How Can Indian Companies Make Foreign Investment In India

When it comes to FDI, it is usually known as an investment by a foreign company or any company which is not an Indian resident, and all the funds coming through these sources are considered foreign capital. However, a situation can arise when an entity who is a local resident purchases interests in subsidiaries or other companies and that funding is identified to be of foreign origin from the investing company. FDI policies can deal with such situations effectively.

Under the DIPP policy, when a resident company makes a foreign investment, there are two methods to follow. The first is the resident business carrying out the funding in another local company and also through the downstream method of investment. Both of them push foreign funds into the domestic companies and the capital infusion methods can be direct or indirect.

Involving in foreign investment

When it comes to foreign investment in an Indian company, the investing company of Indian origin can help the business of the other company to expand in different areas. On the other hand, if a domestic company with foreign fund options infuses capital in other homegrown companies, how can it be categorized according to the policies of FDI? The segmentation comes as an Indian company investing in another domestic business and the downstream investment.

Indian companies investing in other domestic companies

The domestic enterprise that uses such routes for buying interest in another company must seek prior approval from the Government for the extent of the backing and the amount they need to put in. The companies engaged in this kind of speculation are termed as Core Investment Companies or CIC’s and have to follow the regulatory framework of the Reserve Bank of India or RBI. Furthermore, when the activity follows an automated route, the foreign financing done by those companies that have no operation or downstream interests are allowed to get a remedial foreign investment through the automatic route. To know more about government or automatic route of foreign investment in India, it must comply with the relevant conditions in this sector, the route of entry, and the caps.

Method of downstream investment

Downstream investment is another method through which a resident entity can infuse foreign funds in another domestic company. When a company, which is not under the control or ownership of another resident entity puts money in another local business with all the necessary regulations, compliances in place and fulfills the sectoral conditions during the route of entry, and the caps, it is termed as a downstream investment. It is different from the conventional foreign direct investment known to a majority of people. However, the entities must notify the RBI and the Foreign Investment Facilitation Portal of the activity within thirty days of the infusion even if the capital has not been provided in existing or new ventures. Similarly, the downstream investment that occurs through the infusion of foreign capital in a homegrown enterprise is to be properly supported through an agreement of the shareholders and the Board of Directors. The valuation and the transfer pricing of the capital shall take place according to the guidelines of SEBI or RBI. The entities that are eligible for this kind of funding must bring the necessary money from the foreign countries instead of leveraging funds from the local markets although it can still opt for the funds from the domestic market.

Calculating direct or indirect investment

When a foreign entity which is not a resident invests in an Indian company, it is termed as FDI in India. On the other hand, the indirect foreign funding that comes from a resident Indian company putting in further capital in another resident entity can be described as non-resident or resident investment. During the phase of growth and the creation of wealth in the current economy, the policy of FDI rightly demonstrates how to facilitate foreign funds and different methods of buying interests in Indian enterprises and companies.

Michael Brown is an experienced law marketing specialist working with Ahlawat & Associates (expert mergers and acquisition lawyers).