India: What Investors Need to Know About Foreign Direct Investment

India: What Investors Need to Know About Foreign Direct Investment

Since 1990s, India initiated economic and financial reforms aimed to integrate the economy at the global level. Foreign Direct Investment (FDI) is as an important driver of economic growth and development for the country. Therefore, the Government has been making serious efforts to attract and facilitate FDI. As a result, India has changed from a very restrictive regime for FDI to a more liberal one.

Foreign investment in India is regulated by the Foreign Exchange Management Act, 1999 (FEMA) and its amendments/changes, order/allied rules, Press Notes, etc. The Department of Industrial Policy & Promotion (DIPP) makes policy pronouncements on FDI throughout Press Notes / Press Releases which are notified by the Reserve Bank of India (RBI). All Press Notes/ Press Releases are available at the website of DIPP. The Foreign Investment Promotion Board (FIPB) is also responsible for regulating foreign investment in accordance with the industrial policy.

Indian legislation establishes two kinds of foreign investment: (i) Foreign Direct Investment (FDI) and (ii) Foreign Portfolio Investment (FPI). A foreign investor may invest in India as a FII (Foreign Institutional Investor) or as a Foreign Venture Capital Investor (FVCI). Last but not least, Indian legal framework provides two different routes for FDI, as follows: Automatic Route and Government Route. Under the Automatic Route no prior approval is required. On the contrary, prior approval is needed from FIPB for the Government Route. Sectors where approval from the FIPB is required include defense related matters, air transport services, ground handling services, asset reconstruction companies, banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecommunications and satellites. Besides that, FIPB’s approval is necessary for all kind of FDI in these sectors where: an Indian company is being established with foreign investment and is owned by a nonresident entity; or, an Indian company is being established with foreign investment and is controlled by a nonresident entity; or, the control of an existing Indian company will be/is being transferred/passed on to a non-resident entity; or, the ownership of an existing Indian company will be/is being transferred/passed on to a non-resident.

India prohibits FDI in the following activities: Retail Trading (except single brand product retailing); Lottery Business including Government /private lottery, online lotteries, etc.; Gambling and Betting including casinos etc.; Business of chit fund; Nidhi company; Trading in Transferable Development Rights (TDRs); Real Estate Business or Construction of Farm Houses; Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes; Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

FDI in a wide range of sectors does not require any prior approval (Automatic Route), provided the level of foreign investment does not exceed specified percentages. If FDI proposed investment exceeds the maximum limit amount under the Automatic Route, the approval of the FIPB is required. For instance, approval of the FIPB is required for investments over 49 per cent in telecommunications or investments over 26 per cent in insurance sector or foreign investment in information technology and manufacturing over 100 per cent.

Figure 1: Some sectors and percentage Cap




Airports• Existing 74%
Alcohol distillation and brewing 100%
Banking (Private Sector) 74%
Coal and Lignite mining (specified) 100%
Coffee, Rubber processing and warehousing 100%
Floriculture, Horticulture and Animal Husbandry 100%
Specified Hazardous chemicals 100%
Industrial Explosives Manufacturing 100%
Insurance 26%
Mining (Precious metals, Diamonds and stones) 100%
Non banking finance companies ( conditional) 100%
Petroleum and Natural gas• Refining (private companies) 100%


Foreign capital is freely repatriated, except for FDI under non-repatriate schemes or FDI subject to certain policies related to the sector or activity. Remittance of profits abroad is possible, after accomplishment of certain formalities. It is important to note that profits retained for more than one year are considered re-invested and their remittance further requires special approval.

The legal framework for FDI in India is under development. As FDI is an important driver of economic growth, the Indian Government has been making important regulatory changes to attract FDI. The Indian process of economic liberalization, including privatization of state-owned companies and dismantling the licence raj policy among others, has allowed India to progressively change from a very restrictive regime for FDI – licence raj – to a more liberal one. Nevertheless, some FDI issues still remain to be addressed by the country in order to achieve more sustainable economic growth based on foreign investments.