the instant case, such Indian company is owned and controlled by resident Indian citizens.

Foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian company/ies (regardless of its ownership or control):


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/Foreign Investment Promotion Board approval, regardless of the amount or extent of foreign investment.

For infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments, Government/FIPB approval would be required, regardless of the amount or extent of foreign investment. Further, as and when such a company commences business(s) or makes downstream investment, it will have to comply with the relevant sectoral conditions on entry route, conditionalities and caps.

Calculation of Indirect Foreign Direct Investment


To illustrate, if the indirect foreign investment is being calculated for Company X, which has investment through an investing Company Y having foreign investment, the following would be the method of calculation:

(A) Where Company Y has foreign investment less than 50% Company X would not be taken as having any indirect foreign investment through Company Y.

(B) Where Company Y has foreign investment of say 75% and:

    1. Invests 26% in Company X, the entire 26% investment by Company Y would be treated as indirect foreign investment in Company X;
    2. Invests 80% in Company X, the indirect foreign investment in Company X would be taken as 80%
    3. Where Company X is a wholly owned subsidiary of Company Y (i.e. Company Y owns 100% shares of Company X), then only 75% (being the mirror image of the investment made by the foreign company) would be treated as indirect foreign equity and the balance 25% would be treated as resident held equity. The indirect foreign equity in Company X would be computed in the ratio of 75: 25 in the total investment of Company Y in Company X.
    4. The total foreign investment would be the sum total of direct and indirect foreign investment.
    5. The above methodology of calculation would apply at every stage of investment in Indian companies and thus to each and every Indian company.

Provided that as an exception, the indirect foreign investment in only the 100% owned subsidiaries of operating-cum-investing/investing companies, will be limited to the foreign investment in the operating-cuminvesting/ investing company. This exception is made since the downstream investment of a 100% owned subsidiary of the holding company is akin to investment made by the holding company and the downstream investment should be a mirror image of the holding company. This exception, however, is strictly for those cases where the entire capital of the downstream subsidy is owned by the holding company.

Calculation of Downstream Investments Based on Previous FDI Policy

The erstwhile calculation of downstream investments was based on a pro-rata basis, on the investment made by the foreign company in the Indian investee company. Hence if Company A, being a foreign company holds 49% of shareholding in Company B, in turn Company B, being an Indian Company holds 51% of shareholding in Company C. The effective foreign direct investment in Company is 24.99% (i.e. 49% of 51%).

Additional requirements for downstream investment by an Indian company which is owned and/or controlled by non resident entity/ies:


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.

Conditions for Downstream Investments


(i) Notify within 30 days: A company which has done a downstream investment has to notify the Secretariat of Industrial Assistance, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry Government of India and Foreign Investment Promotion Board of its downstream investment in the form available at http://www.fipbindia.com within 30 days of such investment, even if capital instruments have not been allotted along with the modality of investment in new/existing ventures (with/without expansion programme).

(ii) Board Resolution: Downstream investment by way of induction of foreign equity in an existing Indian company to be duly supported by a resolution of the Board of Directors supporting the said induction as also a shareholders agreement, if any.

(iii) Pricing: Issue/transfer/pricing/valuation of shares shall be in accordance with applicable SEBI/RBI guidelines.

(iv) Leverage funds from Domestic Market: For the purpose of downstream investment, the Indian companies making the downstream investments would have to bring in requisite funds from abroad and not leverage funds from domestic market for such investments. This would, however, not preclude downstream companies, with operations, from raising debt in the domestic market. Downstream investments through internal accruals are permissible.

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