The Indian companies can get investment from the sources abroad and the funds can aid in the growth of the Indian businesses and allow them to expand in different directions. On the other hand, if an Indian company with foreign investments invests into other Indian companies, what are the parameters that classify the latter as a foreign investment according to the policy of the FDI. The foreign investment in India can be divided into two categories.
- Indian company engaged in investing in other Indian companies
- Downstream investment
Investment in Indian companies
When an Indian company uses the foreign investment funds for the activity of investing in the other Indian companies, they must get prior approval from the Government for the extent of foreign investment and the amount it can invest. Such companies are often categorized as Core Investment Companies or the CIC’s and need to follow the framework of RBI regulations. Similarly, when the investment moves through an automatic route, the foreign investment of the Indian company, which does not have any operations or downstream investments can get permission of a combination of foreign investments through the automatic route. Furthermore, the company may have to fulfill the sectoral requirements along with other caps or conditions.
Downstream investment
The downstream investment is another category of foreign investment in India in which an Indian company makes foreign investments in other Indian companies. When an Indian company, which does not have foreign ownership invests in the other Indian companies after fulfillment of the sectoral and the other compliances, it is classified as downstream investment.
The following are the downstream investment needs to fulfill.
- The entity must inform the RBI along with the Foreign Investment Facilitation Portal of the downstream investment within a period of thirty days of the investment even when there is no allotment of capital or investment modality in the new ventures.
- The downstream investment that takes place with the induction of foreign investment in an Indian company must get the support through a resolution of the Board of Directors along with the agreement of the shareholders.
- The valuation of the capital and the issue of transfer pricing must be in accordance of the guidelines of RBI.
- The Indian entities interested in downstream investment must get the necessary funds from the domestic market.
Understanding foreign investment
For a foreign company, which is non-resident, and makes investment in an Indian company, it is classified as foreign direct investment in the Indian scenario. On the other hand, the indirect foreign investment from a resident Indian company with foreign investments in it, and makes investment further as well can be categorized as non-resident investment. It could be an Indian company investing in the other Indian companies, but has foreign investments that can belong to the category of indirect foreign investment.
Foreign direct investment
All those investments that come directly from the non-resident entities in an Indian company is known as FDI in India.
Indirect foreign investment
A company can be said to follow the norm of indirect foreign investment where the company that acquires is under the ownership of a non-resident entity and the total investment by the company that invests goes into another Indian company is considered as indirect foreign investment. The only exception to the rule is that the target company must be a wholly owned subsidiary of the acquiring company.
Exceptions to the methods
When the investing Indian entity is under the ownership and control of the resident Indian citizens, the foreign funds in the investing company is not computed for indirect foreign investment. When it comes to indirect foreign investment, the investment into the hundred percent subsidiary is similar to another investment made by the holding company and the downstream investment is akin to the holding company. However, the exception applies to those cases where the entire money of the downstream subsidiary stays under the ownership of the holding company.
Summing up the discussions
During the stage of growth and creation of wealth in the Indian economy, the policy of the FDI shows the flow of foreign funds and the other methods into the Indian enterprises and the companies. The companies must also discuss the tax implications of these investments with the best tax lawyers in India and comply with the regulations. The Indian government needs to take the right steps for improving the scope of foreign investment.