India’s Major FDI Policy Reforms Since 1991

India’s FDI policy has moved steadily from tight post-Independence controls to a more open, facilitation-based regime. The shift began in 1991 after the balance of payments crisis and has since been shaped by legislative change, sectoral dilution of caps, and simpler approval mechanisms.

From License Raj to Liberalization

• 1991 reforms: The New Industrial Policy marked a break from the License Raj and allowed foreign capital participation to support economic stabilization.
• Automatic approval: Foreign direct investment up to 51% was permitted automatically in selected high-priority sectors.
• Earlier system: Before 1991, foreign investment proposals were examined case by case, often causing delays and capital shortages.
• Policy direction: The new framework began the move from control-based regulation to a more open investment climate.

Institutional Changes and Legal Overhaul

• FIPB, 1992: The Foreign Investment Promotion Board was set up as a single-window clearance body under the Prime Minister’s Office.
• Purpose of FIPB: It was intended to streamline discretionary approvals for foreign investment proposals.
• FERA to FEMA: The Foreign Exchange Management Act, 1999 replaced the Foreign Exchange Regulation Act, 1973.
• Effective date: FEMA came into force on June 1, 2000.
• Legal shift: Foreign exchange violations moved from criminal offences under FERA to civil infractions under FEMA.
• Regulatory division: The change clarified the roles of the Reserve Bank of India and the central government in capital account transactions.

Shift to a Portal-Based Approval System

• FIPB abolished: The Foreign Investment Promotion Board was abolished in May 2017 to reduce delays in processing proposals.
• Departmental handling: Government-route FDI proposals were transferred to the concerned administrative ministries or departments.
• FIFP: The Foreign Investment Facilitation Portal became the online single-point interface for applications requiring government approval.
• DPIIT role: The Department for Promotion of Industry and Internal Trade oversees the portal and coordinates with ministries.
• Policy formulation: DPIIT acts as the nodal agency for the consolidated FDI policy.
• Notifications: The Ministry of Finance notifies FDI-related rules under the Foreign Exchange Management framework.
• Security checks: In sensitive cases, ministries consult the Ministry of External Affairs and the Ministry of Home Affairs for clearances.

Entry Routes and Sectoral Caps

• Two routes: FDI enters India through the automatic route or the government route.
• Automatic route: No prior approval is required before investment.
• Government route: Formal approval is needed before funds are brought in.
• 100% automatic FDI: The policy allows 100% FDI under the automatic route in several sectors, including greenfield pharmaceuticals, construction and manufacturing.
• Sensitive sectors: Some sectors continue to have caps or require government approval on security or public-interest grounds.
• Prohibited sectors: FDI is barred in lottery business, gambling and betting, chit funds, Nidhi companies, and real estate business, except township development and infrastructure.

Recent Policy Developments

• Insurance sector: Press Note 1 of 2026 raised the FDI limit in insurance to 100% under the automatic route.
• Resident director requirement: Amendments to the Indian Insurance Companies (Foreign Investment) Rules, 2015 removed the requirement that a majority of directors and key managerial personnel be resident Indian citizens.
• Land-border investment: Press Note 2 of 2026 allowed non-controlling investments of up to 10% beneficial ownership from countries sharing a land border with India under the automatic route.
• China and Hong Kong: Direct investments or transactions involving acquisition of control from China and Hong Kong continue to require government approval, regardless of size.
• Manufacturing fast-track: A 60-day approval timeline was introduced in March 2026 for government-route proposals from land-bordering countries in selected manufacturing sectors such as solar cells and electronic components.
• Draft rules: The Reserve Bank of India released draft Foreign Exchange Management (Foreign Investment) Rules, 2026, on July 21, 2026, to replace the Non-Debt Instruments Rules, 2019.

Key Prelims Takeaways

• FEMA 1999: The main statute governing FDI in India, in force from June 1, 2000.
• FERA replaced: FEMA replaced the stricter Foreign Exchange Regulation Act, 1973.
• FIPB abolition: The Foreign Investment Promotion Board was abolished in May 2017.
• FIFP: The Foreign Investment Facilitation Portal is the present online interface for government-route FDI applications.
• Automatic vs government route: Automatic route needs no prior approval; government route requires ministerial approval.
• Insurance cap: FDI in insurance has been raised to 100%, but LIC remains capped at 20%.
• Restricted sectors: FDI is prohibited in lottery, gambling and betting, chit funds, Nidhi companies, TDR trading, and certain sectors not open to private investment such as atomic energy and railway operations, except specified infrastructure.