Foreign direct investment (hereinafter referred to “FDI”) in a nutshell, means the investment which a participant of a domestic country receives from investor of a foreign country. FDI plays a pivotal role in shaping a nation's economic landscape. Since the liberalization of India’s economy in 1991, FDI has been a key driver of the country's development. India’s FDI policies are governed by the Foreign Exchange Management Act (FEMA) of 1999, which has constantly evolved to maintain a balance between attracting investment and protecting national interests. As India aspires to become a global economic powerhouse, FDI continues to be essential driver for its development. Through this article the we have tried to give a gist of FDI in India.
Key law governing FDI
Foreign Investment in India is governed by the Foreign Direct Investment (FDI) policy announced by the Government of India through the Master Direction on Foreign Investment in India read with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), as may be amended from time to time by way of notifications.
Entry Route/ Eligible Sectors for Investment in India
The regulation provides clear guidelines to attract Foreign Direct Investment (FDI) into India, focusing on sectors that drive sustainable economic growth and innovation. While certain sectors are excluded to ensure alignment with national priorities, FDI is actively encouraged in a wide range of industries that support the country's development.
FDI is not permitted in the following activities:
- Chit funds
- Nidhi companies
- Agricultural or plantation activities
- Real estate businesses, with exceptions for the development of townships, residential/commercial properties, infrastructure projects like roads and bridges, and Real Estate Investment Trusts (REITs) regulated under SEBI's REITs Regulations, 2014
- Trading in Transferable Development Rights (TDRs)
- Atomic energy
- Lottery businesses
- Gambling and betting
- Railway operations
- Manufacturing of tobacco-related products, such as cigars, cheroots, cigarillos, and cigarettes
Eligible Investors
- Foreign Investment: Investors, whether individuals or entities, from outside India can invest in the country in line with the FDI Policy, except in prohibited sectors.
- Land Border Countries: Investors from countries sharing a land border with India, or where the beneficial owner is from such countries, can only invest under the Government route.
- Restrictions for Investors from Pakistan/ Bangladesh: Pakistani citizens or entities can only invest under the Government route and are restricted from investing in sectors like defence, space, atomic energy, and other prohibited areas. Additional conditions apply to investors from Pakistan and Bangladesh, depending on the type of investment and investee entity.
- Transfer of Ownership: If the beneficial ownership of an existing or future FDI in an Indian entity changes to involve investors from restricted countries (as mentioned in above two points), government approval is required.
- NRIs and Foreign-Owned Entities: Non-Resident Indians (NRIs) and Companies, trusts, or partnership firms incorporated outside India and owned by NRIs can invest in India under special provisions available to NRIs in the FDI Policy.
- FPIs and FVCIs: Foreign Portfolio Investors (FPIs) and Foreign Venture Capital Investors (FVCIs) can invest in India as per the terms outlined in the NDI Rules.
- Trading on Indian Stock Exchanges: Registered FPIs and NRIs can trade Indian stocks through registered brokers on recognized Indian stock exchanges, in line with the applicable regulations.
- National Pension System (NPS): NRIs or Overseas Citizens of India (OCIs) are eligible to subscribe to the National Pension System (NPS) through normal banking channels, as per the provisions of the Pension Fund Regulatory and Development Authority (PFRDA) Act.
Eligible Investee Entities
FDI regulations outline specific types of entities that are eligible to receive FDI, each subject to certain conditions:
- Indian Companies: Foreign investment in Indian companies is allowed through the issuance of capital, subject to conditions such as entry routes, ceiling limits, and pricing norms as per FDI regulations.
- Partnership Firms/Proprietary Concerns: Non-Resident Indians (NRIs) can invest in the capital of a partnership firm or proprietary concern in India on a non-repatriation basis, provided the funds are remitted through NRE/FCNR(B)/NRO accounts or inward remittance via authorized dealers/banks. These entities must not engage in agriculture, plantation, real estate, or print media sectors. For non-NRI investors, prior approval from the Reserve Bank of India (RBI) is required.
- Trusts: Foreign investment is not permitted in trusts, except for Venture Capital Funds (VCFs) registered and regulated by SEBI, and other designated investment vehicles.
- Limited Liability Partnerships (LLPs): Foreign Investment is allowed in LLPs operating in sectors where 100% FDI is permitted automatically and without performance conditions. Indian companies or LLPs with foreign investment can also make downstream investments in other companies or LLPs, subject to certain conditions. The conversion of a company into an LLP (or vice versa) with foreign investment is also allowed under the automatic route.
- Investment Vehicles: Entities such as Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and Alternative Investment Funds (AIFs), which are regulated by SEBI, are allowed to receive foreign investment, provided the investor is not from a restricted country. The investment must comply with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
- Other Entities: FDI is not allowed in any entities other than those mentioned above.
Instruments of Investments
Foreign investors can invest in Indian companies through various instruments, subject to certain conditions:
Equity Shares: Issued in compliance with the Companies Act, 2013, including partly paid shares.
Partly Paid Shares:
- 25% of the total amount must be paid upfront, with the balance to be paid within 12 months for non-residents.
- Listed companies may defer balance payments by appointing a monitoring agency in compliance with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (as amended from time to time). Unlisted companies can also defer the balance payments by appointing a monitoring agency (AD Category-I Bank) and the agency should report to the Investee company as stated in the aforementioned SEBI Regulations (as applicable for listed companies).
- Failure to pay the remaining amount may result in forfeiture, as per the Companies Act, 2013 and the Income Tax provisions.
Share Warrants:
- Issued with 25% upfront payment, and the balance within 18 months.
- Conversion price must align with the fair value at issuance.
Convertible Debentures:
- Must be fully and mandatorily convertible, with terms (price and conversion formula) set at issuance.
- Non-fully convertible debentures are treated as debt instruments and governed by ECB guidelines.
Preference Shares:
- Must be fully and mandatorily convertible, with similar conditions to convertible debentures.
- Non-convertible preference shares are considered debt instruments.
Capital contribution of LLP:
- Foreign investment can be made in the capital contribution/ share of profit of LLP
Sectoral Caps and Pricing Guidelines
- Sectoral caps are prescribed for foreign investment in different sectors, including FDI in Equity Instruments, foreign investment in capital contribution of LLP, and indirect foreign investment (Downstream Investment). Sectoral caps are prescribed in the NDI Rules/ FDI Policy issued by the Department of Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, Government of India.
- Foreign investment up to 100% is allowed under the automatic route in sectors not listed in the NDI Rules/ FDI Policy.
- For any clarifications regarding foreign investment in specific sectors or related conditions, queries should be directed to the Department of Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, Government of India.
Downstream Investment (DI)
- ‘Downstream Investment’ (DI) is investment made by an Indian entity which has received foreign investment or an Investment Vehicle in the equity instruments or the capital, as the case may be, of another Indian entity, i.e. Indirect Foreign Investment.
‘Indirect Foreign Investment’ is downstream investment received by an Indian entity from:
- another Indian entity (IE) which has received foreign investment and which is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India; or
- an investment vehicle whose sponsor or manager or investment manager is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India. If sponsor or manager or investment manager is organised in a form other than companies or LLPs, SEBI shall determine whether the sponsor or manager or investment manager is foreign owned and controlled.
[Explanation 1: For cases where the original investment made in the investee entity was made as a resident but later the investor entity becomes owned and/or controlled by persons resident outside, the same shall be reckoned as downstream investment from the date on which the investor entity is owned and/or controlled by persons resident outside India. Such downstream investment shall be in compliance with the applicable entry route and sectoral cap and shall require to be reported by the investor entity within 30 days from the date of such reclassification in form DI]
[Explanation 2: The investments made by NRIs/OCIs on non-repatriation basis is treated as deemed domestic investment. Accordingly, an investment made by an Indian entity which is owned and controlled by a Non-Resident Indian or an Overseas Citizen of India including a company, a trust and a partnership firm incorporated outside India and owned and controlled by a Non-Resident Indian or an Overseas Citizen of India, on a non-repatriation basis in compliance with Schedule IV of these rules, shall not be considered for calculation of indirect foreign investment.
- The guiding principle of the Downstream Investment (DI) guidelines is that “what cannot be done directly, shall not be done indirectly”. Based on the guiding principle of the DI, arrangements, sectoral conditions, entry route, conditionality, pricing guideline specified for the direct FDI/ Foreign Investment are equally applicable to the Indirect Foreign Investment.
- Only Indian Companies and LLPs (Indian Entity) can receive DI/ Indirect Foreign Investment.
- The Indian Entity making the DI must bring in funds from abroad, not from domestic market borrowing. However, subscription to Non-Convertible Debentures by foreign persons will not be considered domestic borrowing. DI can be made using internal accruals, defined as profits transferred to a reserve account after tax payments.
Other conditions
Investment and transfer of said investment between non-residents/ residents must comply with the pricing guidelines (as applicable for different type of instruments and how the instruments are issued - subscription to MOA, fresh issue of shares, rights issue, bonus issue, ESOPs, etc. or depending on the transfers) along with other conditions, compliance requirements as prescribed under the FEMA Regulations, Companies Act, 2013, SEBI Regulations, etc., as may be applicable.
Reporting requirements
Persons resident outside India making investments in Indian Entities must comply with the following reporting requirements:
- Form FC-GPR: Indian companies issuing equity instruments to persons resident outside India must report the issue/ allotment in Form FC-GPR within 30 days from the issuance date.
- Annual Return (Form FLA): Indian companies receiving FDI or LLPs receiving foreign investment must file Form FLA with the Reserve Bank by July 15 of each year (for the financial year April-March).
- Form FC-TRS:
- Transfers: Transfers of equity instruments between residents and non-residents, or within non-residents, must be reported in Form FC-TRS.
- Stock Exchange Transfers: Foreign residents transferring shares on a recognized stock exchange must report it in Form FC-TRS.
- Participating Interest: Transfer of participating interest/rights in oil fields must be reported in Form FC-TRS.
- Deadline: The form must be filed within 60 days of transfer or receipt of funds.
- Form ESOP: Companies issuing Employee Stock Options to foreign employees must report in Form ESOP within 30 days.
- Form DRR: The Domestic Custodian must report the issuance/transfer of depository receipts within 30 days of the issue closing date.
- Form LLP-I: LLPs receiving capital contributions must file Form LLP-I within 30 days.
- Form LLP-II: Transfers of capital contributions or profit shares between residents and non-residents or Disinvestment by non-residents must be reported in Form LLP-II within 60 days.
- Form LEC (FII): Foreign Portfolio Investors (FPIs) must report equity purchases/transfers on stock exchanges in Form LEC (FII).
- Form LEC (NRI): Non-Resident Indians (NRIs) must report the purchase/transfer of equity instruments in Form LEC (NRI).
- Form InVI: Investment vehicles issuing units to non-residents must file Form InVI within 30 days.
- Downstream Investment (Form DI): Indian entities or investment vehicles making downstream investments must notify the Secretariat for Industrial Assistance (DPIIT) within 30 days and file Form DI with the Reserve Bank within 30 days of equity allotment.
- Form CN: Indian start-ups issuing Convertible Notes must report in Form CN within 30 days. Transfers of Convertible Notes must also be reported by the transferor or transferee within 30 days.
Note: All reports are to be made through or by an Authorized Dealer bank, unless otherwise specified.
Conclusion
It is undeniable that FDI plays a transformative role in India’s economic growth. However, for India to solidify its position as a global economic powerhouse, it must continue to strike a right balance between attracting foreign investment and safeguarding national interest. Through this article we have provided a brief overview of key concept in FDI, as these policies are frequently revised, the reader is advised to connect with us at: for any queries.
[Disclaimer: The content published is only for educational purpose and shall not be construed as the rendering of any professional/ legal advice in any manner whatsoever. The readers must exercise their own Judgement and refer the original source before any implementation. In no event shall the authors be liable for any direct, indirect, special or incidental damage resulting from or arising out of or in connection with the use of information or any inadvertent error in the Article. Further, the content is an original work of the authors and may be used only after prior written permission.]
