Get insights into foreign direct investment (FDI) into India including Indian laws to comply with, permitted sectors, capital instruments and investments by NRIs

In 2018, India saw more than $38 billion of inbound deals compared with China’s $32 billion, buoyed by stable fundamentals, a bankruptcy code and fresh opportunities in sunrise sectors. [source: Economic Times]

The graph below from World Bank shows a steady increase in foreign investment into India over the last two decades:

Foreign Direct Investment (Net Inflow, USD)

As per RBI, Gross FDI inflows to India increased to US$ 61.0 billion in 2017-18 from US$ 60.2 billion in 2016-17.

Factors to consider while investing in India

To invest in India, you need to consider the following three factors:

  1. You need to observe the political and economic environment in India relevant to your investment and area of business. Many factors would affect your investment decisions including
    • Your ability to carry out business operations. For example single-brand vs. marketplace model for an e-commerce investment or environmental regulations for an investment in a manufacturing company.
    • Location of your customers i.e., whether your customers are Indian or international, and
    • Location and quality of the workforce that you would need to hire in India. Workforce for a tech company would have a different location in India than for a manufacturing company.
  2. Following are the Indian laws that would govern your investment in India:
    • Exchange Control Laws: Foreign currency transactions with India are governed by the Foreign Exchange Management Act, 1999 and circulars/press notes/notifications under it. Investment into Indian companies or their full/partial acquisitions are governed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 and the provisions of the annual Consolidated Foreign Direct Investment Policy Circular (“FDI Policy”) issued by the Department of Industrial Policy and Promotion (“DIPP”) in the Ministry of Commerce and Industry, Government of India.
    • Corporate Laws, primarily Companies Act, 2013, Companies Act, 1956 and regulations from the Securities and Exchange Board of India (SEBI) for listed companies
    • Sector-specific Laws, there are specific laws related to investment financial services (Banking, Non-banking Financial services), Infrastructure (highways, airport, railway), manufacturing, insurance, defence, and other sectors.
    • Labor Laws, including the Industrial Dispute Act, 1947, Minimum Wage Act, 1948 as well as state-specific laws that depend on the nature of work to be performed, type of establishment and number of employees.
  3. Following are the laws related to taxes that would have an impact on your investments:
    • Domestic Tax Laws, including the Income Tax Act, 1961, and Goods and Services Tax.
    • International Tax Treaties, countries such as Mauritius, Singapore, the Netherlands have favourable treaties.

Prohibited Sectors for FDI

FDI is prohibited in the following sectors:

  • Gambling, betting, casino, online lottery
  • Chit funds (rotating saving and borrowing associations), Nidhi company (Non-banking financial company focused on borrowing and lending money between their members)
  • Real estate
  • Railway – Operations
  • Atomic Energy
  • Manufacturing of tobacco or tobacco substitutes

Permitted Sectors for FDI

There are two routes for foreign investment in Indian companies in India:

  1. permitted up to the limit indicated against each sector/ activity, or
  2. permitted up to 100% under the automatic route, subject to applicable laws/ regulations, security and other conditions. In such cases, prior approval of RBI or the Government of India, through concerned administrative ministry/department, is not required.

Following are the examples of sectors where there is a limit on FDI or some approval from the Government of India is required.

Financial sector

Foreign investment of up to 74% is permitted in banking in private sector out of which (i) up to 49% is under the automatic route, and (ii) between 49%-74% is under the government approval route.

49% foreign investment is permitted under the automatic route for infrastructure company in securities market such as stock exchanges, commodity exchanges, depositories and clearing corporations. Such investments should be comply with SEBI Regulations.

100% FDI in is allowed under the automatic route in Non-banking Financial Services Companies (NBFC) and activities regulated by financial sector regulators including RBI, SEBI, IRDA, Pension Fund Regulatory and Development Authority, National Housing Bank, etc.

Civil Aviation

100% FDI is permitted under automatic route for

  • Greenfield and existing projects for Airports and Non- Scheduled Air Transport Service
  • Helicopter services/ seaplane services requiring DGCA 4 approval

100% FDI, with 49% under automatic route and 49% under government approval route, is permitted in Air Transport Services including Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and Regional Air Transport Service.


100% FDI is permitted into manufacturing of small arms and ammunition under Arms Act, 1959 where up to 49% is under the automatic route and investment above 49% requires government approval. Such investment will be subjected to the industrial license under Industries (Development and Regulation) Act, 1951 and may require giving government entities access to modern technology.


49% FDI under automatic route is permitted in Insurance companies/insurance brokers, subjected to approval and verification by Insurance Regulatory and Development Authority (IRDA).

Multi-brand Retail Trading

51% foreign investment is permitted in multi-brand retail trading under the government approval route, subjected to the following conditions:

  • minimum capitalization of USD 100 million,
  • within three years 50% of the total FDI in the first tranche of USD 100 million to be invested in the backend infrastructure,
  • retail sales outlets may be set up in those Indian states which allow FDI in multi-brand retail trade, and
  • 30% mandatory local sourcing requirement from Indian micro, small, medium industries, which have a total investment in plant and machinery not exceeding USD 2 million.

Single-brand Retail Trading

100% foreign investment is permitted in single-brand retail trading under the automatic route, subjected to the following conditions:

  • The product should be of a single brand including it should be sold under the same brand internationally and it should be branded during manufacturing.
  • For investment above 51%, 30% of the value of goods to manufacture the product should be sourced from Indian small and medium enterprises. The sourcing requirement can be fulfilled incrementally over the five years from the date of opening the first store in India.
  • Single brand product trading can be done through e-commerce as well as brick-and-mortar stores.


B2B E-Commerce

100% foreign investment is permitted in e-commerce platforms facilitating buying and selling between businesses.

B2C E-Commerce

Market-place model

An e-commerce site, under the market-place model, connects buyers and sellers to facilitate transactions between them. The site itself doesn’t sell anything directly to buyers, i.e. it doesn’t hold any inventory. 100% FDI is permitted in the market-place model.

Example – that lists buyers and sellers and facilitate auctions between them. doesn’t own the goods sold on its site.

Inventory-based model

An e-commerce site, under the inventory-based model, sells it’s own goods and services directly to buyers. FDI is not permitted in the inventory-based model.

Example – sells a significant amount of goods on its site through Cloudtail India Private Limited, which is owned by Through a recent Government notification, February 1 onwards is not allowed to sell through Cloudtail India Private Limited.

Limited Liability Partnerships

100% FDI under automatic route is permitted into Limited Liability Partnerships (“LLP”) operating in sectors/ activities where 100% FDI is allowed through the automatic route.

Mode of FDI Investments

Foreign investments into Indian companies could be direct or indirect.

Direct investment: The non-resident investor (foreign investor) invests directly into an Indian company or LLP.

Indirect investment: An Indian company (or LLP), which is owned or controlled by non-resident investors (foreign investors / non-Indian entity), invests in another Indian company (or LLP). This is also referred to as a downstream investment and has to comply with the same norms and sectoral conditions for direct investments.

Capital Instruments for FDI

Foreign investment into an Indian company could be through the following capital instruments:

  1. subscription to or purchase of equity shares,
  2. convertible preference shares,
  3. convertible debentures, or
  4. share warrants of the company

A foreign investor can remit the investment amount through regular banking channels.

The issue of shares of an Indian company to a foreign investor is subjected to the guidelines by RBI (for a company not listed on an Indian stock exchange) and by SEBI (for a listed company).

The Indian company receiving FDI is required to report the investment received to RBI in a prescribed format and within 30 days of receiving the investment.

Other Foreign Investments

Foreign Venture Capital Investor

Foreign investors who are registered with SEBI as Foreign Venture Capital Investor (FVCI) are allowed to invest in Indian companies.

Unlike pricing restrictions for FDI investment, FVCIs has the benefit of free entry and exit pricing subjected to income tax laws.

FVCIs are allowed to invest in sectors such as IT Hardware, IT Software, Biotechnology, infrastructure, asset finance companies, and infrastructure finance companies.

Indian startups can raise up to 100% fund from FVCIs by issuing equity or equity-linked instruments or debt instruments.

Foreign Portfolio Investment

Foreign Institutional Investors (FIIs) and Qualified Foreign Investors (QFI) can make the following portfolio investments without being subjected to FDI restrictions and investment up to a maximum of 10% of post-issue paid-up share capital:

  1. invest in unlisted or listed shares, convertible or non- convertible debentures
  2. Indian depository receipts
  3. domestic mutual funds, and
  4. exchange-traded derivatives and other similar securities

Investment by Non-resident Indians

Non-resident Indians (NRI) can invest in India in the following ways:

  1. repatriation basis: such investments are eligible for being fully repatriated outside India, or
  2. non-repatriation: such investments are treated at par with domestic investments and can’t be repatriated outside India.

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