Overview of FDI in India – FDI routes, pricing norms, FDI over the years, and recent changes
The Foreign Exchange Management Act (FEMA) was introduced in 1999 to develop and maintain India’s foreign exchange market. Over time, India has progressively opened foreign investment opportunities across multiple sectors. Investment in India is permitted through three primary routes: Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), and Foreign Venture Capital Investment (FVCI). FDI represents one of the most significant sources of financial resources for the country’s economic development. Since India opened its doors to foreign investors in 1991, FDI flows have been steadily increasing and have become a major contributor to foreign exchange reserves. Besides serving as a source of long-term, sustainable capital in the economy, FDI helps develop strategic sectors, enhances collaborations with global players, and generates employment, among other advantages. Therefore, the government of India aims to attract and promote FDI to supplement domestic capital, technology, and skills for accelerated development and economic growth.
Foreign Direct Investment Legal Framework in India
At present, Foreign Direct Investment (FDI) in India is regulated by the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, and press releases/circulars/notifications issued in connection therewith. The Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, regularly publishes the FDI Policy, which consolidates all the above rules/regulations, etc., after considering the regulatory changes implemented in the interim period.
What is Foreign Direct Investment?
FDI fundamentally refers to investment made by a resident outside India in an unlisted Indian company through capital instruments or in more than or equal to 10% of the post-issue paid-up equity capital on a fully diluted basis of a company listed in India. A resident outside India is also allowed to invest in the capital of an LLP and body corporate.
Entry Routes for Investment
An individual outside India can invest in equity shares, compulsorily convertible debentures, and compulsorily convertible preference shares of an Indian company. Such investment can be made through the government route or the approval route. Under the government route, prior approval of the government of India is mandatory. Proposals for foreign investment under government routes are evaluated by the respective administrative ministries/departments. Under the automatic route, no approval is needed from the government of India.
Prohibited Sectors
While most sectors welcome foreign investment, the government has restricted FDI in certain sectors to protect the interests of stakeholders at large. The list of industries in which non-residents are not permitted to invest is as under:
- Atomic energy
- Real estate business or construction of farmhouses
- Chit funds
- Lottery business, including government/private lottery, online lotteries, etc.
- Nidhi company
- Gambling and betting, including casinos, etc.
- Railway operations (other than setup of railway infrastructure)
- Trading in Transferable Development Rights (TDR)
- Manufacturing of cheroots, cigars, cigarillos and cigarettes, tobacco or related substitutes
Foreign technology collaboration in any form, including licensing for franchises, trademarks, brand names, and management contracts, is prohibited in the context of lottery, gambling, and betting activities.
Sectoral Caps
In sectors beyond those mentioned above, FDI is allowed to the extent of the sector-wise limits provided and subject to the fulfilment of conditions as specified under the FDI Policy. Where no sector-specific limit is mentioned, 100% FDI under the automatic route is permissible.
Pricing Norms
The issue or transfer of shares under the FDI Policy to a resident outside India must be at a price equal to or higher than the fair value as determined under the prescribed methodologies. The prescribed methodologies are as follows:
Reporting Requirements
An entity that receives FDI must undertake necessary compliance based on the nature of the transaction. Additionally, the entity must file the annual return on Foreign Liabilities and Assets (FLA) with the RBI.
Interesting Facts about Foreign Direct Investment in India
1. FDI Equity Inflow Over 23 Years
During 2022-23, driven by a rise in Foreign Direct Investment in unlisted companies, the market value of FDI in India grew by 6.9% in rupee terms.
| Year | FDI (USD billion) |
| 2025 | 81.04 |
| 2024 | 71.28 |
| 2023 | 71.36 |
| 2022 | 81.97 |
| 2021 | 84.84 |
Source: IBEF Foreign Direct Investment Report.
2. Share of Foreign Direct Investment (FDI) in India
India has attracted the largest FDI from the USA (17.2%), followed by Mauritius (14.9%), the United Kingdom (14.2%), Singapore (13.2%) and the Netherlands (10%).
3. The service sector attracted the largest share of FDI equity, both at market value and face value.
4. Information, communication, financial and insurance activities emerged as the primary FDI recipients in service sectors.
5. Foreign subsidiaries in India have maintained strong external trade linkages as exports and imports represented more than one-third of their sales and purchases.
Recent Significant Changes
1. In line with the vision and strategy of the government of India as per the Indian Space Policy 2023, the Union Cabinet has enabled the FDI in the space sector by prescribing liberalized FDI thresholds for various sub-sectors/activities, and 100% FDI is now permissible under:
Up to 74% of FDI is under automatic routes: Satellites, manufacturing and operation, satellite data products, ground segments, and user segments. Beyond 74%, these activities fall under the government route.
Up to 49% of FDI is through the automatic route: Launch vehicles and associated systems or subsystems and creating spaceports for launching and receiving spacecraft. Beyond 49%, these activities would fall under the government route.
Up to 100% is under automatic route: Manufacturing components and systems/subsystems for satellites, ground segments, and user segments.
2. To prevent opportunistic takeovers/acquisitions of Indian companies due to the COVID-19 pandemic, the government would require prior approval of any investment by an entity of a country sharing its land border with India or where the beneficial owner of any investment is from a country sharing its land border with India.
3. Life Insurance Corporation of India, the country’s largest public-sector insurance company, was permitted FDI up to 20 percent under the automatic route.
Conclusion
Given the above, the FDI landscape in India is rapidly expanding and evolving. With more sectors being liberalized, FDI in India is expected to increase significantly. However, given the complexities surrounding the FDI regime in India, it is crucial for both the foreign investor and the Indian Investee entity to analyze the permissibility of the investment and ensure that the attached terms and conditions, including pricing norms and compliance requirements, are duly adhered to.
Why Choose India Company Incorporation?
We at India Company Incorporation have a team of experienced Chartered Accountants who can advise you on the permissibility of foreign investment, assist you with obtaining requisite approvals, and undertake the necessary compliance requirements to ensure that any foreign investment is by the Indian FDI regulations.
