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CS Professional · Strategic Management and Corporate Finance · Foreign Funding - Institutions

A foreign company holds 40% of the equity of Indian company A. Company A holds 60% of the equity of Indian company B. Under the indirect foreign investment approach in FDI policy, which is correct if A is not owned and controlled by resident Indian citizens?

The whole 60% holding of A in B counts as indirect foreign investment. Because A is not owned and controlled by resident Indian citizens, the entire downstream investment is treated as foreign. Proportionate counting, giving 24%, applies only to an owned and controlled resident Indian company.

  1. AThe entire holding of A in B counts as indirect foreign investment in BCorrect
  2. BIndirect foreign investment in B is 24% only, being 40% of A's 60%
  3. CNo indirect foreign investment is counted in B
  4. DOnly direct foreign investment counts, so B is a domestic company for all purposes

Explanation

Where the investing Indian company is not owned and controlled by resident Indian citizens, its entire investment in a downstream company counts as indirect foreign investment. Here A has 40% foreign ownership, so it is not owned by resident Indians, and the full 60% counts. The 24% figure comes from proportionate counting, which applies only if A is both owned and controlled by resident Indian citizens.

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