As discussed in the previous article ‘Downstream Investment under Foreign Exchange Law’, in order to comply with the provisions of FEMA, at the time of making any downstream investment by a foreign owned and controlled entity (‘FOCE’) into an Indian company, provisions of FEMA NDI Rules are required to be adhered to and conditions and provisions needs to be complied with.
Accordingly, it is imperative to understand the calculation of downstream investment under FEMA regulations.
Case Study 1:
The 1st level Indian entity is owned to the extent of 50% or more by non-residents or foreign citizens; or is controlled by non-residents or foreign citizens, such Indian Entity would be considered as FOCE. In such case, entire shareholding by FOCE into 2nd level Indian entity would be considered as foreign investment, irrespective of the proportion of investment made in such 2nd level Indian entity. In such cases, FEMA compliance needs to be complied with even by such FOCE. This method has to be considered for every downstream investment.
On the other hand, only if the 1st level Indian Entity has shareholding of more than 50% owned by resident Indian citizen and is controlled by resident Indian citizen, it will be considered as Indian Owned and Controlled Entity (‘IOCE’). Thus, for an Indian entity to be considered as IOCE, ownership of more than 50% as well as control of more than 50% is essential. Thus, any downstream investment made by an IOCE in an Indian entity, is considered to be domestic investment.
Case Study 2:
Part I: As the foreign investment in the 1st level Indian Entity is 100%, an Indian entity would be considered as FOCE. Further downstream Investment by FOCE into 2nd level Indian Entity is 60%, then entire 60% would be considered as foreign investment in the 2nd level Indian Company.
Part II: As the foreign investment in the 1st level Indian Entity is 40%, the 1st level Indian entity would be considered as IOCE. Thus, Investment by such IOCE would be considered as domestic Investment. Further Investment by foreign entity directly in 2nd level Indian entity is also less than 50%, thus 2nd level Indian entity would also be considered as IOCE.
Part III: As the foreign investment in an Indian Entity is 100%, it would be considered as FOCE. Downstream investment by FOCE into 2nd level Indian entity, would be considered as foreign investment. Further, direct investment by foreign entity in 2nd level Indian entity would also be considered as direct foreign investment. Thus, total foreign investment in 2nd level Indian entity would be considered as 80%.
Case Study 3:
Sister concern of 1st level Indian entity: As the foreign direct investment in the sister concern of 1st level Indian entity is more than 50%, it would be considered as FOCE. Any investment made by sister concern of 1st level Indian entity would be considered as foreign investment.
1st level Indian entity: Investment by sister concern into 1st level Indian Entity coupled with direct investment by foreign entity in 1st level Indian entity is 80% (as entire investment by sister concern would be considered as foreign investment), 1st level Indian entity would be considered as FOCE. Any investment made by 1st level Indian entity would be considered as foreign investment.
2nd level Indian entity: In the case of 2nd level Indian entity, 20% is invested by 1st level Indian Entity, and 20% is invested by sister concern of 1st level Indian entity, thus, since aggregate foreign investment is 40%. Thus, 2nd level Indian entity would be considered as IOCE as foreign investment is less than 50%. Any further investment by 2nd level Indian entity would be considered as domestic investment.
3rd level Indian entity: As entire holding of 3rd level Indian entity is held by 2nd level Indian entity, it would be considered as IOCE as 2nd level Indian entity is also an IOCE.
For detailed discussion on the above case studies, please feel free to connect at contact@devadhaantu.in