The investment in the other Indian downstream company by an Indian company already having foreign investment is called downstream investment subject to conditions of ownership and control.
According to information from the RBI, thus, there will be two Indian Companies, a first level company which has accepted foreign investment and in turn has made investment in a second level company i.e. another Indian company.
What are the exceptions to the downstream investment rule
The downstream rule may not be applied in following cases:
1) Where the first level Indian company is owned and controlled by resident Indian citizens;
2) Where the second level Indian company is engaged in an activity eligible for 100% foreign investment under automatic route;
3) Where for investment in sectors it is specified in a statute or a rule there under. The above methodology of determining direct and indirect foreign investment therefore does not apply to the insurance sector which will continue to be governed by the relevant Regulation;
4) Downstream investment/s made by a banking company, as defined in clause (c) of Section 5 of the Banking Regulation Act, 1949, incorporated in India, which is owned and/or controlled by non-residents/ a non-resident entity/non-resident entities, under Corporate Debt Restructuring (CDR), or other loan restructuring mechanism, or in trading books, or for acquisition of shares due to defaults in loans, shall not count towards indirect foreign investment.
Information courtesy: Reserve Bank of India