Deal Talk
June 20, 2025
Zomato’s New ‘Desi’ Shareholding Recipe: Less Foreign Ice, More Domestic Spice!
Introduction
On April 18, 2025, the board of directors of
the listed company Eternal Limited (popularly referred
to as “Zomato”) approved,
subject to shareholder approval, a proposal to limit
the total foreign ownership in Zomato to up to
49.50% shareholding on a fully
diluted basis. This limit is intended to include
foreign ownership acquired: (i) on primary or secondary
markets, (ii) under the foreign direct investment,
foreign portfolio investment and indirect investment
routes, and (iii) investments by foreign owned and
controlled companies, or other persons resident
outside India (“Shareholding Cap”).1
The proposal for implementing this Shareholding
Cap was put for vote before the shareholders of
Zomato and was approved with 99.85% of votes in
favour of the Shareholding Cap on May 19, 2025.2
This entrenchment of a Shareholding Cap in a
sector which falls under ‘Automatic Route’
under Indian exchange control laws is a unique and
interesting example of a listed company imposing
a restriction on the transferability of its shares.
These self-entrenched restrictions are uncommon
in listed companies which operate in ‘Automatic
Route’ sectors, as they may have the impact
of dampening market liquidity of shares (which is
a key feature of publicly traded securities). So,
the question remains – what’s driving
this strategic move? Could there be a deeper legal
or regulatory rationale at play?
Dive into our latest Deal Talk to uncover the
story behind the introduction of this Shareholding
Cap in Zomato, and how it ties back to pivotal events
in India’s foreign direct investment trajectory
and the e-commerce market in India.
Why was this done? Is the implementation
of the Shareholding Cap permissible?
The reasons for implementing the Shareholding
Cap are two-fold, and we attempt to break it down
in the following manner below:
Maintaining
the classification of Zomato as an “IOCC”:
As on March 31, 2025, Zomato’s shareholding
comprises of approximately 55% domestic shareholding
on a fully diluted basis. Therefore, Zomato qualifies
as an IOCC under Indian exchange control laws.
While IOCC is a market-adapted terminology, the
usage of this term IOCC is to describe a company
which fulfils the requirements of two definitions
under the Foreign Exchange Management (Non-debt
Instruments) Rules, 2019 (“NDI Rules”):
(a)“company owned by resident Indian citizens”;
and (b) “company controlled by resident Indian
citizens”. According to Explanation (b) to
Rule 23 of the NDI Rules, a “company owned
by resident Indian citizens” refers to an
Indian company where the
ownership
is vested in resident Indian citizens and / or Indian
companies, which are ultimately owned and controlled
by resident Indian citizens. On the
other hand, Explanation (e) to Rule 23 of the NDI
Rules clarifies that a “company controlled
by resident Indian citizens” is an Indian
company whose
control
is vested in resident Indian citizens and / or Indian
companies which are ultimately owned and controlled
by resident Indian citizens.
Considering that “ownership of an Indian
company” as per Explanation (a) to Rule 23
of the NDI Rules means
beneficial
holding of more than fifty percent of the equity
instruments of such company by resident Indian citizens,
it can be stated that Zomato is a “company
owned by resident Indian citizens”. Further,
as per publicly available information, Zomato is
also controlled by Indian resident citizens. Therefore,
as per NDI Rules, Zomato qualifies both as an “company
owned by resident Indian citizens” and “company
controlled by resident Indian citizens” (i.e.
an IOCC).
Now to close the loop,
the Shareholding
Cap has been put into place to ensure that Zomato
continues to remain an IOCC under Indian laws, going
forward.
In a listed company, changing control as an action
can be done either through the board control or
shareholding control. If the Shareholding Cap is
breached, Zomato would cease to be an IOCC and would
become a “foreign owned and controlled company”
(“FOCC”) under the
NDI Rules (i.e. an Indian company whose ownership
or control is vested with non-residents).
However, this still does not answer the question:
why is it so important for Zomato to remain an IOCC?
Impact
of Zomato as an IOCC on the operations of its subsidiaries:
It is publicly known that on August 10, 2022,
Zomato acquired 91% shareholding in Blink Commerce
Private Limited (formerly known as Grofers India
Private Limited) (“Blinkit”),
by way of a share swap. Prior to this acquisition,
Zomato held 9% shareholding in Blinkit. Therefore,
as a result of this transaction, Blinkit became
a wholly owned subsidiary of Zomato.
Now
what is connection between the IOCC classification
of Zomato and the business of BlinkIt?
As long as Zomato continues to be an IOCC, the
investment by Zomato into BlinkIt will be considered
as domestic investment. However, the moment the
classification of Zomato changes from an IOCC to
an FOCC, the entire investment by Zomato into BlinkIt
would be considered as ‘downstream investment’3.
This would essentially mean that BlinkIt would become
an entity with ‘indirect foreign investment’.
But
what is the concern if BlinkIt becomes an entity
with “indirect foreign investment”?
Under the NDI Rules, “downstream investments”
are also subject to foreign investment sectoral
caps and conditionalities prescribed thereunder,
when read with the current Consolidated FDI Policy
effective from October 15, 2020 (“FDI
Policy”).
Blinkit currently operates as an online marketplace
serving as a platform for buying and selling of
products sold by third party sellers that own the
inventory of goods sold on its platform. It does
not have its own inventory from which goods and
services are sold on its platform (“Non-Inventory
Model”). Under the FDI Policy, foreign
investment in the “inventory-based model of
e-commerce” is altogether prohibited (“Inventory
Based Model”).4 Therefore,
Blinkit cannot change from a Non-Inventory Model
to an Inventory Based Model in the event Zomato
is classified as an FOCC, and looks like this is
exactly what the long term plan of Zomato for Blinkit
is – a shift from Non-Inventory Model to an
Inventory Based Model! If Blinkit continues with
the Non-Inventory Model, then there should not be
any risk with respect to the FOCC classification
of Zomato.
In its press releases, Zomato has noted that
the introduction of the Shareholding Cap is intended
to make the business more “resilient in
the long term”.5 Further,
transitioning into the Inventory Model will ensure
that Blinkit can introduce new and underserved categories
such as home décor, gourmet foods, toys,
pooja items and seasonal merchandise (which are
not being targeted currently by Indian third party
sellers and brands on their platform), by offering
direct working capital support to such brands and
owning the inventory themselves. Additionally, this
will also help in the enhancement of margins in
fragmented and unbranded categories (including established
FMCG).6
Further, as per public information, major competitors
of Blinkit (such as Amazon7, Swiggy8,
Flipkart9) are currently an FOCC, and
thus are hit by the aforementioned FDI prohibition
applicable to the Inventory Based Model. For instance,
Amazon / Swiggy / Flipkart can only conduct business
as per the Marketplace Model in India and cannot
sell products based on the Inventory Model. Therefore,
in sum, imposition of the Shareholding Cap by Zomato
will provide Blinkit a competitive advantage within
the industry as it would allow Blinkit to move to
an Inventory Based Model.
Evolution of FDI in e-commerce
FDI has not always been permitted in the e-commerce
space and has been marked by a variety of developments
in the Indian legal landscape through legislative
and policy efforts. A chronology of pivotal events
leading up to the current FDI Policy are as follows –
|
Date
|
Nature of Development
|
Impact on FDI
landscape
|
|
February 7, 2000
|
Enactment of Press Note 2 of 2000 (“PN2”)10:
The PN2’s enactment was important
because it allowed for 100% FDI in B2B e-commerce
for the first time, subject to the condition
that such companies would divest 26% of
their equity in favour of the Indian public
in five years, if these companies are listed
in other parts of the world.
However, FDI in B2C e-commerce (i.e.
direct retail to consumers online) remained
prohibited. This was done to protect the
businesses of small shop owners.
|
PN2 enabled platforms like IndiaMART,
which operated on a B2B model, to attract
foreign capital.
Nevertheless, it continued to restrict
B2C models such as those of Amazon and Flipkart
from operating in India, and thus foreign
investment in this sector remained lower.
|
|
August 28, 2012
|
Enactment of Press Note 5 of 2012 (“PN5”)11:
PN5 revised the FDI framework around
multi-brand retail trading, by allowing
investments of up to 51% under the government
route, subject to prescribed conditionalities
being met.
The conditions set out were as follows:
(i)
Fresh agricultural produce was to be unbranded.
(ii)
The foreign investor must invest a minimum
of USD 100 million.
(iii)
At least 50% of the total FDI is to be invested
in “backend infrastructure”
(i.e. capital expenditure) within 3 years
from the first tranche of FDI.
(iv)
At least 30% of the value of procurement
of manufactured / processed products
purchased is to be sourced from Indian “small
industries” which have a total investment
in plant & machinery not exceeding USD
1 million.
(v)
Retail sales outlets to only be set up in
cities with a population of more than 10
lakh people and a 10 kilometre area (as
per the census of 2011).
(vi)
The government of India is to have the first
right to procurement of agricultural products.
(vii)
Retail trading would not be permissible
for any companies engaged in multi-brand
retail trading.
|
While PN5 helped in creating certainty
about the government’s intent to permit
FDI in multi-brand retail trading, ambiguity
in relation to the conditionalities persisted.
Accordingly, not much FDI was witnessed
in multi-brand retail trading even after
enactment of PN5.
|
|
May 12, 2015
|
Enactment of the Consolidated FDI Policy
of 2015 (“2015 FDI Policy”)12
The 2015 FDI Policy clarified that FDI
in single-brand product retailing would
be permitted up to 100%, with government
approval being required for FDI above 49%.
This was subject to multiple conditionalities
that were also set out, and the key ones
included: (i) products being sold under
the same brand internationally, and (ii)
sourcing of 30% of the value of goods purchased
would require to be undertaken from MSMEs,
in case FDI was being invested beyond 51%.
Further, with respect to multi-brand
product retailing, FDI of up to 51% was
permitted under the government approval
route. The conditionalities for this investment
were similar in nature to the PN5, but modified
to the extent below:
(i)
Fresh agricultural produce to be unbranded.
(ii)
The foreign investor must invest a minimum
of USD 100 million.
(iii)
At least 50% of the total FDI is to be invested
in “backend infrastructure”
(i.e. capital expenditure) within 3 years
from the first tranche of FDI.
(iv)
At least 30% of the value of procurement
of manufactured / processed products
purchased is to be sourced from Indian “small
industries” which have a total investment
in plant & machinery not exceeding USD
2 million.
(v)
Retail sales outlets to only be set up in
cities with a population of more than 10
lakh people and a 10 kilometre area (as
per the census of 2011).
(vi)
The government of India is to have the first
right to procurement of agricultural products.
(vii)
Retail trading would not be permissible
for any companies engaged in multi-brand
retail trading.
|
The 2015 FDI Policy was critical in bringing
clarity on the legislative intent surrounding
FDI in e-commerce.
However, the definition of “e-commerce”
was not clarified and the restriction on
e-commerce being limited to B2B continued
to remain applicable. Thus, practically,
parties continued to face similar challenges
as before when evaluating foreign investments
in this sector in India.
|
|
March 29, 2016
|
Enactment of Press Note 3 of 2016 (“PN3
2016”)13:
The PN3 2016 enactment introduced guidelines
for FDI in e-commerce and permitted FDI
in B2C e-commerce in the following circumstances:
(i)
A manufacturer is permitted to sell its
products manufactured in India.
(ii)
A single-brand retail trading entity operating
through brick and mortar stores.
(iii)
An Indian manufacturer selling its own single-brand
products. The Indian manufacturer would
be the investee company, which is the owner
of the Indian brand and manufactures in
India, in terms of value, at least 70% of
its products in house, and sources, at most
30% from Indian manufacturers.
Further, along with the definition of
certain critical terms, it also specified
the conditionalities relating to FDI in
the e-commerce sector. The key conditions
were:
(i)
E-commerce marketplace may provide support
services to sellers in respect of warehousing,
logistics, order fulfillment, call centre,
payment collection and other services.
(ii)
An e-commerce entity was barred from permitting
more than 25% of the sales affected through
its marketplace from one vendor or their
group companies.
(iii)
E-commerce entities providing a marketplace
were mandated to ensure that they do not
directly or indirectly influence the sale
price of goods or services and maintain
a level playing field.
These points were subsequently codified
into the Consolidated FDI Policy of 2017,
released thereafter.
|
PN3 2016 was released in light of pending
litigations on issues relating to FDI in
e-commerce. For the first time, the PN3
2016 clarified definitions of key terms
such as “e-commerce” and “e-commerce
entity” and the “marketplace
model” and “inventory model”.
At the same time, it balanced the concerns
of brick and mortar retailers who felt threatened
by the potential impact of large-scale retailers
and e-commerce models on their businesses.
PN3 2016 was instrumental in clarifying
that “e-commerce” under India’s
FDI policy included services within its
ambit. Under the 2015 FDI Policy, while
PN3 2016 effectively provided much needed
comfort, through its definitions, to the
structure of Amazon and Flipkart (which
were based on the marketplace model overseas),
and hence prompted the way towards foreign
investments in this sector.
|
|
May 9, 2018
|
Acquisition of Flipkart by Walmart14:
Walmart, a foreign investor incorporated
in USA, acquired a 77% controlling stake
in Flipkart for USD 16 billion, valuing
Flipkart at around USD 20 billion.
|
As mentioned above, the enactment of
PN3 2016 and the FDI Policy of 2017 facilitated
this deal, and the acquisition signalled
strong interest from foreign investors into
this sector in India.
|
|
December 26, 2018
|
Enactment of Press Note 2 of 2018 (“PN2
2018”)15:
While PN2 2018 was largely mirrored around
PN3 2016 and the FDI Policy of 2017, certain
critical differences were incorporated,
as below:
(i)
PN2 2018 limited an entity having equity
participation by an e-commerce marketplace
entity or its group companies from selling
its products on the platform run by the
said marketplace entity. This was done to
ensure parity.
(ii)
Inventory of a vendor would be deemed to
be “controlled” by an e-commerce
marketplace entity if more than 25% of the
purchases of such vendor are from the marketplace
entity or its group companies.
(iii)
An entity having equity participation or
control by an e-commerce marketplace entity
or its group companies would not be permitted
to sell its products on the platform run
by such marketplace entity.
(iv)
E-commerce entities providing a marketplace
were mandated to ensure that they do not
directly or indirectly influence the sale
price of goods or services and maintain
a level playing field.
(v)
Services like logistics, warehousing, advertisement
/ marketing, payments, financing, etc. could
be provided by e-commerce marketplace entity
or other entities in which e-commerce marketplace
entity has direct / indirect equity participation
or common control, to vendors on the platform
at arm's length and on a fair, non-discriminatory
basis across vendors.
|
Amazon responded by restructuring Cloudtail
and Flipkart separated from its preferred
sellers. The issuance of Press Note 2 (2018)
intensified the regulatory scrutiny around
control over the sellers.
|
What if Zomato becomes an FOCC?
What other things will change for Zomato?
While the above highlights how Zomato being an
FOCC would have impacted the operations of its subsidiaries
(and particularly, Blinkit), there are certain other
considerations that Zomato will have to bear in
mind, in relation to itself, if it is an FOCC.
Since an FOCC is not owned or controlled by Indian
residents, the legislative and policy intent is
to treat an FOCC at par with a person resident outside
India under the NDI Rules and therefore, to treat ‘downstream
investment’ as foreign investment, so that
foreign investors do not circumvent Indian foreign
exchange laws through their downstream investments.
Accordingly, in case of a transfer of shares
of an Indian company by an FOCC to an Indian resident,
the FOCC will be treated as a non-resident and the
shares will have to be transferred at a maximum
of the fair market value (“FMV”)
of the shares at the time of such transfer (i.e.
the FMV shall be the “ceiling” price).
However, the converse shall apply in case of a transfer
of shares of an Indian company to an FOCC by a non-resident,
wherein the FOCC will be treated as an Indian resident
and the shares will have to be transferred at a
minimum of the FMV of the shares at the time of
such transfer (i.e. the FMV shall be the “floor”
price).
A similar treatment is applicable in the context
of primary investments as well, and a consolidated
version of the treatment of FOCCs, and corresponding
pricing and regulatory reporting requirements under
Indian laws is as below –
|
Scenario
|
Regulatory Classification
of FOCC
|
Pricing Guidelines,
if applicable
|
Reporting Requirement,
if applicable
|
|
SECONDARY
TRANSFERS
|
|
Transfer of shares of an Indian company
by an FOCC to an Indian resident
|
Non-resident
|
Yes, as per NDI Rules (FMV is the ceiling
price)
|
Form FC-TRS to be filed
|
|
Transfer of shares of an Indian company
by an Indian resident to an FOCC
|
Non-resident
|
Yes, as per NDI Rules (FMV is the floor
price)
|
Form FC-TRS to be filed
|
|
Transfer of shares of an Indian company
by an FOCC to another FOCC
|
-
|
-
|
While no reporting requirement is prescribed,
the Purchaser FOCC may have to file Form
DI (if insisted by the authorised dealer
bank)
|
|
PRIMARY INVESTMENTS
|
|
Investment by an FOCC into an Indian
company
|
Non-resident
|
Yes, as per NDI Rules
|
Form FC-GPR
|
|
Investment by an FOCC into a foreign
company
|
Resident
|
Yes, as per Indian overseas investment
regulations
|
Form ODI and Form APR
|
On the other hand, as an IOCC, Zomato will be
considered as an Indian resident under the NDI Rules
and FDI Policy and will not be governed by the above
table. Thus, Zomato’s decision to remain an
IOCC will also have an impact on the manner in which
it can conduct its own future primary and secondary
investments within the group.
Conclusion
Zomato’s proposal to implement the proposed
Shareholding Cap marks a significant shift in its
strategy, potentially for the purposes of aligning
itself more closely with India’s foreign investment
frameworks and its interests of domestic diversification
through its group companies.
For foreign institutional investors and foreign
portfolio investors, the imposition of the Shareholding
Cap may introduce practical limitations on their
future investment capacity in Zomato. While the
Shareholding Cap does not directly dilute the foreign
investors’ existing holdings, it could restrict
their future ability to increase their stake beyond
the prescribed threshold.
SEBI vide Circular Number IMD/FPIC/CIR/P/2018/61
(Monitoring of Foreign Investment Limits in Listed
Indian Companies)16 provided the mechanism
for depositories to track the foreign investment
in all listed companies and also mechanism to be
adopted if any sectoral limits or FDI prohibitions
are breached. As per the Circular, upon a breach
happening, the depositories shall inform the stock
exchanges, and the exchanges can halt all further
purchases by all foreign investors. Additionally,
upon a breach, the foreign investors also get a
period of 5 (five) trading days from the date of
settlement of trades to divest their excess shareholding
by selling shares to a domestic investor. This circular
as it states, only covers FDI prohibitions in the
listed company. Therefore, it will be interesting
to see if Zomato can engage with the depositories
to monitor the contractually agreed Shareholding
Cap.
As Zomato navigates the intricate balance between
opting for “domestic spice” over “foreign
ice”, it remains to be seen whether other
companies will adopt similar models to expand their
group’s business operations in India, given
that this move may well set a precedent for other
Indian startups and newly listed companies seeking
to preserve their domestic status under India’s
foreign investment laws (particularly those operating
in sensitive or highly regulated sectors where downstream
compliance and business model flexibility are critical).
Authors
-
Anurag Shah,
Parina Muchhala and
Nishchal Joshipura
You can direct your queries or comments to the relevant member.
1https://www.bseindia.com/xml-data/corpfiling/AttachLive/017212f2-d17d-4a56-b0a9-1aac41de7db4.pdf.
2https://www.livemint.com/market/stock-market-news/zomatos-foreign-ownership-cap-may-lead-to-msci-exit-says-jefferies-stock-falls-3-11747730622989.html.
3Downstream investment refers to indirect
foreign investment into Indian companies (i.e. investments
into Indian companies through India-incorporated
entities that are an FOCC under Rule 23 of the NDI
Rules).
4As per the Table set out in Schedule
I of the NDI Rules, “inventory-based model
of e-commerce” means an e-commerce activity
where inventory of goods and services is owned by
e-commerce entity and is sold to the consumers directly.
5https://www.bseindia.com/xml-data/corpfiling/AttachHis/00a81abd-41d4-478e-a4d1-c30df4dc6502.pdf.
6Meeting Notice (pg. 12).
7Amazon India is a wholly owned subsidiary
of Amazon Inc. (incorporated in USA).
8https://www.bseindia.com/corporates/shpforeignownership.aspx?scripcd=544285&qtrid=125.00&QtrName=March%202025.
9Over 75% of Flipkart is held by Walmart
(incorporated in USA). See, for example:
https://www.businesstoday.in/latest/corporate/story/flipkarts-valuation-drops-by-5-billion-in-2-years-heres-why-421828-2024-03-18.
10https://dpiit.gov.in/sites/default/files/pn23_0.pdf.
11https://dpiit.gov.in/sites/default/files/pn5_2012_2.pdf.
12https://dpiit.gov.in/sites/default/files/FDI_Circular_2015.pdf.
13https://dpiit.gov.in/sites/default/files/pn3_2016_0.pdf.
14https://www.livemint.com/Companies/qOBduC3OBVpKTv9CpCYayH/Walmart-completes-16billion-buyout-of-Flipkart.html.
15https://dpiit.gov.in/sites/default/files/pn2_2018.pdf.
16https://nsearchives.nseindia.com/content/equities/SEBI_circular_17052018.pdf.
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