Downstream Investment by Foreign-Owned Indian Companies (FOCC) in 2026

By Nagavarapu Sudheer, M.Com., F.C.S., L.L.B., Partner, A2 Consultants

Once a foreign group has an Indian subsidiary, the next investments are often made from India: buying a stake in a local supplier, setting up a second Indian company, or entering a joint venture through an LLP. Many groups assume these are purely domestic transactions. They are not. Under India's foreign exchange rules, an Indian company that is foreign owned or controlled carries its foreign character with it, and its investments are treated as indirect foreign investment.

What is a FOCC?

An Indian company or LLP is "owned" by non-residents if they hold more than 50% of its equity or capital, and "controlled" by non-residents if they can appoint a majority of its directors or control its management or policy decisions. A company that meets either test is a foreign owned or controlled company (FOCC). A typical Indian subsidiary of a foreign parent is a FOCC.

The core principle: what cannot be done directly cannot be done indirectly

Rule 23 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 treats an investment by a FOCC in another Indian entity as indirect foreign investment. The RBI's Master Direction on Foreign Investment (updated January 2025) confirms that downstream investment is to be treated on par with direct FDI. In practice this means:

• Entry route and caps: the target's sector must permit foreign investment, and the same sectoral caps, approval route and conditions apply as if the parent invested directly.
• Pricing: the pricing guidelines that apply to FDI (fair value for issue and transfer of shares) also apply to downstream investment.
• Land-border ownership: if any beneficial owner in the chain is from a country sharing a land border with India, the Press Note 3 framework applies to the downstream investment too. Since Press Note 2 (2026), non-controlling beneficial ownership within the threshold moves to the automatic route but remains subject to reporting. See our note on Press Note 2 (2026).

How the investment may be funded

A FOCC may fund downstream investment only from:

• funds brought in from abroad (fresh equity or other permitted foreign inflows); or
• internal accruals, meaning profits transferred to reserves after tax.

It may not use funds borrowed in the domestic market. This catches groups that fund an Indian acquisition through a bank loan to the subsidiary. Where cash is needed, the usual route is a fresh equity infusion from the parent, which itself is FDI and must be reported.

Share swaps and deferred consideration

The January 2025 Master Direction resolved two practical issues. Downstream investment through a share swap is permitted on the same footing as FDI, and deferred consideration structures (escrows, holdbacks, earn-outs and post-closing price adjustments) are allowed within the limits that apply to FDI. Both need to be reflected correctly in the transaction documents and the valuation.

Downstream investment into an LLP

A FOCC may invest in an LLP only where the LLP operates in a sector that allows 100% foreign investment under the automatic route and has no FDI-linked performance conditions. The contribution must be at or above fair value and must come from permitted funding sources. Investments into LLPs are increasingly used for joint ventures with Indian promoters, so check the sector carefully before signing.

Reporting

• Form DI: the investing FOCC must report the downstream investment to the RBI through the FIRMS portal within 30 days of the investment (for example, allotment of shares or transfer of shares).
• Becoming a FOCC: an Indian entity that becomes a FOCC must also report this within 30 days.
• Investee filings: the investee files its normal corporate filings (for example, PAS-3 for allotment, or LLP Forms 3 and 4 for a new partner).
• Board approval: the investment must be approved by the FOCC's board, and by a shareholders' agreement or shareholders' resolution where it is required.
• Annual reporting: both entities report their foreign liabilities in the annual FLA return to the RBI. See our FEMA compliance calendar.

Companies Act points that are easy to miss

• Section 186 limits on investments and loans apply, with a special resolution needed above the prescribed limits.
• Investment through more than two layers of investment companies is restricted for most companies.
• Related-party approvals apply where the target is a group company or a promoter's entity.

Common mistakes we see

1. Funding an Indian acquisition with a domestic bank loan to the FOCC.
2. Paying below fair value to a resident seller (or above it to a non-resident).
3. Missing the 30-day Form DI deadline, which then needs a late submission fee or compounding.
4. Ignoring a minority land-border shareholder several layers up the chain.
5. Investing in an LLP in a sector that is not fully open under the automatic route.

For buy-side checks on the target itself, see our due diligence checklist for foreign buyers.

Talk to A2 Consultants

A2 Consultants structures and reports downstream investments for foreign-owned Indian companies, from sector checks and valuation to Form DI and the related board and LLP filings. The first conversation is free: book a 30-minute call at www.a2consultants.in or write to sudheer@a2consultants.in.