Fdi Policy in India — Sectoral Caps, Routes and Recent Reforms

Foreign Direct Investment (FDI) serves as a primary non-debt financial driver for economic growth, capital formation, technology transfer, and job creation. Regulated under the Foreign Exchange Management Act (FEMA), 1999, India’s foreign investment framework is periodically updated by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry. Over the decades, India transitioned from a restrictive foreign capital regulatory environment under the old Foreign Exchange Regulation Act (FERA) of 1973 to an open policy ecosystem where over 90% of sectors allow 100% FDI under the automatic route.

Routes of Foreign Direct Investment in India

Automatic Route

Under the automatic route, non-resident investors or Indian entities do not require prior approval from the Reserve Bank of India (RBI) or the Government of India before making investments. The investee company must file the post-investment documentation on the single master form (SMF) via the Reserve Bank of India’s FIRMS portal within 30 days of receiving inward remittances or issuing capital equity instruments.

Government Route

Under the government route, foreign investment proposals require mandatory prior review and clearance from the central government. Following the abolition of the Foreign Investment Promotion Board (FIPB) in May 2017, applications are submitted online through the Foreign Investment Facilitation Portal (FIFP) managed by DPIIT. Proposals are processed by the respective administrative line ministries or departments in consultation with security and financial regulatory authorities.

Prohibited Sectors

To safeguard national sovereignty, public order, and state monopolies, FDI is prohibited across all routes in the following areas:

• Lottery business (including government, private, and online lotteries)
• Gambling, betting, and casinos
• Chit funds and Nidhi companies
• Trading in Transferable Development Rights (TDRs)
• Real estate business or construction of farmhouses (excluding township development and commercial real estate development)
• Manufacturing of cigars, cheroots, cigarillos, and cigarettes of tobacco or tobacco substitutes
• Atomic energy generation and core train operations in railway infrastructure

Sectoral Caps and Entry Routes

Sector-Wise Investment Thresholds

Major Structural Reforms and Policy Updates

Press Note 3 of 2020 (Land-Border Safeguard)

Issued in April 2020, Press Note 3 amended the FDI policy to mandate prior government clearance for all investments coming from entities incorporated in, or beneficial owners residing in, countries sharing a land border with India (China, Pakistan, Bangladesh, Myanmar, Nepal, Bhutan, and Afghanistan). This measure prevents opportunistic takeovers and distressed acquisitions of domestic firms during economic downturns.

Space Sector Liberalisation (2024 Reform)

In March 2024, the government issued Press Note 1 of 2024, liberalising foreign investment limits in the space sector by establishing three activity tiers:

• Component Manufacturing: 100% FDI permitted under the automatic route for manufacturing components, sub-systems, and ground/user segment equipment.
• Satellites Operations: Up to 74% FDI allowed under the automatic route for satellite manufacturing, operation, data products, and ground/user segment systems; government approval required beyond 74%.
• Launch Vehicles: Up to 49% FDI allowed under the automatic route for launch vehicles, associated systems, and creation of spaceports; government approval required beyond 49%.

Abolition of FIPB and Creation of FIFP

The Union Cabinet dissolved the Foreign Investment Promotion Board (FIPB) in May 2017 to eliminate administrative delays and duplicate checks. Approvals are decentralized to line ministries (such as Defense, Telecom, and Information & Broadcasting) while using the Foreign Investment Facilitation Portal (FIFP) as a single online submission node managed by DPIIT.

Single Window Digital Integration

Foreign investors use the National Single Window System (NSWS) alongside the Reserve Bank of India’s FIRMS platform. This setup provides unified clearances for land allotment, environmental permits, central corporate registrations, and cross-border financial filings on a single portal.

Facts for Quick Revision

• DPIIT under the Ministry of Commerce and Industry formulates the FDI policy, while the RBI administers regulations under FEMA.
• Foreign Direct Investment in India is accepted through equity shares, compulsorily convertible debentures (CCDs), compulsorily convertible preference shares (CCPS), and share warrants.
• FERA 1973 was replaced by FEMA 1999 to transition from foreign exchange control to trade facilitation and capital account management.
• The Foreign Investment Promotion Board (FIPB) was abolished on May 24, 2017, and replaced by the Foreign Investment Facilitation Portal (FIFP).
• Press Note 3 of 2020 mandates prior government approval for foreign investments originating from all seven land-border-sharing countries.
• Space sector reforms (Press Note 1 of 2024) permit 100% FDI under the automatic route for manufacturing satellite components and subsystems.
• Greenfield pharmaceutical investments permit 100% FDI under the automatic route, whereas brownfield investments require government approval beyond 74%.
• India allows up to 74% FDI in private sector banking, but restricts foreign equity in public sector banks to 20% under the government route.
• Single-Brand Retail Trading allows 100% FDI under the automatic route, subject to a 30% local sourcing requirement when foreign equity exceeds 51%.
• The FIRMS (Foreign Investment Reporting and Management System) portal managed by the RBI is the platform for submitting Form FC-GPR for post-investment reporting.