India

INTRODUCTION Special Purpose Vehicles ("SPVs") as organized in India are distinct legal entities, typically structured as private limited companies under the Companies Act, 2013 ("Companies Act"), though they are occasionally formed as trusts or limited liability partnerships. SPVs are primarily used to isolate financial and operational risks for the sponsors or stakeholders participating in the vehicle. These kinds of structures typically serve as pivotal mechanism in infrastructure development, public-private partnerships (“PPPs") and asset securitization. In sectors such as highways, metro rails, and smart cities, government bodies often establish SPVs to pool resources from public and private stakeholders while ring-fencing the broader assets of the participants. In the Indian corporate landscape, businesses typically set up SPVs to execute specific projects. Participating entities, whether investors, governments, or consortium partners, enter into joint venture or shareholders' agreements that define their roles, contributions, and profit-sharing terms. This structure limits the liability of the SPV to its own assets, thereby ensuring that the parent entities and their assets are not subject to severe exposure. The SPV's compliance obligations are usually ring-fenced, and their inherent structure allows for operational independence from the parent entities. The Foreign Exchange Regulatory Framework Foreign investment into India is primarily governed by the Foreign Exchange Management Act, 1999 ("FEMA"), read with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules") and the consolidated Foreign Direct Investment Policy issued by the Department for Promotion of Industry and Internal Trade ("DPIIT"). Foreign direct investment ("FDI") is permitted either under the automatic route or with prior government approval, depending on the sector. While key sectors like manufacturing and technology enjoy liberalized norms, sensitive areas such as defense and media, require scrutiny and prior approval from the Government of India. Downstream Investments and Indirect Foreign Investments As corporate structures grow more complex, the intersection of Special Purpose Vehicles and foreign investment regulations become significant legal issue. Rule 23 of the NDI Rules governs the regulatory framework for downstream investments in India. As per Rule 23(7)(g) read with the Explanation after sub-rule (7) of Rule 23 of the NDI Rules, "downstream investment" means the investment made by an Indian entity which has total foreign investment in it, or an Investment Vehicle, in the capital instruments or the capital, as the case may be, of another Indian entity. Further, Explanation (i) to Rule 23 of the NDI Rules defines "indirect foreign investment" as a downstream investment received by an Indian entity from another Indian entity which has received foreign investment which is neither owned nor controlled by resident Indian citizens, and is rather owned or controlled by persons resident outside India. Similar conditions apply to downstream investments by investment vehicles whose sponsors or managers are foreign-owned or controlled. Interplay of Downstream Investment and Control Test Rule 23 of the NDI Rules introduces the Foreign Owned or Controlled Companies (“FOCCs”) test, to determine whether an Indian company is owned and controlled by any person residing outside India. As per the NDI Rules, an Indian company qualifies as an FOCC when more than 50% of its equity instruments are beneficially held by persons resident outside India, or where such persons resident outside India can exercise control over its management or policy decisions. Under the NDI Rules, the FOCC test operates through two distinct limbs: Corporate/LLP: If an Indian company or Limited Liability Partnership (“LLP”) has received FDI, then, any investment made by such Indian company or LLP will be treated as an indirect foreign investment irrespective of the fact that such Indian company or LLP is not owned and controlled by resident Indians or if it is owned and controlled by non-residents; Pooled investment vehicle route: In the case of investment vehicles such as Alternative Investment Funds, Real Estate Investment Trusts, and Infrastructure Investment Trusts, where the sponsor, manager, or investment manager of such investment vehicle is not owned and controlled by resident Indian, or is owned and controlled by persons resident outside India, any downstream investment made by such investment vehicle into an Indian company will be treated as indirect foreign investment.   The distinction between entities that are "owned" and "controlled" by persons resident in India versus those outside India is important to note. As mentioned above, ownership means the beneficial holding of more than fifty percent of the equity instruments in a company. Control, as defined in Rule 2(d) of the NDI Rules (which incorporates the definition in Section 2(27) of the Companies Act, 2013), refers to the right to appoint a majority of the directors or to control the management or policy decisions of the company. Control can be exercised by virtue of shareholding rights, shareholding agreements, or voting agreements. Notably, the Supreme Court of India, in the case of ArcelorMittal India Private Limited v. Satish Kumar Gupta & Ors (2018), though decided in the context of Section 29A of the Insolvency and Bankruptcy Code, 2016, laid out a test for "control" that has been treated as the authoritative law in the context of FEMA. This test contains both de jure control (the right to appoint a majority of directors) and de facto control (the right to control management or policy decisions). Indian companies that trigger these ownership or control thresholds by non-residents are classified as FOCCs. Legal Conditions for Downstream Investments Indian entities that have received indirect foreign investment are required under Rule 23(1) of the NDI Rules to comply with the same entry routes, sectoral caps, pricing guidelines, and other conditions, as applicable to direct foreign investment. This is an integral part of the FEMA philosophy, which states that "what cannot be done directly cannot be done indirectly". Accordingly, whenever an Indian entity that has received foreign investment acquires equity instruments of another Indian company, the transaction is a downstream investment. Where the investor entity qualifies as an FOCC, that downstream investment gives rise to indirect foreign investment in the investee company. Downstream investments that are classified as indirect foreign investment must also satisfy specific operational conditions under the NDI Rules. First, as required under Rule 23(2) of the NDI Rules, the downstream investment must be approved by the Board of Directors of the investing entity; and where a Shareholders' Agreement is in place, such investment must be in accordance with that agreement. Second, when an Indian entity that has received foreign investment makes a downstream investment, it must ensure that the funds used are brought in from abroad or sourced from internal accruals (i.e., profits transferred to reserves and retained earnings after payment of taxes). It is strictly prohibited from using funds borrowed in the domestic market. Additionally, under recent RBI clarifications, such investments may also be structured via equity instrument swaps. Furthermore, corporate structuring via SPVs is subject to statutory layering restrictions. Indian companies, including foreign-owned subsidiaries, are generally restricted from having more than two layers of subsidiaries under Section 2(87) read with Section 186 of the Companies Act and the Companies (Restriction on Number of Layers) Rules, 2017, subject to specified exemptions. This framework has been introduced to prevent complex multi-layered structures designed to facilitate tax evasion, round-tripping, or the flouting of sectoral caps under the FDI policy. Under the current calculation methodology, where an investing Indian company is owned or controlled by persons resident outside India, the entire downstream investment it makes is treated as indirect foreign investment in the investee entity, subject to limited exceptions. For example, if an FOCC acquires 50% of the equity of a downstream company, the entire 50% is treated as indirect foreign investment for the purposes of sectoral-cap monitoring and reporting. Conversely, where the investing company has no foreign ownership or control, its downstream investment does not give rise to indirect foreign investment. Reporting of Downstream Investments through SPVs The Reserve Bank of India ("RBI") is responsible for ensuring compliance with reporting timelines, and delays often trigger compounding proceedings. As per the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 ("Reporting Regulations"), an FOCC making a downstream investment must fulfill certain reporting requirements based on the nature of the transaction. In the case of a primary investment, the FOCC must satisfy two obligations. First, it must notify the Secretariat for Industrial Assistance, DPIIT, within 30 days of making such downstream investment, even if the equity instruments have not yet been allotted. Second, the FOCC must file Form DI with the RBI within 30 days from the date of allotment of such equity instruments. In the case of a secondary investment, the requirements depend on the residency of the seller. If the FOCC purchases shares from a non-resident, it must file Form FC-TRS within 60 days from the date of transfer of equity instruments or receipt of consideration, whichever is earlier. Additionally, it must file Form DI within 30 days from the date of acquisition of the equity instruments and intimate the DPIIT within 30 days from the date of the investment. If the FOCC purchases shares from a resident, it is required to file Form DI within 30 days from the date of acquisition and make the necessary intimation to the DPIIT within the same 30-day window. Practitioners frequently rely on a compliance matrix derived from Rule 23(5) of the NDI Rules, the RBI Master Direction on Foreign Investment, and prevailing Authorized Dealer ("AD") bank practice. This practice applies the "assumed residency principle," wherein FOCCs are treated as non-residents for pricing purposes but as residents for reporting purposes. The requirements in different scenarios involving an FOCC are outlined below: Transfer from FOCC to Indian resident: Where an FOCC transfers its equity instruments to an Indian resident, the pricing guidelines under the NDI Rules will apply. However, no reporting is mandated under the Reporting Regulations; Transfer from Indian resident to FOCC: Where an Indian resident transfers its equity instruments to an FOCC, the pricing guidelines under the NDI Rules along with the filing of Form DI and intimation to the DPIIT is required; Transfer from FOCC to a person resident outside India: Where an FOCC transfers its equity instruments to a person resident outside India, the pricing guidelines under the NDI Rules will not apply. However, the filing of Form- TRS will be required under the Reporting Regulations; Transfer from person resident outside India to a FOCC: Where a person resident outside India transfers its equity instruments to a FOCC, then pricing guidelines under the NDI Rules will apply along with the intimation to the DPIIT and filing of Form FC-TRS and Form DI; Transfer from a FOCC to a FOCC: Where a FOCC transfers its equity instruments to another FOCC, then, by application of the principle of “assumed residency”, both the FOCCs will be treated as persons resident outside India and accordingly, the pricing guidelines under the NDI Rules may apply. Further, the NDI Rules and the Reporting Regulations do not expressly mandate reporting for transfers between two FOCCs. However, AD banks often take a conservative approach and may require the filing of Form DI by acquiring FOCC as a matter of prudential practice.   Use of SPVs to Centralize FEMA Compliance The deployment of SPVs allows foreign investors to centralize and front-load their cross-border funding mechanics at the point when capital is initially injected into the Indian entity. While subsequent downstream investments into other Indian companies continue to be governed by Rule 23 of the NDI Rules, the SPV structure provides operational flexibility. Once the SPV is capitalized, each subsequent downstream investment no longer requires a separate cross-border remittance; the Foreign Owned or Controlled Company (FOCC) can deploy funds already brought into India or utilize its internal accruals (i.e., post-tax profits transferred to reserves) to execute transactions domestically. However, it is a critical misconception that establishing an Indian SPV eliminates FEMA pricing and compliance friction at the downstream level. Under the assumed residency principle embedded in Rule 23(1) of the NDI Rules, an FOCC is treated on par with a non-resident. Therefore, if an FOCC invests in an Indian startup, that transaction must strictly adhere to FEMA pricing guidelines, requiring the investee company to obtain a valuation report using an internationally accepted pricing methodology (typically certified by a Merchant Banker or Chartered Accountant), just as if a foreign investor were investing directly[1]. The compliance burden rests firmly on the SPV; the first-level FOCC is statutorily responsible for ensuring that its downstream investments comply with entry routes, sectoral caps, and pricing norms, and must obtain an annual statutory auditor certificate confirming this compliance. Where SPVs truly streamline compliance is in the pooling of investments and the management of sectoral FDI limits. For sectors subject to FDI caps, downstream investments made by an FOCC are treated in their entirety as indirect foreign investment. Rule 23 dictates that this indirect foreign investment must not breach the applicable sectoral ceiling of the target company. Using this method, foreign funds and strategic investors can monitor their aggregate portfolio holdings against these prescribed thresholds, creating greater value creation while avoiding flouting of FDI Norms. Conclusion The utility of SPVs in India extends well beyond their traditional role in ring-fencing financial risk. For foreign investors, structuring transactions through an Indian SPV offers a practical pathway to navigate the regulatory maze of FEMA. Rather than engaging in fragmented, deal-by-deal reporting and pricing certifications across multiple downstream entities, investors can centralize compliance obligations at the initial point of entry. However, this structural efficiency is not a loophole. The NDI Rules are certain: what cannot be done directly cannot be done indirectly. Downstream investments remain strictly tethered to FEMA's sectoral caps and pricing guidelines. Therefore, while an SPV can insulate a foreign investor from repetitive cross-border administrative burdens, it demands rigorous governance at the board level to avoid triggering compounding proceedings. When structured correctly, an SPV balances commercial flexibility with strict regulatory adherence and provides a stable and compliant foundation for deploying foreign capital in India. [1] Under Section 247 of the Companies Act, 2013, the valuation of shares must be conducted by a valuer registered with the Insolvency and Bankruptcy Board of India (IBBI). Similarly, Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 mandates that for unlisted Indian companies, the valuation must be determined via an internationally accepted pricing methodology for valuation on an arm's length basis, duly certified by a Chartered Accountant, a practicing Cost Accountant, or a Merchant Banker registered with the Securities and Exchange Board of India (SEBI). Authored by Mr. Jyoti K Chowdhury, Senior Partner and Mr. Shubham Tripathi, Principal Associate

On May 2, 2026, the Indian government notified two (2) amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the “NDI Rules”) to align the NDI Rules with the below listed changes introduced in India’s Foreign Direct Investment (“FDI”) policy through Press Notes issued earlier this year:   Press Note 1 of 2026, which liberalized the foreign direct investment (“FDI”) norms applicable to the insurance sector (“PN1”); and   Press Note 2 of 2026 (“PN2”), which defined beneficial ownership for the first time under India’s FDI norms and carved out investments coming in from countries sharing a land border with India (“LBCs”) into investments that will require prior government approval and those that will only be subject to a prior intimation requirement.   Subsequently, on May 4, 2026, the Indian government notified a new standard operating procedure to process FDI proposals (the “2026 SOP”), which replaced the previously applicable procedure issued in 2023 (the “2023 SOP”).   This update analyzes these recent changes to India’s FDI regime and discusses their practical impact on cross-border transactions involving India.   Liberalization of FDI norms in the insurance sector   As the insurance sector in India has matured over the years, the need for capital and technical expertise has also increased.  The Indian government has liberalized FDI norms in the sector from time-to-time in an effort to meet these needs with the FDI cap being enhanced to 49% in 2015 and 74% in 2021.   Removal of the cap in its entirety has been in the works for some time now.  As discussed in our update here and as clarified by the Indian government in parliament, many foreign players continue to hold stakes well below 74%, with control in the hands of their Indian partners.  As foreign investment in the sector was, historically, been tied to the joint venture model, this had become a major roadblock for fresh investment.  Therefore, the government was keen to remove the cap entirely in a bid to attract new entrants who could invest without having to partner with any domestic entity.   After prolonged consideration, the liberalization of the sector was enacted through the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025 (the “Insurance Amendment Act”), which, among other changes, increased the foreign investment limit prescribed under the Insurance Act, 1938 to 100%.  Subsequently, the Indian government issued the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025 (the “Insurance Amendment Rules”), which specified the conditions applicable to any foreign investment in the sector under the automatic route.  We have analyzed the key changes introduced by the Insurance Amendment Act and the Insurance Amendment Rules in our client update here.   By issuing PN1 and the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2026, the Indian government has now amended the FDI Policy and the NDI Rules to ensure that India’s FDI regime aligns with the changes introduced by the Insurance Amendment Act and the Insurance Amendment Rules.   Now that the liberalization of the insurance sector is fully implemented across all applicable laws, the belief is that there will be a significant rise in FDI in the insurance sector, especially as foreign investors will now be able to exercise full strategic and operational control on their companies.  Without the need of a joint venture partner, foreign investors will be able to operate independently and deploy capital as required.  However, the joker in the pack is the IRDAI, India’s insurance regulator.  Armed with an agenda of safeguarding the interests of Indian policyholders, the IRDAI imposes stringent solvency norms, restricts commission payments to intermediaries, and retains significant regulatory oversight.  Given this, it will have to be seen whether the FDI liberalization and other changes introduced by the Insurance Amendment Act to ease the conduct of business in the sector will provide sufficient impetus for deployment of additional foreign capital.  Insurance is a long term game, and the regulatory environment has to be conducive for the growth of the sector.   Norms governing investments from LBCs   At the beginning of the COVID-19 pandemic, in early 2020, the Indian government issued Press Note 3 of 2020 (“PN3”) under which mandatory government approval is required for all investments coming into India from entities or individuals in LBCs.  This move was primarily aimed at curbing opportunistic takeovers of Indian business during a fragile economic period.  However, as discussed in our client update here, there was a lack of clarity on various issues at the time, including the definition of beneficial ownership and the process and timelines for entities or individuals from LBCs to obtain the necessary government approvals.   As the post-pandemic economy boomed and FDI surged, the lack of clarity arising from the PN3 notification came to the fore.  Even a minimal, indirect exposure of an investor from an LBC triggered prior government approval, resulting in delays and increased transaction costs.  Tracing ultimate beneficial ownership became a mammoth fact-finding exercise, especially for investments involving listed companies and multiple holding companies, and pooled investment vehicles.  This resulted in passive and non-controlling investments being subjected to the same level of scrutiny as strategic investments.   Over time, these issues were somewhat ironed out through practical steps taken by industry participants (such as authorized dealer banks).  For instance, to address the lack of clarity on the definition of beneficial ownership, industry participants informally adopted the threshold of 10% for beneficial ownership in line with similar requirements under Indian company and anti-money laundering laws.  Further, in the context of global deals, especially when relating to FDI in sectors not otherwise requiring government approval (such as IT or manufacturing), reliance was placed on self-declarations and contractual representations.   The Indian government’s cabinet ministry finally approved certain changes to formally address these issues through legislation earlier this year.  These approvals have now been implemented through the introduction of PN2, the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2026 and the 2026 SOP.   As part of the changes, the Indian government has introduced a threshold-based system. Investments with beneficial ownership from LBCs up to 10% without any element of control will now be allowed under the automatic route.  However, such investments will need to be reported to the Department for Promotion of Industry and Internal Trade through a standalone reporting form prescribed under the 2026 SOP.  At the same time, a carve-out also prescribes that all investments from Pakistan will continue to require prior government approval.  By contrast, investments beyond the 10% threshold or involving any kind of control from citizens or entities of other LBCs will continue to require prior government approval.  Further, the definition of beneficial ownership has been aligned with the definition already adopted under the Prevention of Money Laundering Act, 2002, which considers both, direct and indirect holdings, and elements of control and influence.   The move away from blanket approval requirements to a more calibrated and threshold-based screening mechanism signals the government’s acknowledgment of the change in economic realities in the past five (5) years.  While protecting the economy against undervalued takeovers appeared to be need of the hour in 2020, rising valuations followed by a significant drop in FDI inflows into India in the past couple of years has necessitated the changes to provide more procedural and timing certainty.  The formal acknowledgment of a beneficial ownership threshold and allowing passive investments to be made without the need for regulatory approval has addressed the concerns of private equity and venture capital investors.  Further, alignment of the definition of beneficial ownership with existing laws will ensure consistency and certainty in investor understanding.  That said, from an ease of business standpoint, this change merely provides formal recognition to the practice and thresholds already adopted by the industry.  Separately, the scope of information required to be traced has been expanded significantly, and the requirement is to now go beyond the objective ownership threshold and also identify other elements of control.  While tracing such information may be important to prevent circumvention of the threshold, the change is unlikely to reduce deal friction or improve deal timelines.   Changes introduced by the 2026 SOP   In the immediate aftermath of the introduction of PN3, government approval applications for investments where beneficial ownership from LBCs was identified remained pending for several months.  In fact, in 2024, press reports had noted that almost 40% of the 500-odd approval applications filed since the introduction of PN3 remained pending while the Indian government had, at the time, only approved about 125 proposals and rejected 200 others.  In recent times, the inter-ministerial committee responsible for evaluating PN3 applications attempted to convene more frequently to try and expedite the approval process.  However, formal overhaul of the approval procedure remained pending, which continued to impact deal certainty and timelines.   The 2026 SOP implicitly acknowledges the need to evaluate approvals for investments from LBCs in a timebound manner.  For instance, the 2026 SOP expressly requires the Ministry of External Affairs (“MEA”) to provide their comments/ clearance in respect of the specific fact that an investment originates from an LBC within the same stipulated timelines as are applicable for submission of all other comments from the MEA on the proposal, i.e., within eight (8) weeks from submission of the application.  In addition, the provision permitting competent ministries to escalate delayed FDI proposals and other FDI proposals, including those relating to investments from LBCs, to an inter-ministerial committee for inputs and comments has also been deleted.  These changes suggest that while proposals involving investments from LBCs will continue to be scrutinized, they will need to be cleared through the same procedures and within the same timelines as are applicable to other FDI proposals.   The 2026 SOP also introduces detailed guidelines on reporting of LBC investments falling below the approval threshold of 10%.  To comply with the reporting requirements introduced under the threshold-based system of PN2, parties will now need to provide detailed information even where approval is not specifically required but some beneficial ownership or control can be traced back to LBCs, including, details of shareholding, beneficial ownership and control rights at the investor level (including, director appointment, veto and other voting rights vested or proposed to be vested with any citizen or entity from an LBC).   Separately, the 2026 SOP now provides for expedited evaluation of investments from LBCs in certain key sectors, including, rare earth minerals processing and manufacturing of advanced battery components, electronic capital goods, other capital goods, electronic component manufacturing and rare earth permanent magnets.  Proposals relating to these sectors will be evaluated by the relevant ministry within sixty (60) days.  However, such expedited evaluation will only be available in transactions where the investment from the LBC investor is capped at 49%, and majority shareholding and control of the Indian investee entity remains, directly and indirectly, with resident Indian citizens.   Lastly, the 2026 SOP introduces several other procedural changes to streamline the approval process for FDI proposals into India, including: (i) introducing specific timelines for the government to conduct its initial scrutiny, raise requests for clarifications and close applications due to insufficient information/ clarifications; (ii) permitting applicants to apply for correction of errors other than grammatical or typographical errors in the FDI approval so long as such errors are apparent from the record; and (iii) deleting the requirement to disclose details of past proposals that were closed, withdrawn or rejected in subsequent applications.   The introduction of explicit processes and timelines for proposals involving LBC investments within the 2026 SOP is a welcome change.  However, the overall approval timelines for all FDI proposals remains at twelve (12) weeks, which is significantly higher than other jurisdictions in the region competing for global FDI such as Vietnam, Malaysia and Thailand, who, typically, resolve their investment review processes within fifteen (15) to sixty (60) days.  Moreover, the introduction of the new reporting requirements for LBC investments falling below the prescribed threshold may prove to be counterproductive from an ease of business standpoint given the nature and extent of details sought as part of the reporting requirements.  Ultimately, it seems that entities and individuals investing from LBCs will have to assess India’s market size and whether there is a compelling investment opportunity for them in India.

We are pleased to announce that Phoenix Legal acted as the legal counsel for existing investor Nexus Venture Partners in relation to its investment in the 56 million$ Series D Funding round of Maestroedge Solutions Private Limited (Snabbit), a quick service app providing on-demand home services, co-led by Susquehanna Venture Capital (SIG) and Mirae Asset Venture Investments. With this fresh capital infusion, Snabbit plans to expand into new cities, deepen the penetration in existing markets, and strengthen its technology and operational infrastructure as it scales up to meet rising demand in the segment. The Phoenix Legal team was led by Ashima Dewan (Partner) along with Shrishti Sharma (Senior Associate) with strategic inputs from Sumit Sinha (Partner).

We are pleased to announce that Phoenix Legal acted for Alkemi Growth Capital in relation to its investment in a growth funding round of Medvital Ventures Private Limited (Medvital), a company engaged in the business of manufacturing, trading and distribution of smart medical devices. The funding round was led by Alkemi Growth Capital and also saw participation from Shubhan Ventures and certain existing investors. The funding from Alkemi Growth Capital and other investors will enable Medvital to scale its operations and further expedite product development.   The Phoenix Legal team for this transaction was led by Sumit Sinha (Partner), with support from Sukanya Bhattacharya (Associate Partner), Sachit Singla (Senior Associate), and Anupriya Singh (Associate).