The Government of India ("Government") has revised its policy in relation to downstream investments by banking companies incorporated in India that are owned and/or controlled by non-residents or non-resident entities ("Revised FDI Policy")[1]. The Revised FDI Policy came into force on July 31, 2012 through an amendment of the current foreign direct investment policy ("FDI Policy")[2].

Besides prescribing rules regarding foreign direct investment, the FDI Policy also specifies the method for calculating the extent of indirect foreign ownership in an Indian company. In general, the FDI Policy regarding downstream investments is as follows:  

  • An investment made by an Indian company that is (a) owned and controlled by resident Indian citizens, and/or (b) owned and controlled by Indian companies which are in turn owned and controlled by resident Indian citizens, does not constitute foreign investment.
  • An investment made by an Indian company that is owned and/or controlled by non-residents or non-resident entities constitutes foreign investment.

The Revised FDI Policy provides a specific (advantageous) exception to this general rule for downstream investments by banking companies incorporated in India that are owned and/or controlled by non-residents or non-resident entities. Any downstream investment made by banking companies incorporated in India (that are owned and/or controlled by non-residents or non-resident entities) pursuant to corporate debt or loan restructuring arrangements, or in trading books, or acquisition of shares due to loan defaults, will not be considered for the purposes of calculating indirect foreign investment. In other words, these banking companies, even though they are owned and/or controlled by non-residents or non-resident entities, will be considered Indian-owned and controlled companies and therefore not subject to any restrictions imposed on foreign-owned/controlled companies.

However, the Government has clarified that a strategic investment by such banking companies in their subsidiaries, joint ventures and associates will continue to be considered to be indirect foreign investment and subject to the FDI Policy.

The Revised FDI Policy provides more flexibility for all such specifically exempt foreign-owned Indian banking companies to undertake debt restructuring for Indian borrowers.