The Reserve Bank of India (“RBI”) has amended the regulations governing Foreign Direct Investments (“FDI”) through a notification[#_ftn1][1] published in the official gazette on September 6, 2013. A circular dated September 12, 2013[#_ftn2][2] has also been issued to this effect. The amendment is in relation to use of internal accruals for downstream investments by Indian companies, which are not owned/ controlled by Indian residents.
The guidelines on downstream investments were introduced through Press Note 4 of 2009 (contents of which were incorporated in the master circular on foreign direct investments issued from time to time). However, the downstream investment guidelines were notified in the official gazette only on June 7, 2013[#_ftn3][3], after more than four years of their introduction.
Position as per the notification dated June 7, 2013
Prior to the introduction of the notification dated June 7, 2013, Indian companies (which are not owned/ controlled by residents), intending to make downstream investments, were permitted to make such investments either from funds from abroad or from their internal accruals. However, given the specific language of the notification dated June 7, 2013, it appeared that only pure investment holding companies (as opposed to investment and investment-cum-operating companies) were permitted to use internal accruals to make downstream investments.
Such a restrictive language created concerns in several cases where internal accruals were used by holding cum operating companies to fund down-stream acquisitions.
Current position
Vide the notification published on September 6, 2013 and the circular dated September 12, 2013, the use of internal accruals for downstream investments is now permissible for all companies and is not restricted to investment holding companies. The necessary conditions on entry, compliance with sectoral caps, approvals, would however need to be adhered to as earlier.
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