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RBI eases downstream investment rules for Indian companies

Current · Source: Reserve Bank of India · RBI/2013-14/251 · issued 12 Sep 2013 · ~2 min read
Quick answerRBI has relaxed downstream investment rules: Indian companies can now use internal accruals for downstream investments, not just those engaged solely in investing. Earlier, only investment-holding companies could do this. The foreign funding condition remains unchanged.
The rule, in the simplest words
How it plays out — a real example

Rahul, a forex & trade-finance officer in Indore, is reviewing a downstream investment proposal from a local Indian company. He checks if the company has used its internal accruals for the investment, as per the RBI's relaxed rules. Since the company has indeed used its internal accruals, Rahul proceeds with the review, ensuring that the foreign funding condition is still met.

What changed

Earlier, only Indian companies engaged solely in investing in other Indian companies could use internal accruals for downstream investments. Now, any Indian company can use internal accruals for downstream investments, subject to the conditions in clause 6(i) of the July 2013 circular. The requirement to bring in funds from abroad (not domestic borrowings) remains unchanged.

What it means for you

This gives Indian companies more flexibility to fund downstream investments using their own retained earnings, without needing to route funds from abroad for every such investment. Banks must ensure that downstream investments still comply with the foreign funding condition—domestic borrowings are not allowed for this purpose. Operating subsidiaries can still raise debt locally.

What you must do

Who it affects

Indian companies making downstream investments, Foreign investors in Indian companies, AD Category-I banks handling foreign investment transactions

❓ Common questions

Can an Indian company now use domestic borrowings for downstream investments?

No. The condition that downstream investments must be funded from abroad (not domestic borrowings) remains unchanged. Only internal accruals are now permissible for any Indian company, not just investment-holding companies.

Does this circular affect the definition of 'owned and controlled by resident entity'?

No. The circular only amends condition (d) in para 6(ii) of the Annex to the July 2013 circular. All other conditions, including ownership and control definitions, remain unchanged.

📜 Read the original circular — full text as issued by RBI
RBI/2013-14/251 A. P. (DIR Series) Circular No.42 September 12, 2013 To All Category-I Authorised Dealer Banks Madam / Sir, Foreign Investment in India – Guidelines for calculation of total foreign investment in Indian companies, transfer of ownership and control of Indian companies and downstream investment by Indian companies Attention of Authorised Dealers Category – I (AD Category - I) banks is invited to Para 6 (ii) of Annex to A.P. (DIR Series) Circular No. 1 dated July 04, 2013 as regards downstream investments by an Indian company which is not owned and/or controlled by resident entity/ties. 2. On review of the policy, it has now been decided to amend condition at (d) in the aforesaid para.  The amended condition is given in the Annex . 3. All the other conditions contained in the A.P. (DIR Series) Circular No.1 dated July 04, 2013, shall remain unchanged. 4. AD Category - I banks may bring the contents of the circular to the notice of their customers/constituents concerned. 5. Reserve Bank has since amended the Regulations and notified vide Notification No.FEMA.284/2013-RB dated August 27, 2013 and notified vide G.S.R.596 (E) dated September 06, 2013. 6. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law. Yours faithfully, (C.D. Srinivasan) Chief General Manager [Annex to A.P.(DIR Series) Circular No.42 dated 12.09.2013] c.f. Annex to A.P.(DIR Series) Circular No. 1 dated July 04, 2013
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2013-14/251 · issued 12 Sep 2013. The plain-English explanation above is BankPulse’s own independent summary.
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Worked example & action-note template

Example: if you are a Compliance officer at a bank this circular applies to (Indian companies making downstream investments, Foreign investors in Indian companies, AD Category-I banks handling foreign investment transactions), your first concrete step on “RBI eases downstream investment rules for Indian companies” is: “Update internal compliance checklists to reflect that any Indian company can now use internal accruals for downstream investments, not just investment-holding companies.” (RBI issued this 12 Sep 2013).

  1. Circular: RBI/2013-14/251 -- RBI eases downstream investment rules for Indian companies
  2. Issued: 12 Sep 2013
  3. Action required: Update internal compliance checklists to reflect that any Indian company can now use internal accruals for downstream investments, not just investment-holding companies.
  4. Action required: Advise customers that the foreign funding condition (no domestic borrowings for downstream investment) still applies; only internal accruals are an exception.
  5. Action required: Ensure downstream investment proposals are reviewed against the revised condition (d) in Annex to this circular and clause 6(i) of the July 2013 circular.
  6. Action required: Communicate the change to your AD Category-I bank's customers and constituents as directed.
  7. Owner: ____________ Target date: ____________
  8. Board/committee approval needed? Y / N
  9. Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.

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Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8408&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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