Direct and Indirect Foreign Investment in Indian Companies: Meaning

Investment in Indian companies can be made by both non-resident as well as resident Indian entities. Any non-resident investment in an Indian company is direct foreign investment. Investment by resident Indian entities could again comprise both resident and non-resident investments.

Meaning of Company ‘Owned by Resident Indian Citizens’ & Company ‘Owned by Non-Residents’

Company ‘Owned by Resident Indian Citizens’ shall be an Indian company if more than 50% of the capital in it is beneficially owned by resident Indian citizens and/or Indian companies, which are ultimately owned and controlled by resident Indian citizens; Company shall be considered ‘Controlled’ by resident Indian citizens if the residents Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors in that company.

 Company ‘Owned by Non-Residents’ means an Indian company where more than 50% of the capital in it is beneficially owned by non-residents; Company ‘Controlled by ‘non-residents ’ means an Indian company where non-residents have the power to appoint a majority of its directors in that company.

 

Counting of Direct foreign investment & Indirect Foreign Investment

(i) Counting of Direct Foreign Investment: All investments made directly by non-resident entities into the Indian company would be counted towards ‘Direct foreign investment’.

(ii) Counting of Indirect Foreign Investment: The entire indirect foreign investment by the investing company into the other Indian Company would be considered for the purpose of computation of indirect foreign investment. However, as an exception, the indirect foreign investment in the 100% owned subsidiaries of operating-cum-investing/investing companies will be limited to the foreign investment in the operating-cum-investing/ investing company. This exception has been made since the downstream investment of a 100% owned subsidiary of the holding company is akin to investment made by the holding company and the downstream investment should be a mirror image of the holding company. This exception, however, is strictly for those cases where the entire capital of the downstream subsidiary is owned by the holding company.

(iii) The methodology for calculation of total foreign investment would apply at every stage of investment in Indian companies and thus in each and every Indian company.