FEMA Insights 102: Making Sense of “Control” in Cross-Border Investments
- Rajnish Pal
- Jul 17, 2025
- 2 min read
Updated: Dec 31, 2025
Why ownership percentages alone no longer tell the full regulatory story under FEMA
In cross-border transactions, few concepts create as much confusion and risk as “control.” Business teams often assume that control flows naturally from majority shareholding. Indian foreign exchange regulations, however, take a far more nuanced view.
Under India’s foreign exchange framework, control is not a mathematical exercise. It is a substance-based assessment that focuses on influence, decision-making power, and strategic rights—often irrespective of headline ownership numbers.
This distinction has significant consequences for foreign investment into India as well as overseas investments by Indian companies.
Control under FEMA: More than shareholding
From a regulatory standpoint, control is not limited to owning more than 50% of equity. Regulators assess how decisions are actually made within the company.
Control may arise through:
Rights to appoint or influence the board of directors
Veto or affirmative voting rights on key matters
Contractual provisions that enable strategic direction
Any arrangement that allows decisive influence over management or policy
In effect, FEMA applies a “substance over form” approach. Even minority investors may be treated as controlling shareholders if their rights go beyond investor protection and into operational influence.
Why this distinction matters
Whether an entity is classified as foreign-owned or foreign-controlled directly impacts:
Applicability of sectoral caps
Requirement of government approvals
Downstream investment treatment
Disclosure and reporting obligations
A structure that appears compliant on paper may attract regulatory scrutiny if control is inferred from shareholder agreements or governance arrangements.
The inbound vs outbound control paradox
One of the most misunderstood aspects of India’s regulatory regime is the asymmetry between inbound and outbound investments.
Inbound (FDI): Control is assessed based on actual influence—typically majority rights or decisive governance powers.
Outbound (ODI): A holding of 10% or more is presumed to confer control, even without board representation or operational involvement.
This presumption can materially affect deal timelines, compliance sequencing, and capital deployment—particularly in competitive overseas acquisitions.
Strategic implications for businesses
For founders, CFOs, and investment teams, this creates three immediate takeaways:
Minority stakes are not automatically “safe” from a control perspective
Governance rights must be calibrated as carefully as valuation
Cross-border deal structuring requires early regulatory analysis, not post-signing fixes
In fast-moving transactions, misunderstanding control thresholds can mean delayed remittances—or lost opportunities.
Continue reading the full analysis
👉 The complete article, including practical illustrations and regulatory nuances, is available on Substack: “Making Sense of ‘Control’ in Cross-Border Investments”
Read the full article on Substack → https://rajnishnotes.substack.com/p/making-sense-of-control-in-cross?r=77wna
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