Indian subsidiaries of non-resident / foreign or multinational companies are commonly referred to as “FOCC” (i.e., foreign owned and/or controlled companies) and the investment made by such FOCCs in other Indian companies or limited liability partnerships (“LLPs”) are referred to as “downstream investments”.

FOCCs are treated differently from Indian companies for their investments in, and exits from, other Indian companies and LLPs. FOCCs need to comply with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) which poses some challenges in structuring of such investments or exits  

Unfortunately, the NDI Rules do not provide a detailed framework for downstream investments by FOCC giving rise to lack of clarity as can be seen from some of the following issues:

Investment in OCPS and OCDs

Optionally convertible preference shares (“OCPS) or optionally convertible debentures (OCDs”) are instruments which provide flexibility to parties in structuring their transaction. The investor gets the flexibility to choose at a later point in time, whether to convert his investment into equity shares and participate in the profits and capital appreciation or redeem the instrument to protect the capital he has invested.

The issue that arises is, whether FOCCs can invest in OCPS or OCDs? Would the NDI Rules apply to an investment by FOCC in an instrument that is not an “equity instrument”? Would FOCCs be treated as a non-resident for this purpose, and be restricted in investing in OCPS and OCDs under the NDI Rules?

Under NDI Rules “downstream investment” is an investment made by FOCCs in the “capital instruments” or the “capital” of another Indian entity. Unlike the erstwhile regulations which it has replaced, the NDI Rules do not define the term “capital instrument”. Instead, “equity instrument” is defined which refers to fully, compulsorily and mandatorily convertible debentures, preference shares and share warrants of an Indian company. Having said that it would be safe to assume that the term “capital instrument” would have the same meaning as “equity instruments” under the NDI Rules.

The Reserve Bank of India (“RBI”) had explained in its frequently asked questions (“FAQs”) on 7 May 2018 clarified that investment in an instrument other than capital instrument would not be treated as a downstream investment. The FAQs were issued under the erstwhile regulations replaced by NDI Rules. RBI website ( has a disclaimer that in case of any inconsistency(ies) between FAQs and notification / master directions / circular(s) latter shall prevail. Accordingly, the FAQs do not have a binding effect, however, it may have a persuasive value while defending oneself before the authorities.

The law governing downstream investments is not comprehensive. NDI Rules merely provide that downstream investments need to comply with the entry route, sectoral caps, pricing guidelines and other attendant conditions as applicable for foreign investment. The term “other attendant conditions as applicable for foreign investment” is too broad. To what extent will the rules of foreign investment apply to a downstream investment?

Relying on FAQs, although RBI may not treat OCPS and OCDs investment as a “downstream investment”, conversion of the OCPS or OCDs into equity shares would be treated as a downstream investment. Accordingly, it needs to be ensured that such investment on conversion is compliant with entry route, sectoral caps, pricing guidelines and other attendant conditions as applicable for foreign investment.

The NDI Rules do not provide for the timing and manner of payment of consideration for acquiring the equity instruments in the case of downstream investments. It is not clear if payment made at the time of subscribing the OCPS or OCDs would be treated as valid payment for shares received on conversion of these instruments under the NDI Rules. If the FAQs are to be relied upon, one can assume that acquiring equity shares on conversion would be permissible.

Again, would the pricing guidelines apply at the time of subscribing to OCPS or OCDs or at the time of conversion? This is not clear. If investment in OCPS and OCDs is not a downstream investment, pricing guidelines would not apply at that stage. Pricing guidelines will apply at the time of downstream investment, i.e., on conversion. With this interpretation, the FOCC would not know the number of equity shares it will receive at the time of subscribing to OCPS and OCDs. This reduces the attractiveness of OCPS and OCDs as an instrument. If pricing guidelines were to apply at the stage of subscribing to OCPS and OCDs, RBI will need to specifically provide for the same.

Deferred consideration, post-closing escrow, price adjustment and indemnity payment

Some other issues that arise are whether (a) consideration can be deferred or paid after the transfer of equity instrument or (b) the shares or consideration can be kept in an escrow for the benefit of the parties involved after the equity instrument is transferred or (c) the purchase price could be adjusted after the equity instrument is transferred or (d) indemnity payments in relation to the transaction involving transfer of equity instrument can be made without any restrictions?

In the case of a direct investment by a non-resident, the NDI Rules provide for various restrictions on payment of deferred consideration, escrow, purchase price adjustments and indemnity payment after the transfer of equity instruments. However, the NDI Rules on downstream investments do not so provide except for the generic language “other attendant conditions…”. This has lead to ambiguity in interpreting the rules and different practitioners and law firms take different views.


FOCCs need to comply with pricing requirements under the NDI Rules. FOCCs can acquire from, or transfer capital or equity instruments to, Indian residents non-residents as well as other FOCCs.

The NDI Rules provide for the pricing requirements in each case when the FOCC is transferring (i.e., exiting) its investment, however, the NDI Rules do not expressly provide for pricing when the FOCC invests in the Indian company by acquiring capital or equity instruments from a (a) resident; and (b) non-resident. As such, it is advisable to follow the same pricing guidelines when the FOCC is acquiring from residents and non-residents. For transfers between FOCCs, as NDI Rules are silent, pricing guidelines would not apply.

Regulatory filings:

Like the pricing issue, the NDI Rules do not specifically provide for filing requirements when FOCC acquires equity instruments from a resident or a non-resident. In addition to Form DI (used to report downstream investments), authorised dealer banks may also require the filing of Form FC-TRS in such cases. For transfers between FOCCs, as NDI Rules are silent, no reporting may be required although the acquiring FOCC may have to file Form DI.


FOCCs are uniquely placed in the Indian context. FOCCs are important to the entire ecosystem of foreign investments and should not be left grappling for clarity. They are treated as non-residents specifically only for the purposes of NDI Rules. For most other cases, they are treated as an Indian company. The restrictions, if any, on the FOCCs should be laid down clearly.

Lack of clear regulatory framework is one of the factors that affects the ease of doing business in India. Economies globally have been severely impacted due the Covid-19 pandemic. Foreign companies are looking to move out of China. While India seeks to be self-sufficient, foreign capital is still important and needed. There cannot be a better time for the RBI and government to provide clarity to foreign investors.

Foreign investors would be well advised to take competent legal advice to structure their investments.