FOCCs investing in OCIs – a mystery akin to Narasimha?

Can a foreign-owned and controlled Indian companies (FOCC) invest in an Indian company through optionally convertible instruments such as optionally convertible debentures (OCDs) and optionally convertible preference shares (collectively, OCIs) of another Indian company? The ambiguity around investment by an FOCC into an Indian company through OCIs emerges from foreign exchange regulations not directly dealing with this issue in the process of the evolution of forex regulation since its commencement.

Two regulations are important for this discussion: (1) OCI subscription by a non-resident entity (NR) is considered as external commercial borrowing (ECB), and (2) entire downstream investment by an FOCC is treated as part of the total foreign investment. Downstream investment means only investment through a capital instrument in another Indian company, and capital instrument means only equity shares and compulsorily convertible debentures/preference to the exclusion of OCIs. As per the ECB framework, ECBs can only be obtained from an NR.

One view could be that FOCCs cannot subscribe to OCIs because: (1) these are not capital instruments, and what a foreign entity cannot do directly it also can’t do indirectly by routing investment through its Indian subsidiary; and (2) forex regulations state that “[an] Indian entity which has received indirect foreign investment shall comply with the entry route, sectoral caps, pricing guidelines, and other attendant conditions as applicable for foreign investment”.

Akshay Nagpal is a partner and Niharika Choudhary is an associate at L&L Partners. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.

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