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.
Rule 23(5) to (7) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 completes the downstream investment rule. Sub-rule (5) says to whom a foreign-owned Indian company may transfer shares it holds in another Indian company. Sub-rule (6) makes the first-level company responsible for compliance down the chain and requires an annual statutory auditor's certificate. Sub-rule (7) applies both to an LLP. A Note deals with investments made around 2009 and 2013.
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. Rule 23(5) to (7) and the Note are as notified on 17 October 2019; none of the 19 amending notifications up to 2 September 2026 changes them. Amendments made after that date should be checked in the Gazette. There is no official consolidated text. For the filings that go with downstream investment, see our downstream investment reporting page.
A foreign-owned or foreign-controlled Indian company holding equity instruments of another Indian company may transfer them to (a) a person resident outside India, subject to reporting, (b) a person resident in India, subject to pricing guidelines, or (c) another foreign-owned or controlled Indian company. The first-level company is responsible for compliance by the second-level company and so on, must obtain an annual statutory auditor's certificate, and must mention compliance in the Director's report. A qualified auditor's report must be brought immediately to the Reserve Bank's regional office. Sub-rules (5) and (6) apply to an LLP as well.
Rule 23(5): transfers of downstream holdings
Sub-rule (5) applies to equity instruments 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. Those equity instruments may be transferred to:
| Clause | Transferee | Condition printed in the Rule |
|---|---|---|
| (a) | A person resident outside India | Subject to the reporting requirements as specified by the Reserve Bank |
| (b) | A person resident in India | Subject to adherence to pricing guidelines |
| (c) | 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 | None stated |
The Reserve Bank's Master Direction - Foreign Investment in India, updated up to June 15, 2026, restates the exit conditions in paragraph 9.6.1 and adds, as its own statements and not as part of the Rule, that for a transfer to a person resident outside India the reporting is in Form FC-TRS and the pricing guidelines will not apply, and that for a transfer to a foreign-owned or controlled Indian company the pricing and reporting guidelines will not apply. The Rule prints neither of those exemptions. Paragraph 9.6.2 extends the instructions to an LLP. For the pricing rules, see our articles on pricing of share transfers and swaps and, for the reporting form, Form FC-TRS.
The words "owned" and "controlled" are defined in the Explanation to rule 23; see our article on indirect foreign investment and the ownership tests.
Rule 23(6): responsibility and the annual certificate
Sub-rule (6) says:
- The first level Indian company making downstream investment shall be responsible for ensuring compliance with the Rules 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.
- Compliance with the Rules shall be mentioned in the Director's report in the Annual Report of the Indian company.
- In case the statutory auditor has given a qualified report, it 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 the company shall also obtain acknowledgement from the regional office.
The Master Direction repeats it in paragraphs 9.7.1 and 9.7.2. The Rule prescribes no format for the certificate and no time within which the report must be filed other than "immediately" and "annual".
This is the provision that makes the first level company answerable for the compliance of the levels below it. Where the chain has three or four layers, the first level company must collect what it needs from each layer to support the certificate. Our article on downstream investment conditions explains the conditions the certificate covers.
Rule 23(7): LLPs
Sub-rule (7) says the provisions of sub-rules (5) and (6) apply "mutatis mutandis" to an LLP. The Master Direction states the same for the exit conditions (paragraph 9.6.2) and for the compliance responsibility (paragraph 9.7.3). LLP investment generally is explained in our article on Schedule VI.
The Note: 2009 and 2013
A Note follows sub-rule (7). It says that downstream investment treated as indirect foreign investment for the investee entity, made in accordance with the guidelines in existence prior to the 13th February, 2009, shall not require any modification to conform to the Rules, and all such investments after that date come under the Rules. Downstream investment made between 13th February, 2009 and 21st June 2013 which is not in conformity with the Rules shall have to be intimated to the Reserve Bank by 3rd October, 2013 for treating such cases as compliant. The dates are quoted as printed; the Master Direction repeats them in paragraphs 9.8.1 and 9.8.2. The Note matters today only for old investments whose status is questioned. The Rules do not describe any procedure for those past cases.
A worked example
Pelican Industries Private Limited is owned by Nordvik Holdings, a foreign company, and holds shares of Lakshya Components Private Limited. Pelican decides to sell its Lakshya shares. Under sub-rule (5) it may sell to a person resident outside India (reporting as the Reserve Bank specifies), to a resident (pricing guidelines apply), or to another foreign-owned company. Each year, Pelican, as first level company, obtains a statutory auditor's certificate that its downstream investment in Lakshya, and Lakshya's own investments in the next level, comply with the Rules, and mentions this in its Director's report. If the auditor qualifies the report, Pelican must immediately bring it to the Reserve Bank's regional office where its registered office is located.
Need help with the annual downstream certificate?
The annual certificate and the Director's report line need information from every layer of the group. Our downstream investment reporting team can help assemble it with your auditor.
Key takeaways
- A foreign-owned or controlled company may transfer downstream holdings to non-residents (reporting), residents (pricing) or other foreign-owned or controlled Indian companies.
- The first level company is responsible for all downstream levels and must obtain an annual statutory auditor's certificate.
- Compliance must be mentioned in the Director's report in the Annual Report.
- A qualified report goes immediately to the Reserve Bank's regional office, with acknowledgement.
- The same applies to an LLP; the Note covers pre-2009 and 2009 to 2013 investments.
Read next
- Rule 23(1) to (4) of the FEM (Non-debt Instruments) Rules, 2019: downstream investment conditions
- Explanation to rule 23 of the FEM (Non-debt Instruments) Rules, 2019: indirect foreign investment and ownership tests
- Regulations 4(11) and 5 of the Mode of Payment and Reporting Regulations: downstream investment, Form DI and the late submission fee
- 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.