FOCCs and Downstream Investments
Jeevika Poddar
Jeevika Poddar is a Company Secretary, LLB graduate, and Registered Valuer with over 12 years of experience. She runs her own firm, Jeevika Poddar & Associates, where she advises companies on corporate laws, FEMA, business restructuring, valuations, and regular secretarial matters.
She has worked closely with startups and private companies, especially on business valuations and fundraising-related matters. As an Independent Director, she brings a balanced perspective to the boardroom, combining her legal and financial knowledge with practical business insights.
Jeevika is passionate about her work and continuously explores new developments in corporate laws and business valuation. She believes in helping companies stay compliant while supporting their long-term growth.
A Foreign-Owned or Controlled Company (FOCC) is an Indian company or LLP in which foreign entities or non-resident persons hold ownership or control
Any investment made by an Indian FOCC in the capital instruments or capital of another Indian entity is referred to as a downstream investment under the FEMA (Non-Debt Instruments) Rules, 2019. If an Indian entity is considered an FOCC, any downstream investment by such an FOCC will be treated as indirect foreign investment and must comply with all FDI norms.
On January 20, 2025, the RBI updated its Master Direction on Foreign Investment in India. The update clears up some of the earlier grey areas relating to downstream investment, and the key changes are highlighted below.
1. Equating Downstream Investments with Direct FDI
Through its updated Master Directions on Foreign Investment in India, issued on January 20, 2025, the RBI clarified that FOCCs making downstream investments will now be governed by the same terms as direct Foreign Direct Investment (FDI).
The guiding principle is that “what cannot be done directly cannot be circumvented through indirect means.” This nullifies any ambiguity or arbitrage in downstream structuring.
2. Permitting Share Swaps and Deferred Consideration
Historically, FOCCs were uncertain about whether they could use share-swap structures or deferred payment arrangements for downstream investments, even though these were allowed for direct FDI. The new Master Directions now explicitly allow such mechanisms—equity swaps and deferred consideration payments (up to 25% deferred, payable within 18 months)—as long as they meet pricing norms and sector caps under the NDI Rules. Parties should ensure that all deferred consideration payments, consideration escrow arrangements, or equity swap arrangements, along with their related conditions, are explicitly outlined in the share purchase agreement. Such share purchase agreements are typically required as additional attachments to relevant form filings submitted to the RBI when reporting foreign or downstream investments.
3. Prohibition on Using Domestic Borrowings
FOCCs are still not permitted to use domestic loans or borrowings for downstream investments. Only foreign equity funds or internal accruals may be used. This restriction is intended to prevent “round-tripping” or indirect foreign investment through disguised domestic routes.
4. Mandatory Reporting via Form DI
If an entity initially made investments as a domestic company but later becomes an FOCC, those previous investments must be reclassified and reported to the RBI using Form DI within 30 days of the change in status. This enhances transparency and ensures the RBI is aware of all downstream flows.
5. Harmonized Definitions and Consistent Compliance
The updated directions align key terms—like “control”, “convertible notes”, and “sweat equity” with definitions in the NDI Rules and the Companies Act, 2013, reducing ambiguity. Additionally, the updates clarify the applicable forms for different types of transactions: FC-GPR, FC-TRS, and Form DI, bringing consistency across RBI, SEBI, and Ministry of Corporate Affairs filings.
Let us take an example to better understand the changes:
1. Background
a. Alpha Tech Pvt Ltd, incorporated in India, receives foreign funds and thereby becomes a FOCC (foreign-owned by 60% via a global parent).
b. It plans to invest in Beta Innovations Pvt Ltd, a tech startup in India.
2. Structuring the Investment
a. Equity Swap: Alpha Tech issues its own shares to the existing shareholders of Beta in exchange for Beta’s equity—permitted under the new rules, provided the swap respects pricing norms (e.g., SEBI valuation for listed firms or merchant banker valuation for unlisted)
b. Deferred Payment: Alpha Tech pays 75% at execution and defers 25% (subject to milestones), payable within 18 months, with the agreement terms explicitly specified.
c. Source of Funds: Only foreign equity proceeds or Alpha’s internal accruals are used—no Indian loans are permitted.
3. Compliance Routes
a. Since this qualifies as a downstream investment by an FOCC, Alpha must file the transaction via Form DI soon after completion.
b. Pricing, entry route (automatic or approval), and sector cap—all aligned with FDI norms.
4. If the Entity Transitioned to FOCC Later
a. Suppose Alpha was originally domestic when it invested in Beta. If Alpha later becomes an FOCC, it must report the investment reclassification using Form DI within 30 days of the change in status.
5. Outcomes
a. This structure ensures regulatory clarity, pricing transparency, and strategic flexibility.
b. It also aligns with shareholders’ and regulators’ expectations by adhering to disclosure and reporting norms
c. It helps avoid legal pitfalls that previously arose from grey-area structuring.
Final Thoughts
The RBI’s January 20, 2025, update is a landmark reform in India’s foreign investment policy. By placing downstream investments by FOCCs squarely under the same regulatory ambit as direct FDI, and by allowing modern transaction structures like equity swaps and deferred consideration, it boosts clarity, flexibility, and competitiveness.
At the same time, the updated framework reinforces regulatory vigilance. Restrictions on the return on equity (ROE), strict valuation standards, and tighter reporting obligations ensure that India continues to protect its financial architecture while embracing global capital flows.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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