A Change in the Definition of Indirect Foreign Investment Classification, & Clarifies Whether a Fund is FOCC or IOCC

A recent amendment by the Reserve Bank of India to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), has expanded the long-standing exemption regarding what counts as Indirect Foreign Investment.

This amendment is particularly advantageous forfunds, AIF managers, trusts, and investment vehicles owned and controlled by NRIs or OCIs.

NRIs/OCIs can make investments into India in investment vehicles on a non-repatriation basis without such investments being treated as “Indirect Foreign Investment.”

This not only simplifies structuring but also directly impacts how a fund is classified as FOCC (Foreign Owned & Controlled Company) or IOCC (Indian Owned & Controlled Company).

In this article, we explained to you, with the proper breakdown, what changed and why it matters to the investment community.

1. What has changed in the NDI Rules?

A new substituted explanation is added in the definition of Indirect Foreign Investment as under:

If an Indian entity is owned/controlled by an NRI or OCI, and if the NRI/OCI invests on a non-repatriation basis, then those investments are treated like domestic investments, not foreign investments.

2. Why is this Amendment Significant?

This makes downstream investments smoother, cleaner, and free from foreign investment classification. With this amendment,NRI/OCI-owned & controlled entities, whether incorporated in India or abroad, are now treated equivalently for the exemption. As long as investments are made on a non-repatriation basis, they do not trigger indirect foreign investment.

3. How does this affect FOCC vs IOCC Classification?

I. Foreign-Owned or Controlled Company:

A FOCC is an Indian entity where ownership or control ultimately lies with foreign residents (not NRIs/OCIs using the NRO/non-repatriation route). FOCCs’ downstream investments into India are treated as indirect foreign investment, meaning:

• Sectoral caps, as defined by RBI, apply.
• Pricing guidelines will be applicable.
• Reporting obligations.
• Certain sectors are restricted.

II. Indian Owned and Controlled Company:

An IOCC is an Indian entity ultimately owned and controlled by resident Indian citizens or NRIs/OCIs / NRI/OCI - owned & controlled entities investing under the non-repatriation route (treated as domestic investment).

Note: Investments by IOCCs do NOT count as foreign investment.

4. So, will a fund be considered FOCC or IOCC under the amended rules?

Under the amended rule, a fund will be considered as follows:

I. IOCC (or treated as a domestic investor)

If the fund is:

• Owned & controlled by NRI/OCI or
• Owned & controlled by NRI/OCI-owned & controlled entities, even if incorporated outside India as a company, trust, or partnership.
• AND invests in India on a non-repatriation basis (Schedule IV).

In this case:

Investments in an Indian entity by an IOCC WILL NOT be counted as indirect foreign investment.

II. FOCC

If the fund is:

• Owned or controlled by non-resident foreign nationals (not NRI/OCI), or
• An NRI/OCI invests on a repatriation basis (Schedule I), or
• The ownership/control criteria under the said rule are not satisfied.

In these cases:

Investments in an Indian entity by an FOCC will be treated as indirect foreign investment.

Note: The fund also has to check the second criteria to identify it as an IOCC or FOCC i.e. an investment vehicle whose sponsor or manager or investment manager is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India.

5. Strategic advantages created by the amendment

I. Lower compliance burden

No indirect FDI reporting:

• No sectoral caps.
• No downstream restrictions.

II. Flexible structuring

Allows:

• Offshore funds
• Feeder structures
• Foreign SPVs
• Family office vehicles

To participate in Indian investments without foreign tagging, when owned/controlled by NRI/OCI.

6. Key conditions to ensure compliance:

To benefit from the exemption, ensure:

a. Investments must be made on a non-repatriation basis:

This means the investment is treated like a domestic investment — proceeds remain in India.

b. Must comply with Schedule IV:

This is the NRI-investment-on-non-repatriation schedule.

c.The investing entity can be foreign, but must be owned/controlled by NRI/OCI:

Offshore companies, trusts, and partnerships are now explicitly covered.

7. Conclusion: A Game-Changer for NRI/OCI-Backed Investment Ecosystems

The amendment to the definition of Indirect Foreign Investment of the NDI Rules is a strategic win for India’s investment climate. By broadening the exemption to include foreign entities owned and controlled by NRIs / OCIs, the Government of India has:

• removed ambiguity,
• reduced friction in fund structuring,
• encouraged global Indian capital, and
• simplified downstream investment regulations.

As a result, a fund owned and controlled by NRI / OCI, investing via the non-repatriation route, will be treated as an IOCC (domestic), not a FOCC.

At KDP Accountants, we regularly advise NRI & OCI-backed funds and family office investments on FEMA structuring, FOCC vs IOCC classification, and downstream investment compliance. With years of experience in cross-border taxation and regulatory advisory, our team of professionals correctly evaluates ownership and control and aligns with the latest RBI amendments. For professional assistance, connect us at enquire@kdpaccountants.com, we will help you and provide clear and practical advice for investments in India.

Mihir Mehta
Author

Mihir Mehta is a skilled finance professional with over three years of hands-on experience in foreign investments, overseas direct investments (ODI), AIF-related RBI compliances, and regulatory reporting under the Reserve Bank of India (RBI) framework. His work spans managing complex cross-border transactions, advising clients on regulatory requirements, and ensuring seamless compliance under FEMA and RBI guidelines.

He has successfully represented clients before the RBI, handling regulatory submissions and clarifications with precision and strategic insight. Mihir’s strong analytical approach, attention to detail, and deep understanding of global financial regulations enable him to deliver reliable and compliant solutions across a wide range of cross-border matters.

Passionate about continuous learning and the evolving financial landscape, Mihir aims to contribute meaningful perspectives and practical expertise to the fields of international finance and regulatory compliance.