1. Proportionate calculation of beneficial ownership

“Beneficial ownership” is to be determined in accordance with the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, which set out specific criteria for different types of Investor entities such as companies, partnerships, trusts, associations of persons, etc. The FAQs clarify that the percentage of beneficial ownership is to be calculated by multiplying the percentage holdings of LBC entities at each step of the ownership chain from the ultimate parent down to the Investor. To illustrate, if an LBC entity holds 40% of an intermediate non-LBC entity, which in turn holds 40% of the non-LBC Investor, the effective beneficial ownership of the LBC entity in the non-LBC Investor is 40% × 40% = 16%.

The FAQs provide various illustrations on the assessment of beneficial ownership attributable to LBC citizens and entities in the following scenarios:

(i) Indirect ownership through successive entities: An LBC entity/citizen’s indirect beneficial ownership is calculated by proportionately multiplying the holdings along the ownership chain down to the immediate non-LBC Investor entity;

(ii) Aggregation of ownership through multiple routes: An LBC entity/citizen’s interests held through different entities are aggregated to determine their total beneficial ownership in the immediate non-LBC Investor entity;

(iii) Separate holdings of multiple LBC entities/citizens: The beneficial ownership of multiple LBC entities/citizens (whether acting together or not) at the Investor level must be considered in aggregate; 

(iv) Control through contractual arrangements: Contractual rights must be examined separately for the purpose of determination of beneficial ownership. The shareholding percentage is not relevant if control is exercised by the LBC entity / citizen; and 

(v) Downstream investments: If a foreign-owned or controlled Indian entity (“FOCC”) seeks to undertake downstream investment, the beneficial ownership test must be applied at the level of the foreign Investor that owns/controls the FOCC. The government approval requirement would be applicable to such downstream investment if the FOCC is owned/controlled by a non-LBC Investor whose beneficial owner is an LBC entity/citizen. 

2.Mere residence in an LBC

Press Note No. 3 (2020 series) provided that an investment would require government approval where the beneficial owner of the investment was “situated in or is a citizen of” an LBC. In the context of beneficial owners who are individuals/natural persons, Press Note No. 2 (2026 series) provides that government approval would be required if such beneficial owner is a “citizen of” an LBC. The FAQs expressly clarify this distinction: investments by a non-resident Indian or a citizen of a non-LBC country who is merely residing in an LBC do not require Government approval on this ground alone.

3.Acknowledgment of Reporting

Where an LBC citizen or entity has any direct or indirect ownership in an Investor but the proposed investment does not cross the applicable beneficial ownership / control test, details of the proposed investment are required to be reported to the Department for Promotion of Industry and Internal Trade. The filing must be made through the National Single Window System (“NSWS”) portal by the Indian investee entity or the resident Indian transferor / transferee, as the case may be, before the inward remittance of foreign capital. The FAQs clarify that an acknowledgement is generated upon submission of the requisite information on the NSWS portal, following which the Investor may proceed with the proposed investment without further approval or communication.

Authors: Feroz Dubash, Dushyant Bagga – Partners, Shamik Gupta – Senior Associate, Pranav Kandada, Deepansh Gupta – Associates

Disclaimer: This alert only highlights key issues and is not intended to be comprehensive. The contents of this publication do not constitute any opinion or determination on, or certification in respect of, the application of Indian law by Talwar Thakore & Associates (“TT&A”). No part of this publication should be considered an advertisement or solicitation of TT&A’s professional services.