The gradual liberalization and deregulation of the Indian foreign investment regime has generated significant interest among foreign investors, making India one of the fastest growing destinations for global foreign direct investment. In 2008, despite the slowdown of the global economy, India attracted over US$25 billion in foreign investment1 and from March 9 to May 19, 2009, foreign institutional investors (FII) invested nearly US$4.2 billion in the Indian stock markets.2

Investors and companies need to be aware that foreign investment into India is governed by the Foreign Direct Investment policy (FDI) of the Government of India (GOI) and the Foreign Exchange Management Act, 1999. There are two main underlying competing policy concerns for the FDI policy framework: a recognition that foreign investments are necessary to sustain India's impressive economic growth and a concern for the protection of sectors of strategic interest like telecommunications and defence. Foreign investment up to 100% is now allowed without GOI approval (certain procedural filings are needed within prescribed time limits) in almost all sectors of the Indian economy under the automatic approval route except those subject to sectoral caps/policy. Any foreign investment in sectors of the Indian economy subject to sectoral caps/policy continues to require GOI approval – the GOI approval route. Further, the existing FDI policy imposes complete prohibition on certain sectors like atomic energy where no application for GOI approval is possible.

In February 2009, the GOI, in a laudable attempt to further liberalize foreign investment in India, issued Press Notes 2, 3 and 4 (the 2009 Press Notes) which impact the calculation of total foreign investment in Indian companies and the transfer of ownership or control of Indian companies in restricted sectors to non-resident entities and clarify the circumstances in which GOI approval will be required for downstream investments.

This article provides a high level overview of the key changes to the FDI policy as a result of the 2009 Press Notes and potential implications for foreign investors seeking to invest in Indian companies.


Foreign investment in Indian companies under both the automatic approval and the GOI approval routes may be made directly by a non-resident entity (direct foreign investment) or routed indirectly through a resident Indian entity (with both resident and non-resident shareholdings) that makes downstream investments in Indian companies (indirect foreign investment).

Prior to the 2009 Press Notes, FDI policy under the 1999 Press Note 9 was interpreted to require GOI approval notwithstanding the automatic approval route, for virtually all downstream investments by Indian companies with foreign shareholdings. The previous FDI policy also mandated sector specific methods for calculating indirect foreign investment3 in sectors like telecom/broadcasting and infrastructure.

The 2009 Press Notes, which affect the entire range of foreign investments in India, are an attempt by the GOI to harmonize the calculation of indirect foreign investment across sectors and eliminate GOI approval in certain circumstances.

(a) Press Notes 2 and 4

New criteria for calculation of indirect foreign investment in Indian companies were issued by the GOI in the form of Press Note 2. Based on the new methodology and the criteria in Press Note 2 for Indian ownership and control, if a foreign investor invests up to 49% in an Indian owned and controlled investing company which in turn makes a downstream investment in a target Indian company, the total foreign investment in the downstream target company will be considered to be 0%. Conversely, if the routing investing company is either owned or controlled by a non-resident entity, the 49% foreign investment will be included in the calculation of total foreign investment in the downstream target company.

Press Note 2, however, created some confusion regarding the interpretation of an investing company and the proposed definition of Indian ownership and control and necessitated the issuance of Press Note 4 on February 25, 2009.

Press Note 4 is not only a clarificatory guideline to Press Note 2 but also repeals the restrictive 1999 Press Note 9 of the GOI. Under Press Note 4, a foreign owned or controlled Indian company that either operates a business or operates a business as well as invests in other companies (an "operating-cum-investing company" in Indian parlance) will no longer have to seek GOI approval for its downstream investments as long as it complies with applicable sectoral restrictions. Foreign investment in a pure investing company – an entity holding only investments in another Indian company – will, however, require prior GOI approval irrespective of the amount of foreign investment in that company.

Thus, Press Notes 2 and 4 when read together indicate that foreign investors may invest up to 49% without GOI approval and without such investment being counted towards the indirect foreign investment calculation, by routing their investments through an operating-cum-investing company under Indian ownership and control. The conduit Indian company will be considered to have 0% foreign ownership and may then be used to make downstream investments in target Indian companies in industries subject to sectoral caps/policy.

(b) Press Note 3

Unfortunately, Press Note 3 introduces mandatory GOI approval for the transfer of ownership and control of Indian companies to non-resident entities in restricted sectors such as telecom, defence production, air transport services and broadcasting. Thus, foreign investments as well as any transfer of ownership or control to a foreign entity in the restricted sectors are now subject to GOI approval. Press Note 3 guidelines are not intended to apply to sectors where 100% foreign investment is allowed under the automatic approval route.


Canadian investors seeking to invest in India should be encouraged by the GOI's commitment to increase foreign investment in India. The 2009 Press Notes harmonize indirect foreign investment calculation and effectively allow an indirect increase in foreign investments in industries subject to sectoral caps/policy. Investment in India is a long-term commitment as evidenced by the fact that these changes, although positive for the foreign investment climate in India, have raised issues that need to be further resolved, such as a broader FDI policy and questions on the narrow definition of ownership. There is more good news on the Indian front: the near majority win by the ruling UPA government signifies stability in government for the next five years. The current government is likely to continue its economic reform agenda with a view to further liberalizing the FDI policy over the next five years. Canadian companies seeking to invest globally should continue to regard India as an increasingly favourable environment for foreign investments as the Indian economy continues to liberalize in certain previously restricted sectors.

This article was written in collaboration with Anand Mehta (Thakker & Thakker, a leading law firm in India). The authors wish to thank Radha Subramanian (summer law student) for her assistance in preparing this article.