India to tighten rules on firms with indirect foreign ownership: Report

India is planning to tighten foreign ownership rules, two sources said, in a move that may have significant implications for businesses ranging from e-commerce to pharmaceuticals.

The changes would redefine how India views foreign-owned companies, whether directly or indirectly, making them subject to foreign direct investment (FDI) regulations when it comes to share transfers or restructurings.

The discussions are close to being finalised, the sources, both government officials said. They declined to be identified as the discussion was not public.

The Finance Ministry and the Reserve Bank of India, which issues the final rules, did not respond to requests for comment.

India is reviewing its foreign investment laws to simplify them and plug any loopholes.

New Delhi plans to create a new category of "foreign-owned and controlled entities" (FOCE), which will also include Indian firms with "indirect foreign investment", the first source said.

"What cannot be done directly should not be allowed indirectly either. That will now be clearly reflected in the rules," the source said.

"Even a domestic restructuring or internal transfer could trigger FDI obligations for foreign-owned firms if the rule change is implemented," the source said.

An FOCE will be defined as an Indian company or investment fund that is controlled by persons resident outside India. As well as covering indirect ownership, it will also make directly owned foreign firms subject to FDI rules when it comes to changes in structure or ownership.

In particular, any transfer of the indirect shareholding will need to be reported and will have to comply with sectoral foreign investment caps.

These transactions will also be subject to rules stating they be made at fair market value.

The proposed revision in the rules aims to ensure foreign investors cannot bypass the intent of India's FDI policy, sources said.

The central bank is in agreement on the matter, the second official said.

Since 2020, India has required prior government approval for investments from nations sharing its land borders, including China, after clashes between the two neighbours in the remote Himalayan border.

The new FOCE definition will make it harder for Chinese or other foreign investors to use indirect structures such as offshore investment funds or layered Indian entities to enter regulated sectors through the back door, the second source said.