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.
Further, we discussed few case studies in relation to the FEMA regulations for Downstream Investment in India under article ‘Calculation of downstream investment under FEMA regulations – Part I’. In this article few more case studies are discussed to evaluate the provisions relating to downstream investment under FEMA regulations in detail.
Case Study 4:
In the above case study, since foreign entity holds 100% of 1st level Indian entity, further investment by 1st level Indian entity into 2nd level Indian entity is also considered to be foreign investment and accordingly, both 1st level as well as 2nd level Indian entity would be considered as FOCE. Even though in the facts, it is shown that 80% of the investment in the foreign entity is held by the Indian resident Individual, the nature of investment by foreign entity into Indian entities (directly or indirectly) doesn’t change its characteristic and thus, would continue to be classified as foreign Investment.
Case Study 5:
Part I
MBS Private Limited has issued differential voting shares to the incoming foreign investors. The shareholding pattern of MBS Limited is as under:
Particulars | No. of Shares | % of shareholding rights | % of shareholding at entity level | % of voting Rights | % of voting rights at entity level |
Class A Equity shares | |||||
Mr. M | 25,000 | 25% | 10% | 25,000 | 14.29% |
Mr. B | 40,000 | 40% | 16% | 40,000 | 22.86% |
Mr. S | 35,000 | 35% | 74% | 35,000 | 20% |
Total | 1,00,000 | 100% | 40% | 1,00,000 | 57.14% |
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Class B Equity shares | |||||
Mr. F | 1,50,000 | 100% | 60% | 75,000 | 42.86% |
| 1,50,000 | 100% | 60% | 75,000 | 42.86% |
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Total at entity level | 2,50,000 |
| 100% | 1,75,000 | 100% |
In the above case, as Mr. F is holding more than 50% in MBS Private Limited, MBS Private Limited would be considered as FOCE and would need to comply with FEMA provisions.
Part II
During the year, MBS Private Limited, issued further capital for class C Equity shares with double voting rights voting rights, which is subscribed by Mrs. M, Mrs. B, Mrs. S in the ratio of 5:8:7.
Particulars | No. of Shares | % of shareholding rights | % of shareholding at entity level | Voting Rights | % of voting rights at entity level |
| Class A Equity shares | |||||
Mr. M | 25,000 | 25% | 8.28% | 25,000 | 8.96% |
Mr. B | 40,000 | 40% | 13.25% | 40,000 | 14.34% |
Mr. S | 35,000 | 35% | 11.59% | 35,000 | 12.55% |
Total | 1,00,000 | 100% | 33.12% | 1,00,000 | 35.85% |
Class B Equity shares | |||||
Mr. F | 1,50,000 | 100% | 49.66% | 75,000 | 26.87% |
| 1,50,000 | 100% | 49.66% | 75,000 | 26.87% |
Class C Equity shares | |||||
Mrs. M | 13,000 | 25% | 4.30% | 26,000 | 9.32% |
Mrs. B | 20,800 | 40% | 6.89% | 41,600 | 14.91% |
Mrs. S | 18,200 | 35% | 6.03% | 36,400 | 13.05% |
Total | 52,000 | 100% | 17.22% | 1,04,000 | 37.28% |
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Total at entity level | 3,02,000 |
| 100% | 2,79,000 | 100% |
In the above case, since after further issuance of capital to Mrs. M, Mrs. B and Mrs. S, shareholding of Mr. F reduces to 49.66% and also voting rights reduces below 50%, MBS Private Limited becomes IOCE pursuant to such capital raising.
Thus, from the above case studies, it can be concluded that foreign investment at each level is needs to be looked into. Further criteria of both ownership as well as control needs to be considered while evaluating the downstream foreign investment on a case-to-case basis.
For detailed discussion on the above case studies and the subject, please feel free to connect at contact@devadhaantu.in
