Consolidated FDI Policy Circular of 2020

Paragraph Annexure-4 Annexure 4

Chapter: Annexures · Annexures
Text as on: As issued 15 October 2020; Press Notes since are not applied

Annexure-4

Total Foreign Investment i.e. Direct and Indirect Foreign Investment in eligible Indian entities

1. Investment in an eligible Indian entity can be made both by non-resident as well as resident Indian entities. Any non-resident investment in an Indian company is direct foreign investment. Investment by resident Indian entities could again comprise of both resident and non-resident investment. Thus, such an Indian company would have indirect foreign investment if the Indian investing company has foreign investment in it. The indirect investment can also be a cascading investment i.e. through multi-layered structure.

1.1 For the purpose of computation of indirect foreign investment in an Indian company, foreign investment in an Indian company shall include all types of foreign investments i.e. FDI; investment by , FPIs (holding as on March 31); NRIs; ADRs; GDRs; Foreign Currency Convertible Debentures (FCCBs); Investment Vehicles fully, compulsorily and mandatorily convertible preference shares and fully, compulsorily and mandatorily convertible Debentures or units of an Investment Vehicle, regardless of whether the said investments have been made under Schedule I, II, , III, VI, IX andX of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

1.2 Guidelines for calculation of total foreign investment i.e. direct and indirect foreign investment

(i) Counting of direct foreign investment All investment directly by a non-resident entity into the Indian company/ LLP would be counted towards foreign investment.

(ii)Counting of indirect foreign investment

(a) The foreign investment through the investing Indian company/LLP would not be considered for calculation of the indirect foreign investment in case of Indian companies/LLPs which are ‘owned and controlled’ by resident Indian citizens and/or Indian Companies/LLPs which are owned and controlled by resident Indian citizens. (aa) Downstream investment by an Investment Vehicle shall be regarded as foreign investment if either the Sponsor or the Manager or the Investment Manager is not Indian ‘owned and controlled’ as defined in Regulation 14 of the principal Regulations as defined in RBI Notification No.362/2015-RB dated February 15, 2016.

(b) For cases where condition (a) above is not satisfied or if the investing company is owned or controlled by ‘non-resident entities’, the entire investment by the investing company/LLP into the subject Indian Company would be considered as indirect foreign investment, 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-cum-investing/ 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 subsidiary is owned by the holding company.

Illustration 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:

(I) invests 26% in Company X, the entire 26% investment by Company Y would be treated as indirect foreign investment in Company X;

(II) invests 80% in Company X, the indirect foreign investment in Company X would be taken as 80%;

(III) where Company X is a wholly owned subsidiary of Company Y (i.e.Company Y owns 100% shares of Company X), then only 75% 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.

(iii)The total foreign investment would be the sum total of direct and indirect foreign investment.

(iv) The above methodology of calculation would apply at every stage of investment in Indian companies and thus to each and every Indian company.

(v) Additional conditions

(a) The full details about the foreign investment including ownership details etc. in Indian company(s) and information about the control of the company(s) would be furnished by the Company(s) to the Government of India at the time of seeking approval.

(b) In any sector/activity, where Government approval is required for foreign investment and in cases where there are any inter-se agreements between/amongst shareholders which have an effect on the appointment of the Board of Directors or on the exercise of voting rights or of creating voting rights disproportionate to shareholding or any incidental matter thereof, such agreements will have to be informed to the approving authority. The approving authority will consider such inter-se agreements for determining ownership and control when considering the case for approval of foreign investment.

(c) In all sectors attracting sectoral caps, the balance equity i.e. beyond the sectoral foreign investment cap, would specifically be beneficially owned by/held with/in the hands of resident Indian citizens and Indian companies, owned and controlled by resident Indian citizens.

(d) In the I& B sector where the sectoral cap is up to 49%, the company would need to be ‘owned and controlled’ by resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens.

(A) For this purpose, the equity held by the largest Indian shareholder would have to be at least 51% of the total equity, excluding the equity held by Public Sector Banks and Public Financial Institutions, as defined in Section 4A of the Companies Act, 1956 or Section 2 (72) of the Companies Act, 2013, as the case may be. The term ‘largest Indian shareholder’, used in this clause, will include any or a combination of the following:

(I) In the case of an individual shareholder, (aa) The individual shareholder, (bb) A relative of the shareholder within the meaning of Section 2 (77) of Companies Act, 2013. (cc) A company/group of companies in which the individual shareholder/HUF to which he belongs has management and controlling interest.

(II) In the case of an Indian company, (aa)The Indian company (bb)A group of Indian companies under the same management and ownership control.

(B) For the purpose of this Clause, “Indian company” shall be a company which must have a resident Indian or a relative as defined under Section 2 (77) of Companies Act, 2013/ HUF, either singly or in combination holding at least 51% of the shares.

(C) Provided that, in case of a combination of all or any of the entities mentioned in Sub-Clauses (I) and (II) of clause 1.2(v)(d)(A) above, each of the parties shall have entered into a legally binding agreement to act as a single unit in managing the matters of the applicant company.

(e) If a declaration is made by persons as per section 187C of the Companies Act, 1956 or section 89 of the Companies Act, 2013, as the case may be about a beneficial interest being held by a non-resident entity, then even though the investment may be made by a resident Indian citizen, the same shall be counted as foreign investment.

1.3 The above mentioned policy and methodology would be applicable for determining the total foreign investment in all sectors, except in sectors where it is specified in a statute or rule there under. The above methodology of determining direct and indirect foreign investment therefore does not apply to the Insurance Sector which will continue to be governed by the relevant Regulation. Similarly, above methodology will also not apply to downstream investments by an Investment Vehicle. Relevant conditions of downstream investment by Investment Vehicles are as under:

Explanation 1: Ownership and control is clearly determined as per the extant FDI policy. AIF is a pooled investment vehicle. ‘Control’ of the AIF should be in the hands of ‘sponsors’ and ‘mangers/investment managers’, with the general exclusion of others. In case the ‘sponsors’ and ‘managers/investment managers’ of the AIF are individuals, for the treatment of downstream investment by such AIF as domestic, ‘sponsors’ and ‘managers/investment managers’ should be resident Indian citizens.

Explanation 2: The extent of foreign investment in the corpus of the Investment Vehicle will not be a factor to determine as to whether downstream investment of the Investment Vehicle concerned is foreign investment or not.

(ii) Downstream investment by an Investment Vehicle that is reckoned as foreign investment shall have to conform to the sectoral caps and conditions / restrictions, if

any, as applicable to the company in which the downstream investment is made as per the FDI Policy.

(iii) Downstream investment in an LLP by an Investment Vehicle that is reckoned as foreign investment has to conform to the provisions of Schedule VIII of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 as well as the extant FDI policy for foreign investment in LLPs.

(iv) An Alternative Investment Fund Category III with foreign investment shall make portfolio investment in only those securities or instruments in which a Registered Foreign Portfolio Investor is allowed to invest under the principal Regulations.

(v) The Investment Vehicle receiving foreign investment shall be required to make such report and in such format to Reserve Bank of India or to SEBI as may be prescribed by them from time to time. 1.4 Any foreign investment already made in accordance with the guidelines in existence prior to February 13, 2009 (date of issue of Press Note 2 of 2009) would not require any modification to conform to these guidelines. All other investments, past and future, would come under the ambit of these new guidelines.

Annexure-4

Total Foreign Investment i.e. Direct and Indirect Foreign Investment in eligible Indian
entities

1. Investment in an eligible Indian entity can be made both by non-resident as well as
         resident Indian entities. Any non-resident investment in an Indian company is
         direct foreign investment. Investment by resident Indian entities could again
         comprise of both resident and non-resident investment. Thus, such an Indian
         company would have indirect foreign investment if the Indian investing company
         has foreign investment in it. The indirect investment can also be a cascading
         investment i.e. through multi-layered structure.

1.1 For the purpose of computation of indirect foreign investment in an Indian
         company, foreign investment in an Indian company shall include all types of
         foreign investments i.e. FDI; investment by , FPIs (holding as on March 31); NRIs;
         ADRs; GDRs; Foreign Currency Convertible Debentures (FCCBs); Investment
         Vehicles fully, compulsorily and mandatorily convertible preference shares and
         fully, compulsorily and mandatorily convertible Debentures or units of an
         Investment Vehicle, regardless of whether the said investments have been made
         under Schedule I, II, , III, VI, IX andX of Foreign Exchange Management (Non-Debt
         Instruments) Rules, 2019.

1.2 Guidelines for calculation of total foreign investment i.e. direct and indirect
         foreign investment

(i) Counting of direct foreign investment
              All investment directly by a non-resident entity into the Indian company/ LLP
              would be counted towards foreign investment.

(ii)Counting of indirect foreign investment
              (a) The foreign investment through the investing Indian company/LLP would
                     not be considered for calculation of the indirect foreign investment in case
                     of Indian companies/LLPs which are ‘owned and controlled’ by resident
                     Indian citizens and/or Indian Companies/LLPs which are owned and
                     controlled by resident Indian citizens.
              (aa) Downstream investment by an Investment Vehicle shall be regarded as
                     foreign investment if either the Sponsor or the Manager or the Investment
                     Manager is not Indian ‘owned and controlled’ as defined in Regulation 14
                     of the principal Regulations as defined in RBI Notification No.362/2015-RB
                     dated February 15, 2016.

Provided that for sponsors or managers or investment managers organized
                     in a form other than companies or LLPs, SEBI shall determine whether the
                     sponsor or manager or investment manager is foreign owned and
                     controlled.
              (b) For cases where condition (a) above is not satisfied or if the investing
                     company is owned or controlled by ‘non-resident entities’, the entire
                     investment by the investing company/LLP into the subject Indian
                     Company would be considered as indirect foreign investment, 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-cum-investing/
                     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 subsidiary is owned by the holding company.
Illustration
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:
         (I) invests 26% in Company X, the entire 26% investment by Company Y would
             be treated as indirect foreign investment in Company X;
         (II) invests 80% in Company X, the indirect foreign investment in Company X
              would be taken as 80%;
         (III) where Company X is a wholly owned subsidiary of Company Y (i.e.Company
                Y owns 100% shares of Company X), then only 75% 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.

(iii)The total foreign investment would be the sum total of direct and indirect
              foreign investment.

(iv) The above methodology of calculation would apply at every stage of
              investment in Indian companies and thus to each and every Indian company.

(v) Additional conditions

(a) The full details about the foreign investment including ownership details
       etc. in Indian company(s) and information about the control of the
       company(s) would be furnished by the Company(s) to the Government of
       India at the time of seeking approval.

(b) In any sector/activity, where Government approval is required for foreign
       investment and in cases where there are any inter-se agreements
       between/amongst shareholders which have an effect on the appointment of
       the Board of Directors or on the exercise of voting rights or of creating
       voting rights disproportionate to shareholding or any incidental matter
       thereof, such agreements will have to be informed to the approving
       authority. The approving authority will consider such inter-se agreements
       for determining ownership and control when considering the case for
       approval of foreign investment.

(c) In all sectors attracting sectoral caps, the balance equity i.e. beyond the
       sectoral foreign investment cap, would specifically be beneficially owned
       by/held with/in the hands of resident Indian citizens and Indian
       companies, owned and controlled by resident Indian citizens.

(d) In the I& B sector where the sectoral cap is up to 49%, the company would
       need to be ‘owned and controlled’ by resident Indian citizens and Indian
       companies, which are owned and controlled by resident Indian citizens.

(A) For this purpose, the equity held by the largest Indian shareholder would
       have to be at least 51% of the total equity, excluding the equity held by
       Public Sector Banks and Public Financial Institutions, as defined in Section
       4A of the Companies Act, 1956 or Section 2 (72) of the Companies Act, 2013,
       as the case may be. The term ‘largest Indian shareholder’, used in this
       clause, will include any or a combination of the following:

(I) In the case of an individual shareholder,
         (aa) The individual shareholder,
         (bb) A relative of the shareholder within the meaning of Section 2 (77) of
                 Companies Act, 2013.
         (cc) A company/group of companies in which the individual
                 shareholder/HUF to which he belongs has management and
                 controlling interest.

(II) In the case of an Indian company,
         (aa)The Indian company
         (bb)A group of Indian companies under the same management and
                ownership control.

(B) For the purpose of this Clause, “Indian company” shall be a company which
    must have a resident Indian or a relative as defined under Section 2 (77) of
    Companies Act, 2013/ HUF, either singly or in combination holding at least
    51% of the shares.

(C) Provided that, in case of a combination of all or any of the entities mentioned
                 in Sub-Clauses (I) and (II) of clause 1.2(v)(d)(A) above, each of the parties
                 shall have entered into a legally binding agreement to act as a single unit in
                 managing the matters of the applicant company.

(e) If a declaration is made by persons as per section 187C of the Companies
                   Act, 1956 or section 89 of the Companies Act, 2013, as the case may be about
                   a beneficial interest being held by a non-resident entity, then even though
                   the investment may be made by a resident Indian citizen, the same shall be
                   counted as foreign investment.

1.3 The above mentioned policy and methodology would be applicable for determining
         the total foreign investment in all sectors, except in sectors where it is specified in a
         statute or rule there under. The above methodology of determining direct and
         indirect foreign investment therefore does not apply to the Insurance Sector which
         will continue to be governed by the relevant Regulation. Similarly, above
         methodology will also not apply to downstream investments by an Investment
         Vehicle. Relevant conditions of downstream investment by Investment Vehicles are
         as under:

(i) Downstream investment by an Investment Vehicle shall be regarded as foreign
        investment if either the Sponsor or the Manager or the Investment Manager is not
        Indian ‘owned and controlled’ as defined in Regulation 14 of the principal
        Regulations as defined in RBI Notification No. 362/2015-RB dated February 15, 2016.
        Provided that for sponsors or managers or investment managers organized in a form
        other than companies or LLPs, SEBI shall determine whether the sponsor or manager
        or investment manager is foreign owned and controlled.

Explanation 1: Ownership and control is clearly determined as per the extant FDI
        policy. AIF is a pooled investment vehicle. ‘Control’ of the AIF should be in the
        hands of ‘sponsors’ and ‘mangers/investment managers’, with the general exclusion
        of others. In case the ‘sponsors’ and ‘managers/investment managers’ of the AIF are
        individuals, for the treatment of downstream investment by such AIF as domestic,
        ‘sponsors’ and ‘managers/investment managers’ should be resident Indian citizens.

Explanation 2: The extent of foreign investment in the corpus of the Investment
        Vehicle will not be a factor to determine as to whether downstream investment of
        the Investment Vehicle concerned is foreign investment or not.

(ii) Downstream investment by an Investment Vehicle that is reckoned as foreign
        investment shall have to conform to the sectoral caps and conditions / restrictions, if

any, as applicable to the company in which the downstream investment is made as
        per the FDI Policy.
        (iii) Downstream investment in an LLP by an Investment Vehicle that is reckoned as
        foreign investment has to conform to the provisions of Schedule VIII of the Foreign
        Exchange Management (Non-Debt Instruments) Rules, 2019 as well as the extant FDI
        policy for foreign investment in LLPs.
        (iv) An Alternative Investment Fund Category III with foreign investment shall
        make portfolio investment in only those securities or instruments in which a
        Registered Foreign Portfolio Investor is allowed to invest under the principal
        Regulations.
        (v) The Investment Vehicle receiving foreign investment shall be required to make
        such report and in such format to Reserve Bank of India or to SEBI as may be
        prescribed by them from time to time.
1.4 Any foreign investment already made in accordance with the guidelines in
         existence prior to February 13, 2009 (date of issue of Press Note 2 of 2009) would not
         require any modification to conform to these guidelines. All other investments, past
         and future, would come under the ambit of these new guidelines.