Section 14(5) in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017
(5)Downstream investment made into Indian companies will be subject to the following conditions:(a)The downstream investment should have the approval of the Board of Directors as also a Shareholders' Agreement, if any;(b)For the purpose of downstream investment, the Indian entity making the downstream investment shall bring in requisite funds from abroad and not use funds borrowed in the domestic markets. Downstream investments can be made through internal accruals. For this purpose, internal accruals will mean profits transferred to reserve account after payment of taxes.Further raising of debt and its utilisation shall be in compliance with the Act, rules or regulations made thereunder.(c)Capital instrument of an Indian company held by another Indian company which has received foreign investment and is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India may be transferred to:(i)A person resident outside India, subject to reporting requirements in Form FCTRS;(ii)A person resident in India subject to adherence to pricing guidelines.(iii)An Indian company which has received foreign investment and is not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India.(d)The first level Indian company making downstream investment shall be responsible for ensuring compliance with the provisions of these regulations for the downstream investment made by it at second level and so on and so forth. Such first level company shall obtain a certificate to this effect from its statutory auditor on an annual basis. Such compliance of these regulations shall be mentioned in the Director's report in the Annual Report of the Indian company. In case statutory auditor has given a qualified report, the same shall be immediately brought to the notice of the Regional Office of the Reserve Bank in whose jurisdiction the Registered Office of the company is located and shall also obtain acknowledgement from the RO.(e)The provisions at (c) and (d) above shall be construed accordingly for an LLP.Note: Downstream investment made in accordance with the guidelines in existence prior to February 13, 2009 would not require any modification to conform to these regulations. All other investments, after the said date, would come under the ambit of these regulations. Downstream investments made between February 13, 2009 and June 21, 2013 which is not in conformity with these regulations should have been intimated to the Reserve Bank by October 3, 2013 for treating such cases as compliant with these regulations.
