This article was published in International Trade Law360 and Corporate Finance Law360 on April 5, 2011. © Copyright 2011, Portfolio Media, Inc., publisher of Law360.

The Indian Department of Industrial Policy and Promotion (DIPP), India’s regulator in charge of formulating India’s Foreign Direct Investment Policy (FDI), just released India’s revised Consolidated FDI Policy, effective as of April 1, 2011. Upon taking effect, this new policy amends and replaces in its entirety India’s prior Consolidated FDI Policy that was effective as of October 1, 2010 and all related press notes and other circulars issued by the DIPP from time to time on FDI. The full text of the new Consolidated FDI Policy can be found at

The new Consolidated FDI Policy makes a few noteworthy changes for foreign investors, including the following:

Elimination of Prior FIPB Approval for Pre-Existing Joint Ventures

Under the prior FDI policy, where a foreign investor already had in place a joint venture or a technology transfer or trademark agreement with an Indian party on or before January 12, 2005, it could not enter into a new joint venture, make an investment, enter into a technology transfer, or enter into a technology collaboration or trademark agreement in the same field without the prior approval of the Foreign Investment Promotion Board (FIPB) of India. Under the new policy, foreign investors will no longer be required to obtain FIPB approval before investing in a business in the same field as an existing joint venture or technology transfer or trademark agreement entered into on or before January 12, 2005. This change does not affect the requirements to obtain FIPB approval for investment in sectors subject to sectoral caps.

Streamlining of Approval Requirements for Investments in Holding and Shell Companies and for Downstream Investments

The new policy simplifies the requirements for regulatory approval of investments in holding company or shell company structures in India by eliminating the distinctions in the prior policy between operating companies, operating-cum-investing companies and only investing companies.

Holding Companies – The new policy clarifies that prior FIPB approval is required for investments by foreign investors into companies incorporated in India and whose only activity is investing in the capital of other Indian companies, regardless of the amount invested.

Shell Companies – Similarly, FIPB prior approval is also required for investments by foreign investors in companies incorporated in India and that do not have operations or downstream investments.

Downstream Investments – Investments by companies incorporated in India that are owned and/or controlled by non-resident entities into another company incorporated in India will need to comply with the FDI policy’s caps and approval requirements for investments in sectors subject to sectoral caps (e.g., retail, defense, insurance, banking, telecommunications, news media, etc.). As a reminder, “control” means the power to appoint a majority of the directors of the corporation. “Own” means the beneficial ownership of more than 50 percent of the capital of the corporation.

In addition, such downstream investments will be subject to notification of the DIPP, FIPB and Secretariat of Industrial Assistance in the DIPP (SIA) within 30 days of the investment. Also, the valuation of the securities to be issued in such investments will need to comply with the pricing guidelines issued by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). As a reminder, for investments in shares of privately owned companies, these pricing guidelines typically require that the value of the shares be certified by a firm of auditors or bankers registered with SEBI using the discounted free cash flow method of valuation. Finally, such investments would need to be funded with foreign funds or, subject to certain conditions, internal accruals, but not with the proceeds from debt incurred in India. The new policy, however, clarifies that this latter requirement would not preclude the investee Indian company from borrowing in India to fund its own operations so long as such debt is not used by its Indian parent to make the investment into it.