Introduction to FDI and

regulatory framework
Table of Contents
 Introduction
 Regulatory compliances
 Who can invest in India? 
 Modes/routes for foreign direct investment   
o 1. Automatic route 
o 2. Government route 
 Sectoral caps and compliances 
o I. Sectors where FDI is prohibited 
o II. Sectors where FDI is Permitted 
 Conclusion 
 References

Introduction
With the economic liberalisation of the Indian economy in 1991, it has
contributed in a positive manner as the Indian economy is considered as one
of the largest growing economies with respect to size and growth
prospects. Foreign Direct Investment (FDI) is defined as a cross-border
investment made by a company/individual in a foreign country into another
company/entity residing in another country. Therefore India’s economy has
been considered as one of the most profitable and prospective destinations
for foreign investors and businesses. Furthermore, it has vice-versa
benefitted the Indian economy, as foreign investment is one of its major
monetary sources and also provides various job opportunities for a large
number of its citizens. In order to facilitate the ease of inflow of global funds
into the economy, the government has taken steps to ensure a favourable
policy regime to attract foreign investors and MNCs by adopting favourable
measures and policies. So with respect to the dynamic business conditions
and competitive nature of the Indian economy, it is essential to understand
the legal system and regulatory framework revolving around foreign direct
investments in order to establish a solid foundation for international
businesses intending to initiate their operations in the Indian market. 

Regulatory compliances
Before a foreign company sets foot in India, it is advisable to take into
account the various socio-economic and political factors, ability to carry out
its operations in India, the location of its customers, the efficiency of its
workforce from the perspective of the investment. Once the prior condition
has been fulfilled, incorporating operations in India or any kind of cross-
border investment will require compliance with the regulation that governs
FDI, India’s foreign exchange regulations. There are several legislations and
regulations enacted to govern the various aspects of foreign transactions. 

 Primarily it has to ensure conformity with provisions laid down

under Foreign Exchange Management Act,1999 (“FEMA ”)  and also
observe the circulars, notifications and press notes issued under the
same. The primary object of the Act is to regulate external trade and
payments and to ensure a regulated foreign exchange market in India.
Investments made by foreign individuals and entities are regulated
by Foreign Exchange Management (Non-Debt Instruments) Rules, 2019
(“Non-Debt Instruments Rules”), issued in supersession of the
former Foreign Exchange Management (Transfer or Issue of Security by
a Person Resident outside India) Regulations, 2017 (“TISPRO
Regulations”). 
 An emphasis on the Foreign Direct Investment Policy Circular (“FDI
Policy”) issued by the Department for Promotion of Industry and
Internal Trade (”DPIIT”) in the Ministry of Commerce and Industry
holds great significance. The consolidated FDI policy by the DPIIT
prescribes the channels in which foreign investments are to be made. 
 Consequently observance of the provision of the Companies Act,
2013, Limited Liability Partnership Act, 2008  and also the regulations
laid down by the Securities and Exchanges Board of India (“SEBI”).   
 There may also be applicable sector-specific laws (Infrastructure,
Banking etc.). 

Who can invest in India? 

 Any non-resident individual (NRI)/Entity can invest subject to FDI
policy except for the prohibited sectors. NRI residents and Citizens of
Nepal & Bhutan are permitted to invest on a repatriation basis
 Foreign Institutional Investors (FII) and Foreign Portfolio Investors
(FPI)
 Registered FIIs/ FPIs/ NRIs as per Schedules 2, 2A and 3 respectively
of Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2000 can invest or trade
through a broker of Indian Companies registered on the stock
exchange. 
 Compny, trust or partnership firm that incorporated outside India and
also which owned and controlled by NRIs
 SEBI registered Foreign Venture Capital Investor (FVCI) in any activity
mentioned in Schedule 6 of Notification No. FEMA 20/2000.
Modes/routes for foreign direct investment  

1. Automatic route 
Provided that the sector does not fall within the prohibited sectors, 100%
foreign direct investment is permitted subject to the applicable
laws/regulations. FDI made through the automatic route does not require
any prior approval either by the Central Government or RBI subject to the
extent of foreign investment that is permitted in the concerned sector as
specified in Regulation 16 of FEMA 20 (R) Another consideration is the Press
Note 3 (2020 series) dated April 17, 2020 and notification dated April 22,
2020, by the Government had implemented certain changes to its policy in
light of the COVID-19 pandemic with the intent to prevent opportunistic
takeovers/acquisitions of Indian companies. It stated that regardless of the
sector/activity in which such foreign investment is directed to is situated in or
is a citizen of Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan or
Afghanistan would mandatorily require the prior approval of the Government 

2. Government route 
As per the FDI policy, foreign investment in certain sectors is permitted to a
certain percentage however any investment beyond the permitted threshold
would require the approval of the Government. The sectors which allow FDI
under partial automatic route and partial government approval route are
defence, retail trading, private banking services etc. 

Sectoral caps and compliances 

With respect to the shareholding of non-residents in Indian companies, there
are certain FDI limits that are divided between prohibited and permitted
sectors.

I. Sectors where FDI is prohibited 

Sectors which include activities such as Atomic Energy, Railway operations,
Gambling and betting including casinos/ Lottery business including
government/lottery, online lotteries etc. Chit funds, Nidhi company, Real
estate business or construction of farmhouses,  Trading in Transferable
Development Rights, (TDRs), Manufacturing of cigars, cheroots, cigarillos and
cigarettes, of tobacco or of tobacco substitutes are sectors in which any kind
of foreign investment are not permitted. 
II. Sectors where FDI is Permitted 
Below are certain illustrations of sectors that permit FDI through either
automatic route and government approval.

Defence sector – In the defence sector (subject to the industrial license

under Industries (Development and Regulation) Act,
1951) and manufacturing of small arms and ammunition under Arms Act,
1959 has permitted 100% FDI where up to 49% is under the automatic
route. Any investment above the 49% threshold requires the approval of the
government where it is likely to result in access to modern technology or for
other reasons to be recorded.  

Civil aviation – With respect to greenfield and existing projects for “Airports”
and Non-Scheduled Air Transport Service, FDI of 100% is permitted. In the
case of “Air Transport Services” being Scheduled Air Transport
Service/Domestic Scheduled Passenger Airline and Regional Air Transport it
partially permits up to 49% FDI in automatic route and beyond that
percentage would require government approval. Also, 100% FDI is permitted
for Helicopter services/ seaplane services under the automatic route subject
to the approval of DGCA. 

Banking services – With respect to the private sector, Foreign investment of

up to 49% is permitted under the automatic route and beyond 49% and up
to 74% under the government route. Foreign investment of up to 74% is
permitted in banks in the private sector. Furthermore, individual NRI’s
cannot hold more than 5% of the total paid-up capital and aggregate NRI
holdings cannot exceed 10% of the total paid-up capital. In the case of public
sector banks, foreign direct investment is capped at 20%. 

Non-banking financial companies –  FDI of up to 100% is permitted under

the automatic route in other financial services and activities regulated
financial sector regulators viz. IRDA, SEBI, RBI, Pension Fund Regulatory and
Development Authority, National Housing Bank or any other financial sector
regulator as may be notified by the Government of India, subject to
conditionalities specified by the concerned Regulator/Government agency.

Insurance sector – The insurance sector, as per the Press Note No.2 dated
14th June issued by DPIIT, has amended the sectoral cap on insurance
companies and is permitted a maximum FDI cap of up to 74% under the
automatic route which is also subject to approval/verification by Insurance
Regulatory and Development Authority of India (“IRDAI”). Whereas in the
case of Insurance intermediaries (insurance brokers, reinsurance brokers,
insurance consultants), it has been allowed 100% FDI under the automatic
route 
Multi-brand retail trading – A maximum percentage of 51% FDI is allowed
under the government approval route. This investment simultaneously
should be in compliance with the conditions (i) minimum capitalization of
USD 100 million. (ii) 50% of the total FDI in the first tranche of USD 100
million to be invested in the backend infrastructure within 3 years. (iii) states
which have agreed or agree in the future to allow FDI in multi-brand retail
trade, retail sales outlets may be set up in such States (iv) 30% mandatory
sourcing requirement from Indian micro, small, medium industries which
have a total investment in plant and machinery not exceeding USD 2 million
etc. 

Single Brand Product Retail Trading – FDI of up to 100%is allowed under the
automatic route. SBRT can receive foreign investment on the fulfilment of
conditions such as (i) products that are sold under a ‘single brand’ and
products that should be sold under the same brand internationally. (ii)
products should be branded under manufacture and to be covered within
‘single brand’ product retail trading. (iii) non-resident entities/entities, either
owner of the brand or otherwise, shall be allowed to enter into a legally
tenable agreement with the brand owner for the purpose of undertaking
single brand product retail trading. (iv) if the FDI is above 51%, the sourcing
of 30% of the value of goods purchased should be sourced from India itself,
from Indian micro, small and medium enterprises. (v) SBRT entity operating
through brick and mortar stores, is permitted to undertake retail trading
through e-commerce which is also subject to certain conditions. (vi) SBRT
entity may set off the mandatory sourcing requirements against its
incremental sourcing of goods from India for global operations during the
initial 5 years of starting its operations in India. The incremental sourcing for
the purpose of set-off shall be equal to the annual increase in the value of
goods sourced from India for global operations either director or through its
group companies. However post the 5 year period, the SBRT entity is
required to fulfil the 30% sourcing norms towards India’s operation on an
annual basis. 

Print Media – With respect to Print Media, mainly concerned with publishing/
printing of periodicals, speciality journals, technical and scientific journals
(subject to compliance with the applicable legal framework and the
guidelines issued by Ministry of Information and Broadcasting periodically in
this regard) and publication of a similar edition of foreign newspapers is
allowed to have 100% foreign investment under the government approval
route. On the contrary with respect to the Print Media specifically publishing
of newspapers and periodicals which deal with the current affair and news
and also publishing Indian content in foreign magazines dealing with news
and current affairs is allowed FDI of only up to 26% with the prior approval
of the government. 

Digital media – Digital Media which mainly consists of uploading News and
Current Affairs through the medium of Digital Media is permitted 26% FDI. 
Railways – As per the FDI policy, the list of prohibited sectors have been
revised to substitute ‘railway transport’ with ‘railway operations’, in effect
allowing foreign investment in ‘railway transport. Railway infrastructure is
allowed 100% FDI under the automatic route, however, in the case of
particularly sensitive areas any FDI above 49% will require consideration
from the Ministry of Railways from a security point of view. The Ministry of
Railways has set up sectoral guidelines which include conditions and
approvals required for domestic or foreign participation in the retail sector. 

B2B E-commerce – In the case of companies that are primarily involved in

the activity of buying and selling through the medium of the e-commerce
platform particularly in the Business to Business segment is permitted 100%
FDI. 

B2C E-ommerce – As per the marketplace model of e-commerce where an e-

commerce entity provides an information technology platform on a digital &
electronic network and acts as the middle-person to the buyer and seller,
100 FDI is permitted under the automatic route. However, as per the
inventory-based model of e-commerce which involves maintaining inventory
of goods and services by the e-commerce entity and is sold to the consumers
directly, FDI is not permitted. 

Pharmaceuticals – In the case of greenfield projects in the pharmaceutical

sector, 100% FDI is permitted as per regulation 16 of FEMA 20R. Whereas in
the case of Brownfield projects in the pharmaceutical sector up to 74% FDI is
permitted under automatic route and above this threshold would necessitate
the government approval route. 

Petroleum – Activities such as exploration, research and development,

marketing, deriving petrol-based products are allowed by private companies
in the petroleum sector. If the concerned activities are conducted privately
then 100% FDI is permitted under the automatic route. However if the
government undertaking conducts these activities, then 49% of FDI is
allowed under automatic route and any investment over this limit would
require the approval of the government. 

Conclusion 
In the event of ensuring the fulfilment of the regulatory compliances, the
foreign entity/company can undergo the incorporation process of setting up
its operations in India and also issue securities for the purpose of foreign
investment. The FDI policy has prescribed the mandatory procedure to
regulate the inflow of foreign funds and investments into the Indian
economy. Hence it will be vital to adopt favourable policies and impose
limited restrictions which would help facilitate the smoother inflow of capital
investment within the economy and thus would usher wealth creation and
growth in the economy and also enable the development of entrepreneurship
in India. Therefore with the FDI policy actively scrutinising the investments
routes, it will ensure a greater scope of foreign investment.