Downstream Investment Rules for FOCCs and Form DI in 2026 (FEMA)

Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.

Downstream investment is an investment by an Indian company that has foreign investment into another Indian company. Under rule 23 of the NDI Rules, it counts as indirect foreign investment when the investor is owned or controlled by non residents. The investee must then meet FDI entry routes, sector caps and pricing. The investor must use funds from abroad or internal accruals, not Indian borrowings, and file Form DI with the RBI within 30 days of allotment.

This page covers the ownership and control tests, the calculation, pricing, the funds rule, Form DI and the annual auditor certificate. It ends with worked numbers, the common violations and a filing checklist.

What is downstream investment under FEMA?

Downstream investment is an investment made by an Indian entity that has foreign investment in it, in the capital of another Indian entity. An investment by an investment vehicle also counts. Rule 23 of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 (the NDI Rules) governs it. It matters when the investor is foreign owned or controlled.

Explanation (g) to rule 23 of the NDI Rules defines downstream investment as "investment made by an Indian entity which has total foreign investment in it". The RBI Master Direction on Foreign Investment in India restates it in paragraph 9.1.13.

Not every downstream investment is foreign investment. It becomes indirect foreign investment only when the investing company is not owned and controlled by resident Indian citizens. Explanation (i) to rule 23 says indirect foreign investment is downstream investment received from either of two sources:

1. An Indian entity that has foreign investment and is not owned and controlled by resident Indian citizens. This includes an entity owned or controlled by non residents.
2. An investment vehicle whose sponsor, manager or investment manager fails the same test.

The Master Direction states the principle behind the rule: "what cannot be done directly, shall not be done indirectly". A foreign parent cannot use an Indian subsidiary to enter a sector it could not enter itself. The DPIIT FAQs on FDI Policy (FAQs 9 to 11) define the terms and apply the same entry route, cap and pricing conditions.

When is an Indian company a foreign owned or controlled company (FOCC)?

An Indian company is foreign owned when persons resident outside India beneficially hold more than 50 percent of its equity instruments. It is foreign controlled when they can appoint a majority of its directors or control its management or policy decisions. Either test makes it what practitioners call a foreign owned or controlled company (FOCC).

The NDI Rules do not use the abbreviation FOCC. Explanations (a) to (f) to rule 23 set the tests in words:

1. Ownership of an Indian company means beneficial holding of more than 50 percent of its equity instruments.
2. Owned by resident Indian citizens means ownership vested in resident Indian citizens, or in Indian companies ultimately owned and controlled by them.
3. Owned by persons resident outside India means ownership vested in non residents.
4. Control has the meaning in section 2(27) of the Companies Act, 2013, under rule 2(da). It covers the right to appoint a majority of directors or to control management or policy decisions. Shareholding, management rights, shareholder agreements and voting agreements all count.

Paragraph 2.25 of the Master Direction defines a "Resident Indian citizen" as "an individual who is a person resident in India and is citizen of India". So a foreign national living in India, or an OCI cardholder resident in India, is not a resident Indian citizen. We cover that edge case in our page on OCI cardholders as investors.

Indian investing company	Foreign holding	Who controls the board and policy	Status	Its downstream investment
Wholly owned subsidiary of a US parent	100%	US parent	Foreign owned and controlled	Indirect foreign investment
Joint venture, Japanese partner 60%, Indian founders 40%	60%	Japanese partner	Foreign owned and controlled	Indirect foreign investment
Start up, foreign VCs 45%, founders 55%, founders appoint most directors, no investor vetoes on policy	45%	Resident Indian founders	Owned and controlled by resident Indian citizens	Not indirect foreign investment
Start up, foreign VCs 45%, founders 55%, VCs hold vetoes on budget and business plan	45%	Shared, VCs control policy decisions	Foreign controlled, on our reading	Indirect foreign investment
50:50 joint venture, each side names half the board, foreign partner has a casting vote	50%	Foreign partner through the casting vote	Foreign controlled, on our reading	Indirect foreign investment
Company owned by an NRI on a non repatriation basis under Schedule IV	0% counted	NRI	Deemed domestic investment	Not indirect foreign investment

Control needs the closer look. A minority investor with affirmative votes over the annual budget, the business plan or senior appointments can control policy decisions. We read the shareholder agreement and the articles before we classify the company. A company classified as Indian owned and controlled in one round can become an FOCC after the next round changes the vetoes.

How is indirect foreign investment calculated?

When the investing company is an FOCC, its entire holding in the investee counts as indirect foreign investment. You do not multiply by the FOCC's foreign percentage. When the investing company is owned and controlled by resident Indian citizens, none of its holding counts. Total foreign investment in the investee is direct plus indirect foreign investment, on a fully diluted basis.

Rule 23(3) and paragraph 9.5 of the Master Direction add five rules for the calculation:

1. Equity from converting debt under any arrangement counts towards total foreign investment.
2. FCCBs, and depository receipts with debt as the underlying instrument, do not count.
3. The calculation runs at every stage of investment in every Indian company.
4. For the investing company, count the portfolio investment it held on 31 March of the previous financial year.
5. Indirect foreign investment received by a wholly owned subsidiary is limited to the total foreign investment received by its parent.

The fifth rule stops overcounting. Suppose an Indian company with 70 percent foreign investment forms a wholly owned subsidiary. The subsidiary's indirect foreign investment is 70 percent, not 100 percent.

Investing company	Its foreign investment	Its stake in the investee	Indirect foreign investment in the investee	Why
FOCC A	70%	40%	40%	FOCC: the full stake counts
Company C, owned and controlled by resident Indians	45%	40%	0%	Not an FOCC
FOCC E, parent of wholly owned subsidiary F	70%	100%	70%	Paragraph 9.5.5 limit for a wholly owned subsidiary
FOCC G	100%	100%	100%	FOCC, and the limit equals 100%
Bank that is foreign controlled, shares taken on a loan default	74%	15%	0%	Paragraph 9.4.1 carve out for restructuring and defaults

The fourth rule needs care each April. Listed investing companies see their foreign portfolio holding move daily. The Master Direction fixes the test at 31 March of the previous financial year, so we use that figure for the whole year.

Which conditions apply to the investee company?

An Indian company that receives indirect foreign investment must comply with the entry route, sector cap, pricing guidelines and other conditions for foreign investment in its sector. Rule 23(1) of the NDI Rules says so. If the sector needs government approval, the downstream investment needs it too. If the sector carries a cap, indirect and direct foreign investment together must stay within it.

Paragraph 9.3 of the Master Direction adds the operating conditions:

1. Sector rules travel down (9.3.1). The investee meets the entry route, cap, pricing and performance conditions for its own sector.
2. Only Indian entities can receive it (9.2.1). "No person resident in India other than an Indian entity can receive Indirect Foreign Investment." A partnership firm or a proprietary concern cannot.
3. Companies with no operations (9.3.8). A company without operations that makes a downstream investment, or starts business, must then meet the sector conditions.

Take a sector with an automatic route cap of 49 percent and approval above it. An FOCC that takes 40 percent of a company in that sector uses 40 percent of the cap. A further 15 percent of direct FDI would take total foreign investment to 55 percent. That needs government approval first. Check the current caps on our page on FDI automatic route sectors.

Performance conditions travel down too. A sector with a minimum capitalisation, a lock in or a sourcing rule applies those conditions to an investee that receives indirect foreign investment. We read the sector entry in Schedule I of the NDI Rules before the board approves the deal.

How do pricing guidelines apply to downstream investment?

The investee must follow the pricing guidelines when it issues shares to an FOCC, because rule 23(1) applies them to indirect foreign investment. Issue and purchase from residents must be at or above fair value. On exit, paragraph 9.6.1 of the Master Direction sets a separate pricing and reporting rule for each type of buyer.

For an unlisted company, fair value under rule 21 of the NDI Rules is an arm's length price under an internationally accepted method. A Chartered Accountant, a SEBI registered merchant banker or a practising cost accountant certifies it. We explain methods and certificates in our page on FEMA pricing guidelines.

Transaction by the FOCC	Pricing rule	FEMA reporting	Source
Subscribes to fresh shares of an Indian company	Issue price at or above fair value	Form DI within 30 days of allotment	Rule 23(1), regulation 4(11)
Buys shares from a resident Indian	Price at or above fair value, on our reading	Form DI	Rule 23(1), regulation 4(11)
Sells to a person resident outside India	Pricing guidelines do not apply	Form FC-TRS	Paragraph 9.6.1(1)
Sells to a person resident in India	Pricing guidelines apply, on our reading at or below fair value	None specified in paragraph 9.6.1	Paragraph 9.6.1(2)
Sells to another FOCC	Pricing guidelines do not apply	No reporting	Paragraph 9.6.1(3)

The floor or ceiling follows rule 21, with the FOCC treated as the non resident party. That is our reading of rule 23(1).

The Master Direction also brings swaps and payment mechanisms into downstream investment. Its note to section 9 says arrangements allowed for direct investment, "such as investment by way of swap of equity instruments/equity capital, payment arrangements/mechanism", are available downstream. They must not be used to get around rule 23, including the limit on borrowed funds. Deferred payments still follow rule 9(6) of the NDI Rules, which we cover in our batch guide on deferred consideration and escrow.

Which funds can an FOCC use for downstream investment?

An FOCC must bring the money for downstream investment from abroad, or use internal accruals. It cannot use funds borrowed in the Indian market. Rule 23(4) of the NDI Rules and paragraph 9.3.6 of the Master Direction say so. Internal accruals means profits transferred to the reserve account after tax.

The Master Direction says the investing company "is required to bring in the requisite funds from abroad and not use funds borrowed in the domestic markets". Two clarifications follow. Non convertible debentures subscribed by non residents are not funds borrowed in the domestic market. Raising and using debt must still comply with FEMA rules.

Source of money	Usable for downstream investment?	Rule
Equity remitted by the foreign parent	Yes	Rule 23(4), paragraph 9.3.6
Internal accruals (profits moved to reserves after tax)	Yes	Paragraph 9.3.7
NCDs subscribed by non residents	Yes, not treated as domestic borrowing	Paragraph 9.3.6
External commercial borrowing from the parent	Only for a corporate action such as an acquisition of control, under the ECB end use rule; on our reading not domestic borrowing	Regulation 3A(1)(g), FEMA 3(R)(5)/2026-RB
Term loan or working capital from an Indian bank	No	Rule 23(4)
Inter corporate loan from an Indian group company	No, on our reading, as it is domestic borrowing	Rule 23(4)
Share swap with the investee's shareholders	Yes, if it does not get around rule 23	Section 9 note, Master Direction

The ECB row needs a note. The Borrowing and Lending (First Amendment) Regulations, 2026, FEMA 3(R)(5)/2026-RB of 9 Feb 2026, inserted regulation 3A. Clause (1)(g) bars the use of borrowed funds for "Transacting in listed/unlisted securities". It makes an exception for corporate actions "such as merger, demerger, amalgamation, arrangement, or acquisition of control". An explanation says such borrowing must serve strategic purposes only.

On our reading, a minority stake bought with ECB money falls outside the exception. See our guide on ECB from a foreign parent.

Money is fungible, so we trace it. An FOCC with a bank overdraft and a parent remittance in the same account invites the question of which money paid for the shares. We route downstream money through a separate account, or document that the bank balance before the borrowing covered the investment.

What board and shareholder approvals are needed?

Rule 23(4) of the NDI Rules requires the approval of the investing company's board for every downstream investment, and a shareholders' agreement if one applies. Paragraph 9.3.5 of the Master Direction repeats it. The Companies Act, 2013 adds its own steps, and we check them for each downstream investment.

The Companies Act points we check:

1. Section 179(3)(e). The board exercises the power to invest the company's funds by resolution passed at a board meeting.
2. Section 186. This section regulates investment by a company in other bodies corporate. It sets limits linked to paid up capital, free reserves and securities premium. It can need a special resolution, the consent of all directors present and, in some cases, a lender's approval. It also limits layers of investment companies. It carries exemptions, so confirm whether the section applies to your company and transaction.
3. Layers Rules. The Companies (Restriction on Number of Layers) Rules, 2017 cap the layers of subsidiaries for most holding companies, again with exemptions.

Check the current text of sections 179 and 186, and of those Rules, on the MCA website before you finalise the resolutions. A foreign group planning a holding company in India with several operating subsidiaries should map the layers before the first downstream investment. See our page on wholly owned subsidiaries in India for the structure options.

We draft one board resolution that covers both laws. It records the FEMA status of the company, the source of funds, the pricing certificate and the Form DI deadline. The auditor relies on that resolution when it signs the annual certificate.

How do you file Form DI on FIRMS?

The Indian company making the downstream investment files Form DI with the Reserve Bank within 30 days from the date of allotment of the equity instruments. Regulation 4(11) of FEMA 395/2019-RB sets the duty. In our practice the filing runs through RBI's FIRMS portal. An investment vehicle making downstream investment files the same form. A late filing attracts the RBI late submission fee.

Regulation 4(11) of the FEMA 395/2019-RB reporting regulations has two parts:

1. Intimation to DPIIT. The investing entity notifies the Secretariat for Industrial Assistance (SIA), DPIIT within 30 days of the investment. The duty applies "even if equity instruments have not been allotted". The notice sets out the modality of investment in new or existing ventures, with or without an expansion programme. The regulation names no portal or form, and we found no current DPIIT page that does. Confirm the mode of intimation with DPIIT's FDI policy division before you send it, and keep proof of dispatch.
2. Form DI to RBI. The investing entity files Form DI with the Reserve Bank within 30 days from the date of allotment. RBI prescribes the manner of submission under the closing proviso to regulation 4.

Explanation 1 to paragraph 9.1.15 of the Master Direction adds a third trigger. An investing company may have made its investment while owned and controlled by Indians and later become an FOCC. Its existing downstream investment then counts from the date of reclassification. It must report that investment in Form DI within 30 days of the reclassification.

Event	Filing	Who files	Deadline	Source
FOCC subscribes to or buys shares in an Indian company	Intimation to SIA, DPIIT	Investing company	30 days from the investment	Regulation 4(11)(1)
Equity instruments allotted to the FOCC	Form DI on FIRMS	Investing company	30 days from allotment	Regulation 4(11)(2)
Investing company becomes an FOCC after a fresh foreign round	Form DI for existing downstream holdings	Investing company	30 days from reclassification	Paragraph 9.1.15, Explanation 1
Foreign parent invests in the FOCC itself	Form FC-GPR	The FOCC, as investee	30 days from allotment	Regulation 4(1)
Financial year ends	Statutory auditor's certificate and Directors' report statement	First level company	With the annual report	Rule 23(6), paragraph 9.7.1

The investing company must be registered as an entity and user on the filing portal before it can file. Check RBI's current FIRMS user guide for the steps. Before we open the form, we keep five things ready:

1. The board resolution.
2. The allotment or transfer evidence.
3. The valuation certificate.
4. The funding trail.
5. The investee's sector entry in Schedule I.

Our page on FDI reporting deadlines covers the other FIRMS forms.

Form DI is a flow return. A.P. (DIR Series) Circular No. 16 of 30 Sep 2022 lists it with FC-GPR and FC-TRS.

The late fee is INR 7,500 plus 0.025 percent of the amount for each year of delay. It is capped at the amount and rounded up to the nearest hundred. The option to pay it lasts three years from the due date. After that, the fee option is gone and the contravention is dealt with under FEMA, usually through compounding.

What does the annual auditor certificate cover?

The first level Indian company is responsible for compliance with rule 23 at every level below it. It must obtain a certificate from its statutory auditor each year confirming that compliance. The Directors' report must also state it. A qualified auditor's report must go to the RBI Regional Office where the company is registered.

Rule 23(6) of the NDI Rules and paragraph 9.7 of the Master Direction set the duty. The rule reads: "such first level company shall obtain a certificate to this effect from its statutory auditor on an annual basis". Under paragraph 9.7.2, the company brings a qualified report to the notice of the RBI Regional Office and obtains an acknowledgement.

The first level company is the FOCC that receives the foreign money. Its subsidiaries and their downstream investments sit inside its certificate. So a group with three levels of Indian companies needs one certificate that covers all three.

We give the auditor a schedule with each downstream investment, its date, amount, sector, route, pricing certificate, funding source and Form DI acknowledgement. The auditor tests it and signs. Our page on the statutory audit of a foreign owned subsidiary covers the wider audit cycle.

How do the rules apply to LLPs and investment vehicles?

A foreign owned or controlled LLP can invest downstream only in sectors open to 100 percent automatic route FDI without performance conditions. Indirect foreign investment into an LLP has the same limit. An investment vehicle's downstream investment counts as indirect foreign investment when its sponsor or manager is foreign owned or controlled.

Rule 23(1) and paragraphs 9.3.2 to 9.3.4 of the Master Direction set these rules:

1. LLP as investor (9.3.2). A foreign owned or controlled LLP can invest downstream only in an Indian company in a 100 percent automatic sector with no performance conditions.
2. LLP as investee (9.3.3). An LLP can receive indirect foreign investment only in the same kind of sector.
3. Investment vehicles (9.3.4). For a vehicle run by individuals, the sponsors, managers or investment managers must be resident Indian citizens. Otherwise SEBI decides whether they are foreign owned or controlled.

Rule 23(7) applies the transfer and auditor certificate rules to LLPs. Control of an LLP means the right to appoint a majority of the designated partners. Our batch guide on FDI in LLPs covers the entry rules.

Does downstream investment by a land border owned company need approval?

On our reading, yes, where the FOCC's own foreign investment needed government approval under the land border rule. The downstream investment is indirect foreign investment and must meet the entry route that applies to it. DPIIT's approval letters also require downstream investments to follow paragraph 3.8.4 of the FDI Policy and rule 23.

Rule 23 itself does not mention land border countries. The DPIIT Standard Operating Procedure of 4 May 2026 links them in two ways. Annexure I (the approval file) and the land border report in Annexure VII both ask for existing and proposed downstream investments. Condition (xiii) of the approval letter format in Annexure III ties later downstream investments to paragraph 3.8.4 of the FDI Policy and rule 23.

We treat a downstream investment by a Chinese owned Indian company as needing its own approval, unless the parent's approval letter already covers it. Where the land border stake is small and non controlling under the 2026 test, we treat the FOCC's downstream investment like any other. We explain the land border tests in our batch guide on Press Note 3.

Which investments are not counted as indirect foreign investment?

Three kinds of investment do not count. Investment by an Indian company owned and controlled by resident Indian citizens does not count, even if it has foreign shareholders. Investment by a company owned by NRIs or OCIs on a non repatriation basis is deemed domestic. Some investments by foreign controlled banks on loan restructuring are carved out.

The details:

1. Indian owned and controlled companies. Explanation (i) to rule 23 counts only investment from an entity not owned and controlled by resident Indian citizens. A company with 45 percent foreign investment and Indian control makes domestic downstream investments.
2. NRI and OCI non repatriation investment. Explanation (i) to rule 23 and Explanation 2 to paragraph 9.1.15 cover an entity owned and controlled by NRIs or OCIs on a non repatriation basis under Schedule IV. Its investment "shall not be considered for calculation of indirect foreign investment".
3. Bank restructuring. Paragraph 9.4.1 excludes some investments by foreign owned or controlled Indian banks. These are investments under debt restructuring, in the trading book, or on a loan default. Strategic downstream investment by those banks still counts (9.4.2).

The first carve out is fragile. It holds only while Indians keep ownership and control. A new round that gives a foreign investor a board majority or a policy veto turns every existing downstream holding into indirect foreign investment. Form DI is then due within 30 days of that reclassification.

What changed in 2026

Rule 23 itself did not change in 2026. Several instruments around it did, mainly on land border ownership, funding and reporting. When this page first went up on 16 Jan 2026, none of these had been issued.

Date	Instrument	Old position	New position
9 Feb 2026	Borrowing and Lending (First Amendment) Regulations, 2026, FEMA 3(R)(5)/2026-RB	No regulation 3A on the end use of borrowed funds in the principal regulations	New regulation 3A(1)(g) bars borrowed funds for transacting in securities, except corporate actions such as an acquisition of control
15 Mar 2026	Press Note 2 (2026 Series), DPIIT	Land border beneficial owner undefined	PML Rules beneficial owner test and a reporting duty for small land border stakes
4 May 2026	DPIIT Standard Operating Procedure for FDI proposals	Earlier SOP	Approval files and land border reports ask for existing and proposed downstream investments
15 Jun 2026	RBI Master Direction on Foreign Investment in India, updated	Earlier version	Section 9 restates rule 23, the funds rule, the auditor certificate and the swap and payment note

The borrowing change matters most for funding. On our reading of regulation 3A(1)(g), an FOCC can use ECB for a strategic acquisition of control but not for a minority stake. Plan funding with that line in mind.

Worked example

Scenario 1: classifying the investor and counting the stake.

A US parent holds 70 percent of an Indian company, A Private Limited. Indian founders hold 30 percent, and the parent appoints four of five directors. A Private Limited plans to buy 40 percent of B Private Limited for INR 20 crore. B is in a sector with a 49 percent automatic cap.

1. A Private Limited is foreign owned, at 70 percent, and foreign controlled. It is an FOCC.
2. Its whole 40 percent stake in B counts as indirect foreign investment, not 70 percent of 40 percent.
3. B has no other foreign shareholder, so total foreign investment in B is 40 percent, inside the 49 percent cap.
4. Six months later a UK fund wants 15 percent of B by fresh issue. Total foreign investment would become 55 percent.
5. 55 percent is above 49 percent, so B needs government approval for the UK fund's round.

Scenario 2: checking the funds.

A Private Limited has INR 12 crore available for downstream investment. The money comes from three sources.

Source	Amount (INR crore)	Usable?
Equity remitted by the US parent	5	Yes
Internal accruals, profits moved to reserves after tax	4	Yes
Working capital loan from an Indian bank	3	No
Total available	12	9 usable

A Private Limited can invest INR 9 crore without a problem. If it pays the full INR 12 crore, INR 3 crore comes from domestic borrowing, which breaches rule 23(4). The INR 20 crore deal in Scenario 1 needs a further parent remittance of at least INR 11 crore.

Scenario 3: a late Form DI.

B Private Limited allots the shares to A Private Limited on 10 Jan 2026. Form DI is due by 9 Feb 2026, 30 days from allotment. A Private Limited files on 9 Oct 2026, eight months late.

Item	Working	Amount (INR)
Amount involved (A)	Investment reported	20,00,00,000
Delay (n)	8 months, expressed as 0.67 of a year	0.67
Variable part	0.025% × 20,00,00,000 × 0.67	33,500
Fixed part	Flat amount for a flow return	7,500
Late submission fee	33,500 + 7,500, rounded up to the nearest hundred	41,000

The fee is well below the cap of 100 percent of the amount. A Private Limited pays it as RBI directs, and the form is then processed.

Common mistakes

1. Funding with an Indian loan. A bank loan or a group loan pays part of the price. Fix: fund downstream investments from parent remittances or internal accruals, through a traced account.
2. Missing the 30 day Form DI deadline. Teams file FC-GPR for the parent's money and forget Form DI for the onward investment. Fix: diarise Form DI on the date of allotment.
3. Missing reclassification. A new foreign round turns an Indian controlled company into an FOCC, and nobody files for the old holdings. Fix: test ownership and control after every round and file within 30 days.
4. Ignoring the investee's sector. The FOCC invests in a sector with a lower cap or an approval route. Fix: read the Schedule I entry for the investee before the board meeting.
5. Buying below fair value from residents. Founders sell to the FOCC at a discount. Fix: get a valuation certificate and price at or above fair value.
6. No board resolution at a meeting. A circular resolution approves the investment. Fix: pass it at a board meeting, as section 179(3)(e) requires, and record the FEMA points.
7. No auditor certificate. The annual report goes out without the rule 23 certificate or the Directors' report statement. Fix: give the auditor a downstream schedule before the audit closes.
8. Treating a 50:50 joint venture as Indian controlled. A casting vote or veto gives the foreign partner control. Fix: classify on control as well as ownership.

Checklist

1. Classify the investing company as owned and controlled by resident Indian citizens or as an FOCC, on both ownership and control.
2. Read the investee's sector entry in Schedule I of the NDI Rules for the route, cap and conditions.
3. Add the proposed stake to existing direct and indirect foreign investment in the investee, on a fully diluted basis.
4. Seek government approval first if the sector needs it or the total crosses the automatic cap.
5. Obtain a valuation certificate and set the price at or above fair value.
6. Confirm the funds come from abroad or from internal accruals, and keep the bank trail.
7. Pass the board resolution at a meeting and check the section 186 limits.
8. Notify SIA, DPIIT within 30 days of the investment.
9. File Form DI on FIRMS within 30 days of allotment.
10. Record each downstream investment in the schedule for the annual auditor certificate.
11. Retest ownership and control after every new foreign round, and file Form DI within 30 days of any reclassification.

Our FEMA compliance team files Form DI, prepares the downstream schedule for auditors and reviews structures before the board meets.

Frequently Asked Questions

What is downstream investment under FEMA?+

Downstream investment is an investment by an Indian entity that has foreign investment in it, in the capital of another Indian entity. Rule 23 of the NDI Rules governs it. It counts as indirect foreign investment when the investing company is not owned and controlled by resident Indian citizens. The investee must then meet FDI routes, caps and pricing.

What is an FOCC?+

FOCC means an Indian company that is foreign owned or controlled. It is foreign owned when non residents beneficially hold more than 50 percent of its equity. It is foreign controlled when non residents can appoint a majority of its directors or control its management or policy decisions. Rule 23 of the NDI Rules uses these tests, without the abbreviation.

Who files Form DI and when?+

The Indian company or investment vehicle making the downstream investment files Form DI on RBI's FIRMS portal. Regulation 4(11) of FEMA 395/2019-RB requires it within 30 days from the date of allotment of the equity instruments. A company that becomes an FOCC must also report its existing downstream holdings within 30 days of reclassification.

Can an FOCC use a bank loan for downstream investment?+

No. Rule 23(4) of the NDI Rules and paragraph 9.3.6 of the Master Direction require funds from abroad. The FOCC cannot use funds borrowed in the Indian market. It may use internal accruals, meaning profits transferred to reserves after tax. NCDs subscribed by non residents are not treated as domestic borrowing.

Can an FOCC use ECB for downstream investment?+

Only within the end use rule. FEMA 3(R)(5)/2026-RB of 9 Feb 2026 inserted that rule as regulation 3A(1)(g). It bars borrowed funds for transacting in securities. It allows corporate actions such as a merger or an acquisition of control. On our reading, a minority stake bought with ECB money is not allowed.

Does a 100 percent foreign owned subsidiary count its full downstream stake?+

Yes. When the investing company is an FOCC, its entire stake in the investee counts as indirect foreign investment. Paragraph 9.5.5 of the Master Direction adds a limit for a wholly owned subsidiary. Its indirect foreign investment cannot exceed the total foreign investment received by its parent.

Do pricing guidelines apply to downstream investment?+

Yes. Rule 23(1) of the NDI Rules applies the pricing guidelines to indirect foreign investment. An issue to an FOCC, or a purchase by it from a resident, must be at or above fair value. On exit, paragraph 9.6.1 removes pricing for a sale to a non resident or to another FOCC. It keeps pricing for a sale to a resident.

Is board approval enough for a downstream investment?+

Board approval is the FEMA requirement under rule 23(4), together with any shareholders' agreement. The Companies Act, 2013 adds more. Section 179(3)(e) needs a resolution at a board meeting. Where section 186 applies, it can add a special resolution and the consent of all directors present. Check the current text of both sections.

What is the annual auditor certificate for downstream investment?+

Rule 23(6) of the NDI Rules makes the first level Indian company responsible for downstream compliance at every level. It must obtain a certificate from its statutory auditor each year confirming compliance. The Directors' report must also state it. A qualified report goes to the RBI Regional Office, which acknowledges it.

Does an Indian company with minority foreign investment make indirect foreign investment?+

Not if resident Indian citizens own more than 50 percent and control the company. Its downstream investment is then domestic. If a minority foreign investor holds a board majority or vetoes over policy decisions, the company is foreign controlled. Its downstream investment then counts as indirect foreign investment under rule 23.

Can a foreign owned or controlled LLP invest in an Indian company?+

Yes, but only in sectors open to 100 percent foreign investment on the automatic route without performance conditions. Rule 23(1) and paragraph 9.3.2 of the Master Direction set this limit. An LLP can receive indirect foreign investment only in the same kind of sector. Control of an LLP means the right to appoint a majority of its designated partners.

What is the late fee for a delayed Form DI?+

Form DI is a flow return under A.P. (DIR Series) Circular No. 16 of 30 Sep 2022. The late submission fee is INR 7,500 plus 0.025 percent of the amount for each year of delay. It is capped at the amount and rounded up to the nearest hundred. The option is available for three years from the due date.

Does a downstream investment by an NRI owned company count?+

Not where the NRI or OCI owns the company on a non repatriation basis under Schedule IV. Explanation 2 to paragraph 9.1.15 of the Master Direction treats that investment as deemed domestic. It is not counted for indirect foreign investment. A company owned by an NRI on a repatriation basis is treated like any other foreign owned company.

Who is responsible for compliance in a multi level group?+

The first level Indian company, the one that receives the foreign investment, is responsible for downstream compliance at every level below it. Rule 23(6) of the NDI Rules and paragraph 9.7.1 of the Master Direction say so. Its statutory auditor certifies compliance for the whole chain each year.

Sources

• Reserve Bank of India, Foreign Exchange Management (Non Debt Instruments) Rules, 2019, updated to 2 Sep 2026, https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083
• Reserve Bank of India, Master Direction on Foreign Investment in India, updated to 15 Jun 2026, https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200
• Reserve Bank of India, FEMA 395/2019-RB, Mode of Payment and Reporting of Non Debt Instruments Regulations, as amended to 13 Jun 2026, https://rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=11723
• Reserve Bank of India, A.P. (DIR Series) Circular No. 16, Late Submission Fee, 30 Sep 2022, https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12393&Mode=0
• Reserve Bank of India, FEMA 3(R)(5)/2026-RB, Borrowing and Lending (First Amendment) Regulations, 9 Feb 2026, https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=13306
• DPIIT, Standard Operating Procedure for Processing FDI Proposals, 4 May 2026, https://www.dpiit.gov.in/static/uploads/2026/05/d7693ed0552aef6c3fa8bcdcf6a44cf3.pdf
• DPIIT, Press Note No. 2 (2026 Series), 15 Mar 2026, https://www.dpiit.gov.in/static/uploads/2026/03/b9da5830b052c2f2d788593e97d07c63.pdf
• DPIIT, FAQs on FDI Policy, July 2025 upload, https://www.dpiit.gov.in/static/uploads/2025/07/b42b419be651a25a27d315a664cd424f.pdf
• Ministry of Corporate Affairs, Companies Act, 2013 (sections 179 and 186) and the Companies (Restriction on Number of Layers) Rules, 2017, see the Acts and Rules section, https://www.mca.gov.in/