Explanation to rule 23 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The Explanation at the end of rule 23 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 defines the words on which the downstream investment rules depend: ownership, control, a company or LLP owned or controlled by resident Indian citizens or by non-residents, downstream investment, indirect foreign investment, total foreign investment and strategic downstream investment. It has been amended twice, in 2021 and 2024.
This article is based on the Rules as notified on 17 October 2019 (S.O. 3732(E)) as amended by the notifications named in this article; the latest amendment consulted is S.O. 4870(E) dated 2 September 2026. Amendments made after that date should be checked in the Gazette. There is no official consolidated text; the Explanation was read from the 2019 notification with the amendments applied. If you want an ownership chain tested against these definitions, our downstream investment reporting team can do so.
"Ownership of an Indian company" means beneficial holding of more than fifty percent of its equity instruments; of an LLP, contribution of more than fifty percent in capital and majority profit share. Indirect foreign investment is downstream investment received from an Indian entity with foreign investment that is not owned and not controlled by resident Indian citizens, or is owned or controlled by non-residents, or from an investment vehicle whose sponsor or manager is so placed. Total foreign investment is foreign plus indirect foreign investment, on a fully diluted basis. Clause (d) on "control" was omitted on 16 August 2024; "control" is now defined in rule 2(da).
The clauses of the Explanation
| Clause | Term | Meaning as printed |
|---|---|---|
| (a) | Ownership of an Indian company; ownership of an LLP | Beneficial holding of more than fifty percent of the equity instruments; contribution of more than fifty percent in capital and having majority profit share |
| (b) | Company (or LLP) owned by resident Indian citizens | Ownership is vested in resident Indian citizens and/or Indian companies (or Indian entities, for an LLP) which are ultimately owned and controlled by resident Indian citizens |
| (c) | Company (or LLP) owned by persons resident outside India | An Indian company (or LLP) that is owned by persons resident outside India |
| (d) | Control | Omitted by S.O. 3492(E), 16 August 2024 |
| (e) | Company (or LLP) controlled by resident Indian citizens | Control is vested in resident Indian citizens and/or Indian companies (or Indian entities) which are ultimately owned and controlled by resident Indian citizens |
| (f) | Company (or LLP) controlled by persons resident outside India | An Indian company (or LLP) that is controlled by persons resident outside India |
| (g) | Downstream investment | Investment made by an Indian entity which has total foreign investment in it, or by an investment vehicle, in the capital instruments or the capital of another Indian entity |
| (h) | Holding company | The meaning in the Companies Act, 2013 |
| (i) | Indirect foreign investment | See below |
| (j) | Total foreign investment | The total of foreign investment and indirect foreign investment, reckoned on a fully diluted basis |
| (k) | Strategic downstream investment | Investment by banking companies incorporated in India in their subsidiaries, joint ventures and associates |
Clauses (a), (b), (c), (e), (f), (g), (h), (j) and (k) stand as notified on 17 October 2019.
Clause (d): control, omitted and moved
As notified, clause (d) defined "control" as the right to appoint a majority of the directors, or to control the management or policy decisions including by virtue of shareholding, management rights, a shareholders' agreement or a voting agreement; for an LLP, the right to appoint a majority of the designated partners who, with specific exclusion of others, control all the policies of the LLP. S.O. 3492(E), the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (16 August 2024) omitted clause (d) and, at the same time, inserted rule 2(da): "control" has the same meaning as in the Companies Act, 2013 and, for an LLP, the right to appoint a majority of the designated partners with control over all the policies. See our article on Indian company, control, startup and investor classes.
A difference to note: the Reserve Bank's Master Direction - Foreign Investment in India, updated up to June 15, 2026, still prints the older company definition of "control" in paragraph 9.1.7 (the right to appoint a majority of directors or to control management or policy decisions, including by shareholding, management rights, shareholders' agreement or voting agreement) beside the LLP definition in paragraph 9.1.8, and prints the new rule 2(da) wording in its paragraph 2.4. The Gazette omitted clause (d); this article states the Rules as the notifications give them, and the reader should confirm which meaning applies to a company against the official text.
Clause (i): indirect foreign investment
"Indirect foreign investment" means downstream investment received by an Indian entity from:
- (A) another Indian entity which has received foreign investment and (i) is not owned and not controlled by resident Indian citizens, or (ii) is owned or controlled by persons resident outside India; or
- (B) an investment vehicle whose sponsor or manager or investment manager (i) is not owned and not controlled by resident Indian citizens, or (ii) is owned or controlled by persons resident outside India.
Proviso: no person resident in India other than an Indian entity can receive indirect foreign investment.
The Explanation under clause (i)
This part has changed twice.
- S.O. 3206(E), the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2021 (6 August 2021), which later notifications cite as dated 9 August 2021, inserted an Explanation: an investment made by an Indian entity which is owned and controlled by NRIs, on a non-repatriation basis, shall not be considered for calculation of indirect foreign investment. This is now history.
- S.O. 3492(E) (16 August 2024) substituted it. The current Explanation reads: an investment made by an Indian entity which is owned and controlled by a Non-Resident Indian or an Overseas Citizen of India, including a company, a trust and a partnership firm incorporated outside India and owned and controlled by a Non-Resident Indian or an Overseas Citizen of India, on a non-repatriation basis in compliance with Schedule IV, shall not be considered for calculation of indirect foreign investment.
The Master Direction carries the same current wording as "Explanation 2" to its paragraph 9.1.15, and adds an "Explanation 1" of its own: where the original investment was made as a resident but the investor entity later becomes owned or controlled by non-residents, the investment is reckoned as downstream investment from that date, must comply with the applicable entry route and cap, and must be reported within 30 days from the date of reclassification in Form DI. That is the Master Direction's statement; rule 23 does not print it. Schedule IV is explained in our article on NRI and OCI investment on non-repatriation basis, and Form DI in our article on Form DI and the late submission fee.
How the tests work together
The rule 23 conditions in our articles on downstream investment conditions and transfers by foreign-owned companies apply only if the investor entity falls on the foreign side of the test. In order:
- Is the investor an Indian entity that has foreign investment in it, or an investment vehicle?
- Is it owned (more than fifty percent beneficial holding) or controlled by resident Indian citizens, or by persons resident outside India? "Ultimately owned and controlled" looks through Indian companies in the chain.
- If it is not owned and not controlled by resident Indian citizens, or is owned or controlled by non-residents, the investment is indirect foreign investment for the investee.
- The investee then counts that amount in its total foreign investment, on a fully diluted basis, against its sectoral cap.
For an investment vehicle, the test falls on its sponsor, manager or investment manager. The Master Direction says that where such a person is organised in a form other than a company or LLP, SEBI determines whether it is foreign owned and controlled (paragraph 9.1.15).
A worked example
Pelican Industries Private Limited has foreign investment in it. Resident Indian citizens hold forty-nine per cent of its equity instruments beneficially and Nordvik Holdings, a foreign company, holds fifty-one per cent. Nordvik owns Pelican (more than fifty percent), so Pelican is "owned by persons resident outside India". Pelican's investment in Lakshya Components Private Limited is therefore indirect foreign investment for Lakshya. If, instead, an NRI's wholly owned Indian company invested out of non-repatriation funds under Schedule IV, the Explanation under clause (i) would exclude that investment from the indirect foreign investment calculation.
Need help with ownership and control analysis?
The ownership and control tests need a look through every holding company in the chain. Our downstream investment reporting team can map the structure and say which investments count as indirect foreign investment.
Key takeaways
- Ownership means beneficial holding of more than fifty percent (capital contribution of more than fifty percent and majority profit share for an LLP).
- Indirect foreign investment arises from an Indian entity or investment vehicle that is not owned and controlled by resident Indian citizens, or is owned or controlled by non-residents.
- Clause (d) on control was omitted on 16 August 2024; rule 2(da) now defines control.
- NRI and OCI controlled entities' non-repatriation investments under Schedule IV are excluded from the calculation.
- The Master Direction still prints the older company definition of control; confirm against the official text.
Read next
- Rule 23(1) to (4) of the FEM (Non-debt Instruments) Rules, 2019: downstream investment conditions
- Rule 23(5) to (7) of the FEM (Non-debt Instruments) Rules, 2019: transfers by foreign-owned companies and the auditor certificate
- Schedule IV to the FEM (Non-debt Instruments) Rules, 2019: NRI and OCI investment on non-repatriation basis
- FDI downstream investment rules
Disclaimer: Based on the Gazette text of the instrument this article names, as notified and as amended by the notifications named in the article (for the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 the latest amendment consulted is S.O. 4870(E) dated 2 September 2026), as consulted on 2 October 2026. There is no official consolidated text; the provisions were read with each amendment applied. Sectoral caps, entry routes, conditions, forms and time limits change by notification, press note and circular; later changes should be checked on the Gazette, DPIIT and Reserve Bank sites. This article is general information, not legal advice; check the official text before acting.