Downstream/ Indirect Foreign Investment: Meaning & Example

What is foreign investment?

Investment in an Indian company by a non-resident is called the ‘foreign investment’.

This foreign investment can be:

• Direct Foreign Investment; or

• Indirect Foreign Investment.

Downstream Investment

Investment by non-resident entity/person resident outside India in the capital of an Indian company is generally called the FDI i.e. Foreign Direct Investment.

Whereas in case an Indian company, who has FDI, further invests the money in any other Indian company, it would be called “Indirect Foreign Investment”.

The indirect investment can also be a cascading investment i.e. through multi-layered structure.

The Indirect Foreign Investment is otherwise also known as “Downstream Investment”.

Example

ABC Inc, an American company has invested money in the share capital of XYZ Limited, an Indian company.

XYZ Limited has further invested that money in the share capital of MKL Limited, another Indian company.

This investment by XYZ Limited is called Downstream Investment.

FDI Policy in India

Eligible Indian entities including LLPs, having foreign investment, are allowed to make downstream investment in another Indian company or LLP which belongs to a sector in which 100% FDI is permitted under the automatic route and there are no sector specific conditions for companies receiving the foreign investment.

Such an Indian entity (who is investing) will have to notify RBI and Foreign Investment Facilitation Portal in the prescribed form within 30 days of such investment, whether or not the allotment of capital instruments is completed. Downstream investment to be supported by a board resolution and a shareholders agreement, if any.

For detailed provisions on Downstream Investment, please refer to the Consolidated FDI Policy issued by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, Govt. of India.