When a foreign-owned Indian company invests in another Indian company, FEMA does not look away – it calls that downstream investment (indirect foreign investment) and applies the FDI rulebook a second time. The principle is blunt: what cannot be done directly cannot be done indirectly. This guide explains the FOCC test, the conditions on downstream deals, Form DI reporting, and the January 2025 clarifications that finally let foreign-owned companies use swaps and deferred payment structures.
Are you an FOCC? The ownership-and-control test
| Test | Trigger |
|---|---|
| Ownership | Non-residents beneficially hold more than 50% of the capital (fully diluted) |
| Control | Non-residents can appoint the majority of directors or control management/policy decisions – including through shareholders’ agreements and veto matrices |
Meet either test and the entity is a foreign-owned or controlled company (FOCC). Its investments into other Indian companies or LLPs count as indirect foreign investment in the investee – in full (the one exception: a wholly-owned subsidiary’s investment is counted pro-rata to the actual foreign holding in the parent).
The conditions on downstream investment
- Sectoral rules mirror down: the investee’s sector cap, entry route and conditions apply to the FOCC’s investment as if the FOCC were itself a non-resident – including prohibited sectors and the land-border screening;
- Funding source: the downstream investment must come from funds received from abroad or internal accruals (dividends, retained earnings). What is barred is leveraging domestic borrowings to fund the acquisition;
- Pricing and documentation: since the January 2025 Master Direction update, Rule 21 pricing guidelines and FDI documentation expressly apply to FOCC downstream deals;
- Board approval + shareholder resolution of the investing FOCC.
Reporting: Form DI and the 30-day clock
| Event | Filing | Deadline |
|---|---|---|
| FOCC allotted shares in the investee | Form DI on the FIRMS portal | 30 days from allotment |
| Entity becomes an FOCC (reclassification – e.g. foreign holding crosses 50%) | Form DI (2025 addition) | 30 days from attaining FOCC status |
| Investee’s annual position | FLA return reflects indirect foreign investment | 15 July |
What the January 2025 clarifications unlocked
- Share swaps: FOCCs may acquire downstream via equity swaps – enabling stock-for-stock M&A within India;
- Deferred consideration: the 25%/18-month deferment, escrow and indemnity structures available in direct FDI transfers now expressly extend to FOCC purchases from residents;
- FOCC↔FOCC transfers clarified as permissible with pricing compliance;
- FDI received solely to meet a financial regulator’s net-owned-fund requirement is permissible.
Common structures that trip the rules
| Structure | The catch |
|---|---|
| GCC subsidiary acquires an Indian vendor | The WOS is an FOCC – the acquisition is indirect FDI: sector check, pricing certificate, Form DI |
| Foreign-funded startup creates a subsidiary for a new vertical | Same – and if the vertical is in a capped/prohibited sector (e.g. inventory e-commerce), the structure fails entirely |
| FOCC funds the acquisition with a domestic bank loan | Barred – downstream investment cannot be leveraged on domestic borrowings |
| Indian promoter holds 50%, foreign investor 50% with board control | Control test still triggers FOCC status despite the 50:50 split |
Group structure with foreign ownership?
We map which entities are FOCCs, clear the sector and pricing checks, and file Form DI before the clock runs out.
Talk to My Cloud AccountantFrequently asked questions
What makes a company an FOCC?
More than 50% beneficial non-resident ownership, or non-resident control (majority board appointment rights or control of management/policy decisions, including via shareholder agreements). Either test alone is enough.
Can an FOCC use internal accruals for downstream investment?
Yes – internal accruals (retained earnings, dividends received) are expressly permitted alongside funds from abroad. Only domestic-market leverage for the downstream acquisition is barred.
Does downstream investment need government approval?
Only if a direct foreign investment in the investee’s sector would need it – the entry route mirrors down. Automatic-route sectors stay automatic; approval-route sectors need approval even for the FOCC’s indirect investment.
Is a company owned by NRIs an FOCC?
If the NRI holding is on non-repatriation basis (Schedule IV), no – that investment is deemed domestic and the company’s downstream investments are ordinary domestic deals. Repatriable NRI holdings count toward the foreign 50% like any other non-resident stake.
Based on the FEM (NDI) Rules 2019 (Rule 23), the RBI Master Direction on Foreign Investment (updated 20 January 2025) and current FIRMS practice. Last reviewed: July 2026.