Downstream investment means the indirect foreign investment in the Indian company (i.e. investee company) as a result of investment by other Indian company (i.e. investor) having foreign investment in it.
For example, A (an Indian Company) makes investment in the capital of B (another Indian company). It is just an investment from A to B. However, if A is already having foreign investment in it, then B will also be considered having indirect foreign investment from that foreign source. Therefore, it is technically called as Downstream Investment.
FDI Policy defines “downstream investment” as the investment made by an Indian entity which has total foreign investment in it, or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity. It may be by way of subscription or acquisition.
Further as mentioned in sub-para (a) of paragraph 1 of Schedule IV of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, investment made by NRI(s) in equity instrument of Indian Company, Units issued by Investment Vehicles, the capital of LLP and convertible notes by startup companies on non-repatriation basis shall be deemed to be domestic investment at par with the investments made by residents of India.
Thus in line with the same principle as stated above that any such investment made by NRIs on non-repatriation basis shall be treated at par with domestic investment and therefore any further downstream investment by such company (having investment by NRI on non-repatriation basis) should also be treated as Indian investment (and not like an indirect foreign statement and therefore Press Note 1 of 2021 series dated 19th March, 2021, clarified this clearly that an investment made by an Indian entity which is owned and controlled by NRI(s) on a non-repatriation basis shall not be considered for calculation of indirect foreign investment and the same shall be deemed to be domestic investments at par with the investments made by residents.
Accordingly, a clause (c) has been inserted under para 1.2(ii) of Annexure 4 of the Consolidated FDI Policy Circular of 2020 wherein para 1.2 of the said policy contains the guidelines for calculation of total foreign investment i.e. direct and indirect foreign investment.
Inserted para is as below
“Investment by NRI(s) on a non-repatriation basis as stipulated under schedule IV of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 are deemed to be domestic investments at par with the investments made by residents. Accordingly, an investment made by an Indian entity which is owned and controlled by NRI(s) on a non-repatriation basis shall not be considered for calculation of indirect foreign investment.”
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