Caught in Compliance: The Practical Struggles of FOCCs in India’s Downstream Investment Regime

Introduction

The Supreme Court’s dictum in McDowell & Co. Ltd. v. CTO that a prohibited act cannot be achieved indirectly remains foundational to India’s foreign investment controls. Even as the country recorded impressive foreign investment inflows exceeding USD 81 billion in 2024–25, investors continue to confront regulatory blocks deeply embedded in the downstream investment framework. Foreign-owned or controlled companies, or FOCCs, sit at the heart of this tension. These entities, which are Indian companies with majority foreign ownership or decisive foreign control, serve as conduits through which foreign capital can be reinvested into new Indian ventures. While on paper FOCCs are permitted to undertake downstream investments under Rule 23 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, the pathway remains riddled with interpretational gaps, inconsistent enforcement, and procedural ambiguity.

Downstream investments were expected to provide foreign investors an efficient route to expand their Indian presence, deploy excess capital and undertake acquisitions with fewer formalities than direct FDI. Instead, the current regulatory posture has turned FOCCs into entities burdened with dual identities: they are regarded as foreign investors for pricing and investment conditions, but treated as domestic companies for most compliance and reporting requirements. The result is a contradictory regime that complicates transactions and deters strategic investment planning. This blog examines these fault lines, evaluates recent regulatory changes and offers suggestions drawn from global best practices to create a more coherent and predictable system.

A Regulatory Road Half-Repaired: Why Reforms Remain Incomplete

In January 2025, the Reserve Bank of India issued updated Master Directions intended to clarify long-standing uncertainties surrounding downstream investments. The revisions attempted to harmonise indirect FDI norms with the rules applicable to direct foreign investment. Notably, the directions explicitly recognised the permissibility of deferred consideration and share swap arrangements for downstream transactions, resolving a major pain point that had caused AD banks to seek unnecessary RBI approvals. These ambiguities had intensified after several FOCCs received notices during 2023 for employing deferred payment structures, creating an anomalous situation where indirect FDI faced stricter scrutiny than direct FDI.

The revised framework also confirms that mechanisms like rights issues and bonus issuances to non-residents extend to downstream transactions, aligning indirect investment with the treatment of direct FDI. In addition, the Master Directions provide certainty on the prohibition against using domestic borrowings for downstream investments, restricting FOCCs to foreign funds or post-tax internal accruals. This clarification addresses longstanding confusion over whether escrow arrangements or time-linked payment structures breach the domestic borrowing restriction. Another positive change is the formalisation of reporting obligations for companies that newly attain FOCC status, requiring mandatory filing of Form DI within thirty days.

While these regulatory updates plug some gaps, they fall short of providing holistic certainty. AD banks continue to interpret rules unevenly, compliance triggers remain opaque for several transaction structures, and procedural burdens persist. The reforms, therefore, mend cracks but do not smoothen the regulatory pathway.

Persistent Gaps: Why FOCC Downstream Investments Still Face Friction

The downstream investment framework still suffers from substantial grey zones. A central concern is the inconsistent application of pricing norms under Rule 23(5), which prescribes fair market value requirements for FOCC-to-resident share transfers but remains silent on transfers involving non-residents or multiple categories of sellers. AD banks have responded with varying interpretations, with some imposing both floor and ceiling pricing restrictions even when the rule does not expressly require it. This creates commercial inflexibility and exposes transactions to regulatory objections post-completion.

A second contentious area is the treatment of hybrid instruments. Since the NDI Rules define “capital instruments” in a manner that excludes optionally convertible instruments, these securities are treated as debt until conversion. Consequently, the downstream investment rules do not apply prior to conversion, triggering compliance only at the moment of reclassification. This deferred regulatory scrutiny leaves participants uncertain about pricing, reporting and valuation requirements for pre-conversion transactions. AD banks have adopted divergent approaches, leaving companies guessing which interpretation will apply.

Another practical challenge lies in identifying when an entity becomes a FOCC. Companies with fluctuating foreign shareholding—such as listed companies or those with dynamic institutional investor activity—struggle with determining the precise moment they cross the FOCC threshold. This creates ambiguity around reporting timelines, especially when previous downstream investments may require retrospective reclassification or additional disclosures.

Finally, the absolute bar on domestic borrowings for downstream investments continues to impede legitimate business expansion. While the prohibition aims to prevent round-tripping, it inadvertently penalises FOCCs that wish to fund operational expansion through domestic rights issues or local capital sources. The compulsion to rely solely on costlier foreign funds increases transaction costs, delays decision-making and adds unnecessary rigidity to India’s investment ecosystem.

Why Streamlining India’s FDI Framework Is Urgent

Despite crossing the USD 1 trillion threshold in cumulative FDI since 2000, India remains relatively restrictive when assessed against global benchmarks. The OECD’s Foreign Direct Investment Regulatory Restrictiveness Index allocates India a score of 0.20 in 2024, significantly higher than jurisdictions like Singapore and the United States. This restrictiveness is shaped by sectoral caps, screening procedures and operational constraints, especially in sectors like telecom, media and transportation. Entire industries, such as gambling and nuclear energy, remain fully closed to foreign investment.

Compliance complexity further aggravates investor concerns. A single investment may necessitate multiple filings—FC-GPR, FC-TRS, FLA and sector-specific approvals—introducing friction into otherwise routine transactions. Emerging instruments like share swaps or portfolio-to-direct investment transitions can trigger additional reporting layers, complicating cross-border deals. For India to retain and expand its attractiveness as a global investment hub, the downstream investment framework must be simplified, unified and aligned with international norms.

Learning from Global Models: Charting a Way Forward

A comprehensive reform plan must combine policy changes, technological innovation and structured stakeholder engagement.

Reimagining Domestic Borrowing Rules

Countries like Singapore allow companies, irrespective of foreign shareholding, to utilise both local and foreign capital pools for downstream investments. This enhances financing flexibility and reduces execution timelines. India could adopt a calibrated approach, permitting FOCCs to raise domestic funds subject to sectoral conditions and FDI caps. This would preserve safeguards against round-tripping while ensuring that Indian shareholders are not unfairly disadvantaged.

Clarifying Hybrid Instruments and Preventing Arbitrage

The European Union’s FDI screening framework provides a model for addressing hybrid capital instruments and domestic borrowing structures. By explicitly defining anti-circumvention triggers, the EU ensures that delayed or indirect forms of control do not evade scrutiny. Singapore employs similar principles under MAS supervision. India would benefit from codifying comparable rules, which would reduce discretion-driven decision-making and minimise inconsistent interpretations across AD banks.

Providing Clear Legal Recognition for Deferred Consideration and Share Swaps

Jurisdictions such as Australia expressly permit deferred payments and share swaps under foreign investment statutes, provided that conditions related to valuation and disclosure are met. Codifying similar provisions in the NDI Rules and corresponding reporting regulations would eliminate ambiguity and expedite processing.

Establishing Uniform Pricing Norms through Statutory Amendments

India urgently needs standardised valuation rules for downstream investments involving diverse categories of sellers. A statutory pricing band—linked to a certified fair market value determined by an independent valuer—would prevent arbitrary interpretations and enable commercial flexibility while safeguarding regulatory interests. Complementary amendments to the reporting framework under the Companies Act would ensure consistency across filings such as SH-4, PAS-4 and company-level approvals.

Building an Integrated Digital Infrastructure

India possesses fragmented but functional digital platforms including MCA21, the FIFP portal and the RBI’s FIRMS system. Integrating these into a single workflow would drastically reduce compliance duplication. Countries like Singapore and the United States have already implemented unified reporting systems that provide real-time insights into control structures and investment flows. India can adopt similar architecture with phased rollouts, beginning with sectors that have high foreign participation.

Institutionalising Stakeholder Dialogue

Regular, structured dialogue among regulators, legal experts, industry associations and AD banks can help identify emerging compliance challenges and refine guidelines accordingly. Workshops, advisory groups and consultation papers can create a predictable feedback loop, enabling continuous policy improvement.

Conclusion: The Path to a More Coherent FDI System

India’s foreign investment ecosystem stands at a decisive juncture. While recent reforms indicate progress, the downstream investment framework still functions with substantial opacity, contradictory interpretations and procedural strain. For FOCCs, this results in being “legally included” under the rules but “practically constrained” in execution. To truly unlock India’s next phase of growth, the regulatory framework must transition from rigidity to clarity, from fragmented oversight to integrated systems and from reactive enforcement to predictable policymaking. Only then can foreign investors operate with confidence that their investments are supported not just by law, but by a transparent, modern and globally competitive compliance environment.