Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed against Rule 23 of the NDI Rules and the RBI Master Direction on Foreign Investment
Introduction
Your Indian subsidiary setting up a second Indian company feels like an internal step. It is a foreign investment.
The principle is stated plainly in the rules themselves. The regulatory logic behind downstream investment rules is captured in a single principle embedded in Rule 23(1) of the NDI Rules: what cannot be done directly, shall not be done indirectly.
So the second entity is subject to the entry route, the sectoral caps, the pricing guidelines and the reporting that would have applied had your overseas parent invested in it directly.
Two things then catch groups out.
The first is a funding restriction that cuts across the obvious plan. Under Rule 23(4)(b), a foreign owned or controlled company may use funds received from abroad or its own internal accruals for downstream investment, but it cannot use borrowed funds for this purpose. A parent loan cannot fund the second entity.
The second is newer and almost nobody has it on a checklist. Where a domestic Indian entity subsequently becomes foreign owned or controlled through changes in shareholding or control, it must report that reclassification to the RBI in Form DI within 30 days from the date of acquiring that status. A filing obligation triggered by a change in ownership, with no investment at all.
This guide covers when downstream investment rules apply, what they impose, the two separate filings, and the funding constraint that should shape the structure before it is built.
About this guide
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. Downstream investment is where a group’s second Indian entity meets the FDI framework, and it is usually planned as a corporate step rather than a regulatory one.
Where a rule is settled we state it. Where guidance differs on the precise reporting trigger — and it does — we say so and give the conservative course.
Primary sources: the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, particularly Rule 23; the RBI Master Direction on Foreign Investment in India as updated in January 2025; and the Consolidated FDI Policy.
1. What downstream investment is
A downstream investment is an investment by an Indian entity that has received foreign investment into the equity instruments or capital of another Indian entity. It is governed by Rule 23 of the NDI Rules and is treated as indirect foreign investment for the company that receives it.
Indirect foreign investment is a subset of downstream investment that arises only when the investing Indian entity is a Foreign Owned or Controlled Company.
1.1 Two concepts, not one
| Downstream investment | Indirect foreign investment | |
|---|---|---|
| What it describes | The act — an Indian entity that has received foreign investment investing in another Indian entity | The character of what the second entity receives |
| Arises | Where the investing entity has foreign investment | Only where the investing entity is an FOCC |
| Consequence | Reporting | Full FDI parity — entry route, caps, pricing |
The distinction matters because the two do not always travel together, and guidance blurs them.
Every Indian entity that has received foreign investment must file Form DI when it makes a downstream investment, regardless of how small its own foreign shareholding is. Indirect foreign investment is a narrower category.
1.2 Where guidance differs
Some sources describe the Form DI obligation as attaching to any Indian entity with foreign investment; others describe it as an FOCC obligation.
The conservative position, and the one we recommend: if your Indian entity has any foreign investment and it invests in another Indian entity, treat Form DI as required and confirm the position with your AD bank. The cost of filing where it was not strictly needed is nil; the cost of not filing where it was is a contravention.
2. What makes you an FOCC
An Indian company is a Foreign Owned or Controlled Company where non-residents hold more than 50% of its equity on a fully diluted basis, or control its board or management decisions.
An Indian company is an FOCC if non-residents beneficially hold more than 50% of its equity on a fully diluted basis, or if non-residents have the right to appoint a majority of its directors, or if they can otherwise direct the company’s management or policy decisions through shareholders’ agreement rights or contractual arrangements.
2.1 Ownership or control — either is enough
| Limb | Test |
|---|---|
| Owned | Non-residents beneficially hold more than 50% of equity, on a fully diluted basis |
| Controlled | Right to appoint a majority of directors, or ability to direct management or policy decisions through shareholders’ agreement rights or contractual arrangements |
A wholly owned subsidiary of a foreign parent is plainly an FOCC. So is a minority-held company where the foreign investor has board control through the shareholders’ agreement.
2.2 “Fully diluted” catches convertibles
The ownership test is on a fully diluted basis, so compulsorily convertible preference shares, convertible debentures and outstanding options count as if converted.
A group holding 45% of equity plus CCPS that would take it past 50% on conversion is looking at an FOCC now, not on conversion. That is a common structure in Indian venture and private equity deals.
2.3 LLPs
An LLP is treated as controlled by non-residents where non-residents hold the right to appoint the majority of its designated partners, and such designated partners, to the exclusion of others, exercise control over all the policies of the LLP.
3. The consequence: full FDI parity
An FOCC making a downstream investment is treated, in effect, as a foreign investor. Under Rule 23(1) of the NDI Rules, the investee company must comply with the same framework that governs direct FDI.
Any downstream investment must strictly adhere to the entry route — automatic or government approval — sectoral caps, pricing guidelines, and all attendant conditions including reporting requirements applicable to FDI in the relevant sector.
The investee must comply with entry routes, sectoral caps and pricing guidelines as though the foreign fund had invested directly.
| What applies to the second entity | Consequence |
|---|---|
| Entry route | Government approval required where the sector is on the approval route |
| Sectoral caps | The indirect foreign holding counts toward the cap |
| Pricing guidelines | Valuation and the floor price apply — see share valuation for FDI |
| Reporting | Form DI, DPIIT intimation, and FC-TRS where relevant |
| Other conditions | Whatever attaches to FDI in that sector |
3.1 The sector is the thing to check first
Where a downstream investment is proposed in a sector subject to government approval, the approval requirement applies.
A group whose first Indian entity operates in an unrestricted sector may be planning a second entity in a restricted one — a different line of business, a new product area, a services arm.
Check the sector of the investee, not the investor. The parent’s clean entry route says nothing about the second entity’s.
4. The funding restriction
This is the constraint that most often forces a plan to change, and it is easy to miss because it is a single sub-rule.
Under Rule 23(4)(b), an FOCC may use funds received from abroad or its own internal accruals for downstream investment, but it cannot use borrowed funds for this purpose.
| Source | Available for downstream investment? |
|---|---|
| Funds received from abroad — equity infusion from the parent | Yes |
| The company’s own internal accruals | Yes |
| Borrowed funds — including a parent loan or an Indian bank facility | No |
4.1 Why this bites
A group planning a second Indian entity has an obvious funding route: lend the money to the existing Indian company, which then subscribes for shares in the new one. It is simple, it avoids a fresh FDI filing at the top, and the interest is deductible.
Rule 23(4)(b) closes it.
The funding has to be equity from abroad, or internal accruals the company has actually generated. For a subsidiary that is loss-making or newly established, internal accruals are not an option, so equity from the parent is the route — with the valuation, allotment and FC-GPR that come with it.
See external commercial borrowings for what a parent loan can and cannot do.
4.2 Plan the funding before the structure
Because the restriction determines the sequence: equity into the first entity, then the downstream investment. That is two transactions with their own timelines rather than one loan.
Groups that build the structure first and then look for the money discover the constraint at the point they can least accommodate it.
5. Form DI
An Indian entity making a downstream investment in another Indian entity, which is considered indirect foreign investment, shall file Form DI with the RBI on the FIRMS portal within 30 days from the date of allotment of equity instruments.
Form DI must be filed with the AD Bank within 30 days from the date of allotment of equity instruments.
| Item | Detail |
|---|---|
| Who files | The investing Indian entity |
| Where | FIRMS portal, through the AD bank |
| When | 30 days from the date of allotment |
| Late filing | A late submission fee as determined by the RBI and the Central Government applies |
5.1 The clock runs from allotment
Not from the board decision, not from the payment, not from the incorporation of the second entity. From the date the equity instruments are allotted.
For a group incorporating a new Indian company, that is the subscription allotment at incorporation — which is easy to overlook, because the group is thinking about incorporation rather than about an FDI filing.
6. The reclassification trigger
New since January 2025, and the obligation groups are least likely to know about.
If an Indian company that was previously resident-owned raises a round from a foreign investor, and the foreign investor’s post-round holding exceeds 50% on a fully diluted basis or the investor obtains board control, the company becomes an FOCC. The January 2025 update to the RBI Master Direction on Foreign Investment in India now requires the company to report this reclassification by filing Form DI within 30 days of the change in status. Any subsequent investment by the company into another Indian entity will be treated as indirect foreign investment from that date onward.
The updated Master Direction introduces a new mandatory reporting requirement for entities that transition from resident to FOCC status.
6.1 A filing with no investment
This is the unusual feature. Form DI is normally triggered by an investment. Here it is triggered by a change in the company’s own ownership, with nothing invested downstream at all.
Thirty days from the date FOCC status is acquired.
6.2 Where this catches foreign groups
Three situations.
A funding round crosses 50%. A foreign investor increases its stake past the threshold on a fully diluted basis.
Control shifts without ownership moving. A shareholders’ agreement giving board control, or contractual arrangements directing management decisions, can create FOCC status at any shareholding level.
A domestic shareholder sells. The foreign holding rises passively, without the foreign investor doing anything.
In each case the company has thirty days, and in each case nobody’s calendar has an entry for it.
6.3 The date matters going forward
Every downstream investment made after the reclassification date is indirect foreign investment. A group that acquires FOCC status and then sets up a second Indian entity two months later is making a downstream investment, whether or not it realised the status had changed.
7. The second filing: DPIIT
Separate from Form DI, on a different portal, and frequently missed.
An Indian entity or investment vehicle that makes a downstream investment in another Indian entity, which is indirect foreign investment for the investee Indian entity, shall notify the Secretariat for Industrial Assistance, Department for Promotion of Industry and Internal Trade, of such investment within 30 days from such investment.
The FOCC must intimate the Secretariat for Industrial Assistance under DPIIT within 30 days of the investment, computed from the date of remittance. This filing is submitted through the Foreign Investment Facilitation Portal at fifp.gov.in.
| Form DI | DPIIT intimation | |
|---|---|---|
| To | RBI | Secretariat for Industrial Assistance, DPIIT |
| Portal | FIRMS, through the AD bank | FIFP |
| Within | 30 days of allotment | 30 days of the investment |
7.1 Note the different reference points
Form DI runs from allotment. The DPIIT intimation is described as running from the investment, computed from the date of remittance.
Where remittance and allotment fall on different dates, the two clocks are not aligned. Diarise both from their own trigger rather than assuming one date covers both.
8. Where equity is bought from a non-resident
Where a non-resident acquires equity from an FOCC, Form FC-TRS is required to be filed by the FOCC.
Where the downstream investment involves purchasing equity instruments from a non-resident seller, the FOCC must file Form FC-TRS within 60 days of the transfer of equity instruments or receipt of funds, whichever is earlier.
So a downstream investment structured as a purchase from an existing non-resident shareholder, rather than a fresh subscription, adds a transfer filing on a different clock — sixty days, from the earlier of transfer or receipt.
Establish at the outset whether the transaction is a subscription or a transfer, because it determines which forms apply.
9. The annual auditor’s certificate
An ongoing obligation that outlasts the transaction.
The company is required to obtain an annual auditor’s certificate each year, certifying that all downstream investments made during the relevant period have been undertaken in compliance with FEMA and the relevant rules, regulations, directions and circulars.
The investing entity must obtain an annual certificate from its statutory auditor confirming compliance with the downstream investment regulations, and such compliance must be disclosed in the Board’s Report forming part of the company’s Annual Report.
9.1 It goes in the Board’s Report
That is the part groups miss. The certificate is not merely obtained and filed — the compliance must be disclosed in the Board’s Report within the Annual Report.
For a company that has made a downstream investment, that is a recurring annual disclosure item alongside the other Board’s Report annexures. See statutory registers under the Companies Act.
10. Press Note 3 flows down
The land border analysis applies to downstream investment as it does to direct investment — and the March 2026 relaxation applies here too.
Through the relaxations in 2026, the 10% de minimis rule means downstream investments may proceed under the automatic route where beneficial ownership from a land-bordering country does not exceed 10% and such investor does not exercise control. The presence of a land-bordering country investor shall not trigger the government approval requirement, provided the investor’s beneficial ownership remains within the 10% threshold and no control is exercised.
A March 2026 Press Note 2 amendment to the Consolidated FDI Policy has further reshaped how foreign-funded Indian companies must structure, fund and report downstream investments.
So the same ownership chart that answers the Press Note 3 question for your first entity answers it for the downstream investment too. See Press Note 3 and land border FDI.
11. What January 2025 improved
Worth noting because it resolved a real difficulty.
The January 2025 Master Direction update brings FOCC downstream investments into full parity with direct FDI for equity swaps and deferred consideration mechanisms, resolving a major source of deal uncertainty. Rights issues to non-residents now require full compliance with entry routes, pricing guidelines and NDI conditions, not just sectoral cap adherence.
Parity cuts both ways here. Equity swaps and deferred consideration became available; rights issues became subject to fuller compliance than sectoral caps alone.
12. Two situations, worked through
Scenario A — The second entity funded by a parent loan
A German group’s wholly owned Indian subsidiary plans a second Indian company for a new product line. The finance team proposes that the parent lend the existing subsidiary the required amount, which subscribes for shares in the new company.
The problem. The subsidiary is an FOCC, so this is a downstream investment, and Rule 23(4)(b) prohibits the use of borrowed funds for that purpose. The parent loan cannot fund it.
The available routes. Equity from the parent into the existing subsidiary, or the subsidiary’s own internal accruals — which for a business still building may not exist.
The consequence for the timetable. An equity infusion means a valuation valid at allotment, allotment within sixty days of receipt of funds, and FC-GPR within thirty days of allotment — then the downstream investment, Form DI within thirty days of that allotment, and the DPIIT intimation.
The lesson. Plan the funding before the structure, because the funding restriction determines the sequence.
Scenario B — The company that became an FOCC without noticing
An Indian company with a minority foreign investor at 42% raises a further round. Post-round the foreign investor holds 46% of equity, but its convertible instruments take it past 50% on a fully diluted basis, and the shareholders’ agreement gives it the right to appoint a majority of directors.
The position. The company is now an FOCC on both limbs, and the reclassification must be reported in Form DI within thirty days of the change in status — even though no downstream investment has been made.
What follows. Every downstream investment from that date is indirect foreign investment. The joint venture the company was planning with an Indian partner now has to satisfy the entry route, sectoral caps and pricing guidelines as if the foreign investor were investing in it directly.
What would have caught it. Testing FOCC status on a fully diluted basis at the point of the round, and reading the shareholders’ agreement for the control limb rather than only the cap table.
13. Twelve mistakes
- Treating a second Indian entity as an internal step. It is a foreign investment in substance and in law.
- Checking the investor’s sector rather than the investee’s. The entry route is tested on the company receiving the money.
- Planning to fund a downstream investment with a parent loan. Rule 23(4)(b) prohibits borrowed funds.
- Assuming an Indian bank facility is different. It is still borrowed funds.
- Testing FOCC status on issued equity rather than fully diluted, so convertibles are missed.
- Reading only the cap table, when board control through the shareholders’ agreement is an independent limb.
- Not reporting reclassification. Form DI is due within thirty days of acquiring FOCC status, with no investment at all.
- Running the Form DI clock from the wrong date. It runs from allotment.
- Filing Form DI and stopping. The DPIIT intimation is a separate filing on a different portal.
- Assuming the two filings share a clock. One runs from allotment, the other from the investment computed from remittance.
- Missing FC-TRS where the downstream investment is a purchase from a non-resident rather than a subscription.
- Obtaining the annual auditor’s certificate but not disclosing it in the Board’s Report.
14. Checklist
Before structuring
- FOCC status of the investing entity determined — ownership on a fully diluted basis and control under the shareholders’ agreement
- Sector of the investee identified and its entry route checked
- Sectoral cap tested against the indirect foreign holding that will result
- Press Note 3 analysis run on the ownership chain, including the 10% de minimis position
- Funding source confirmed as equity from abroad or internal accruals — not borrowed funds
- Sequence planned: equity infusion first, downstream investment second, with each set of timelines built in
- Transaction characterised as a subscription or a transfer, since it determines the forms
Executing
- Valuation obtained and valid at allotment, meeting the pricing guidelines
- Allotment made and the date recorded
- Form DI filed on FIRMS through the AD bank within 30 days of allotment
- DPIIT intimation filed on FIFP within 30 days of the investment
- FC-TRS filed within 60 days where equity was purchased from a non-resident
- Acknowledgements retained for all filings
On any change in ownership or control
- FOCC status retested on a fully diluted basis after every round, transfer or shareholders’ agreement amendment
- Form DI reclassification filed within 30 days of acquiring FOCC status
- Date of reclassification recorded, since every later downstream investment is indirect foreign investment
Annually
- Statutory auditor’s certificate obtained, confirming downstream investment compliance for the period
- Compliance disclosed in the Board’s Report within the Annual Report
- FLA return filed, reflecting the position — see the FLA return
Setting up a second Indian entity?
The funding route you are probably planning — a parent loan into the existing company — is the one Rule 23(4)(b) closes, and finding that out after the structure is built costs a full equity cycle. Tell us what the second entity will do and how you intend to fund it and we will tell you whether the sector is clear, what the funding has to be, and what the filing sequence looks like.
15. Frequently asked questions
Q1. What is downstream investment under Indian FDI rules?
An investment by an Indian entity that has received foreign investment into the equity instruments or capital of another Indian entity. It is governed by Rule 23 of the NDI Rules, 2019 and is treated as indirect foreign investment for the company that receives it.
Q2. Is our Indian subsidiary setting up a second Indian company an internal step?
No. Where the subsidiary has received foreign investment, its investment into another Indian entity is a downstream investment, and the principle in Rule 23(1) is that what cannot be done directly shall not be done indirectly. The second entity is treated as if your foreign parent had invested in it.
Q3. What is the difference between downstream investment and indirect foreign investment?
Downstream investment describes the act — an Indian entity with foreign investment investing in another Indian entity. Indirect foreign investment is a narrower subset that arises only where the investing entity is a Foreign Owned or Controlled Company, and it is what brings full FDI parity on entry route, caps and pricing.
Q4. What makes an Indian company an FOCC?
Either limb is sufficient: non-residents beneficially holding more than 50 per cent of equity on a fully diluted basis, or non-residents having the right to appoint a majority of directors or otherwise direct management or policy decisions through shareholders’ agreement rights or contractual arrangements.
Q5. Does “fully diluted” include convertible instruments?
Yes. Compulsorily convertible preference shares, convertible debentures and outstanding options count as if converted. A group holding 45 per cent of equity plus convertibles taking it past 50 per cent is an FOCC now, not on conversion — a common structure in Indian venture and private equity deals.
Q6. Can a company be an FOCC without majority foreign ownership?
Yes, through the control limb. A minority-held company where the foreign investor has the right to appoint a majority of directors, or can direct management or policy decisions through the shareholders’ agreement, is an FOCC at any shareholding level.
Q7. What does FDI parity mean for the second entity?
It must comply with the entry route — government approval where the sector requires it — the sectoral caps, the pricing guidelines and all attendant conditions and reporting applicable to FDI in the relevant sector, as though the foreign investor had invested directly.
Q8. Whose sector do we check?
The investee’s. A group whose first Indian entity operates in an unrestricted sector may be establishing a second entity in a restricted one, and the parent’s clean entry route says nothing about the second entity’s position.
Q9. Can we fund a downstream investment with a parent loan?
No. Under Rule 23(4)(b), an FOCC may use funds received from abroad or its own internal accruals for downstream investment but cannot use borrowed funds for that purpose. A parent loan is borrowed funds and cannot fund the second entity.
Q10. Is an Indian bank facility treated differently?
No. The restriction is on borrowed funds generally, not on the identity of the lender. The permitted sources are funds received from abroad and the company’s own internal accruals.
Q11. What if the subsidiary has no internal accruals?
Then equity from the parent is the route, with the consequences that follow: a valuation valid at allotment, allotment within sixty days of receipt of funds, FC-GPR within thirty days of allotment, and only then the downstream investment. Plan the funding before the structure, because it determines the sequence.
Q12. What is Form DI and when is it filed?
The report of a downstream investment, filed by the investing Indian entity on the FIRMS portal through its AD bank within 30 days from the date of allotment of equity instruments. A late submission fee applies to delayed filings.
Q13. Does the Form DI clock run from allotment or from payment?
From allotment. Not from the board decision, not from the payment, and not from incorporation of the second entity. For a group incorporating a new Indian company, that is the subscription allotment at incorporation, which is easy to overlook.
Q14. Does Form DI apply if our foreign shareholding is small?
Guidance differs. Some sources describe the obligation as attaching to any Indian entity that has received foreign investment, regardless of how small the shareholding; others treat it as an FOCC obligation. The conservative course is to treat Form DI as required and confirm with your AD bank — filing unnecessarily costs nothing, not filing where required is a contravention.
Q15. What is the reclassification reporting requirement?
Introduced by the January 2025 Master Direction update. Where a domestic Indian entity becomes foreign owned or controlled through changes in shareholding or control, it must report that reclassification in Form DI within 30 days from the date of acquiring FOCC status — a filing triggered by a change in ownership, with no investment at all.
Q16. How can a company become an FOCC without doing anything?
Three ways: a funding round taking foreign holding past 50 per cent on a fully diluted basis; a shareholders’ agreement or contractual arrangement conferring board control at any shareholding level; or a domestic shareholder selling, which raises the foreign holding passively without the foreign investor acting at all.
Q17. Why does the reclassification date matter afterwards?
Because every downstream investment made after that date is indirect foreign investment. A group that acquires FOCC status and then establishes a second Indian entity two months later is making a downstream investment, whether or not it realised the status had changed.
Q18. Is Form DI the only filing?
No. A separate intimation must be made to the Secretariat for Industrial Assistance under DPIIT within 30 days of the investment, submitted through the Foreign Investment Facilitation Portal at fifp.gov.in. It is a different filing on a different portal and is frequently missed.
Q19. Do the two filings share a deadline?
They share a length but not a trigger. Form DI runs from the date of allotment; the DPIIT intimation is described as running from the investment, computed from the date of remittance. Where remittance and allotment fall on different dates, diarise each from its own trigger.
Q20. What if we buy shares from an existing non-resident shareholder?
Then Form FC-TRS applies in addition, within 60 days of the transfer of equity instruments or receipt of funds, whichever is earlier. Establish at the outset whether the transaction is a subscription or a transfer, because it determines which forms are required.
Q21. What is the annual auditor’s certificate?
An annual certificate from the statutory auditor confirming that all downstream investments made during the period complied with FEMA and the relevant rules. Critically, that compliance must be disclosed in the Board’s Report forming part of the Annual Report — obtaining the certificate alone is not sufficient.
Q22. Does Press Note 3 apply to downstream investments?
Yes, and so does the 2026 relaxation. Downstream investments may proceed under the automatic route where beneficial ownership from a land-bordering country does not exceed 10 per cent and that investor does not exercise control. The same ownership chart answers the question for both the direct and the downstream investment.
Related reading
- Share valuation for FDI — the pricing guidelines the downstream investment must meet
- External commercial borrowings — why a parent loan cannot fund the second entity
- Press Note 3 and land border FDI — the ownership chart that answers both questions
- FEMA compounding — regularising a missed Form DI
Talk to us before the second entity is incorporated
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. FOCC assessment, downstream investment structuring and funding, sector and entry route analysis, Form DI and DPIIT filings, FC-TRS where relevant, and the annual auditor’s certificate and Board’s Report disclosure — handled as one workstream, because the funding restriction determines the whole sequence.
How we usually start. Tell us what the second entity will do, who owns the first one on a fully diluted basis, and how you intend to fund the investment. We come back with whether the entity is an FOCC, whether the investee’s sector is clear, what the funding must be, and the filing sequence with its deadlines.