FDI in India: Direct vs Indirect Investment

To calculate foreign investment in an Indian company, both direct and indirect foreign investments are considered.

All investments made by a non-resident entity directly into an Indian company are considered direct foreign investments. The entire amount of such investments is counted when calculating the company’s total foreign investment.

• If an Indian company, owned and controlled by resident citizens or other Indian companies owned by resident citizens, makes an investment, it is not considered indirect foreign investment for calculating the total foreign investment in the target company.
• If an Indian company, owned and controlled by non-resident entities, makes an investment, the entire amount of that investment is considered indirect foreign investment in the target company.
• An Indian company is considered “owned” by Indian citizens and Indian companies if more than 50% of the equity interest is beneficially owned by resident Indian citizens and Indian companies ultimately owned and controlled by resident Indian citizens.
• “Control” is defined as the right to appoint the majority of directors or to control management and policy decisions, including through shareholding, management rights, shareholder agreements, or voting agreements.
• If a wholly-owned subsidiary (100% subsidiary) of an operating-cum-investing company/investing company makes an investment, the indirect foreign investment in the target company is limited to the amount of foreign investment in the operating-cum-investing company/investing company. This means the downstream investment reflects the holding company’s foreign investment.
• Downstream investments by an Indian company, owned and/or controlled by non-resident entities, into another Indian company must comply with relevant sectoral conditions regarding entry routes, conditions, and caps for the sectors in which the latter Indian company operates.
• In the information and broadcasting sector and the defense sector, additional considerations must be complied with.
• The foreign investment calculation methods mentioned above apply to business sectors governed by specific state statutes or rules, such as the insurance sector governed by IRDA regulations.

The price of shares issued to non-residents under the FDI policy is determined as follows:

• For Listed Companies:
  The price of shares for an Indian listed company must not be lower than the price at which preferential allotments can be made under SEBI guidelines. This price should be determined based on the specified period before the relevant date, which is the date of purchase or sale of shares.
• For Unlisted Companies:
  If shares are not listed on any recognized stock exchange in India, their fair value must be determined by a SEBI-registered Category I merchant banker or a chartered accountant using the discounted free cash flow method.
• For Rights Issues:
  If the Price Offered to Resident Shareholders is Lower: The price of shares issued to non-resident shareholders cannot be less than the price calculated using the discounted cash flow method.
  If the Price Offered to Resident Shareholders is Higher: The price for non-resident shareholders cannot be lower than the price offered to resident shareholders.