FDI & FEMA

# Foreign Direct Investment in India

Foreign Direct Investment (FDI) in India is primarily governed by the Foreign Exchange Management Act, 1999 (FEMA). FEMA aims at facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange markets in India. Foreign investment in India is regulated under codified foreign exchange regulations, sector specific policies/regulations, government policies as well as International agreements.

### Overview of FDI Framework

The main objective of FEMA is to regulate, consolidate and amend the law relating to foreign exchange to facilitate foreign investment, external trade and payments and promote the orderly development and maintenance of foreign exchange market in India within the broad policy framework on foreign investment issued by the Government from time to time.

Presently, the FDI regime in India is primarily governed by the Consolidated Foreign Direct Investment Policy Circular dated 15.10.2020, as amended through various Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) (FDI Policy), sector specific policies/regulations, Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 dated 17.10.2019 notified by the Department of Economic Affairs (DEA), Ministry of Finance (FEM Non-Debt Instruments Rules 2019) which superseded the erstwhile Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 Notification No. FEMA 20(R)/2017-RB dated 07.11.2017 (FEMA 20R Regulations).

### Key Provisions under FEMA Act

FEMA defines and empowers regulation of FDI as investment by a person resident outside India (non-resident) in an Indian entity through equity or convertible instruments. Main principles of approval include the following:

- Automatic Route: No prior approval needed from RBI or Government for permissible sectors/activities.
- Government Route: Prior approval from relevant ministries/departments required for sectors like defense (above 74%), multi-brand retail, or print media.
- Prohibited Sectors: FDI not permitted in lottery, gambling, chit funds, real estate (except development), atomic energy, and railway operations.
- Sectoral Caps: Specified limits (e.g., 100% automatic in manufacturing/software; 49% automatic in single-brand retail up to that limit).

### Non-Debt Instruments Rules, 2019

The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) further govern foreign investments in India through equity instruments like shares, convertible debentures, and warrants, excluding debt.

NDI Rules regulate FDI (over 10% stake in unlisted or listed companies on fully diluted basis) and FPI, covering sectors per FDI Policy in Schedule I, with prohibitions in Schedule II. They distinguish non-debt instruments (equity in companies/LLPs, AIFs, REITs/InvITs) from debt.

It specifies entry routes, Automatic (no approval) or Government (sectors like defense), provides Pricing guidelines for issue/transfer; reporting via FIRMS portal and provides for Downstream investments by Indian entities with foreign ownership treated as FDI.

### Overview of Sector-wise FDI Caps under Automatic Route

Foreign Direct Investment (FDI) under the automatic route allows up to specified sectoral caps without prior government approval, as per Schedule I of FEMA (Non-debt Instruments) Rules, 2019 and the Consolidated FDI Policy 2020 (amended up to 2026). Caps vary by sector; exceeding them or sensitive conditions shifts to government route. Prohibited sectors (no FDI) include lottery/gambling, real estate trading, atomic energy.

#### A. Key Sectors with 100% FDI under Automatic Route

Sector | FDI Cap | Key Notes
--- | --- | ---
Agriculture & Animal Husbandry | 100% | Controlled conditions only (floriculture, seeds, pisciculture).
Plantation Sector | 100% | Tea, coffee, rubber, etc.
Manufacturing | 100% | Includes wholesale/retail of manufactured goods.
E-commerce | 100% | Marketplace model only. Inventory-based prohibited.
Construction Development | 100% | Townships, housing; conditions on minimum area, capitalization apply.
Civil Aviation | 100% | Non-scheduled air transport, heli-skiing. Airports (greenfield/brownfield) also 100%.
Broadcasting | 100% | Non-news TV up-linking/down-linking. Excludes news/current affairs.
Pharma (Greenfield) | 100% | Brownfield up to 74% automatic; 100% government route.
Private Security Agencies | 100% | Post-security clearance.

#### B. Sectors with Partial Caps under Automatic Route

Sector | FDI Cap (Automatic) | Beyond Cap | Key Notes
--- | --- | --- | ---
Defence | Up to 74% | 100% gov route | Modern tech; no export control breach.
Banking (Private Sector) | 74% | Above 74% gov route | Includes small finance banks.
Insurance | 74% | 100% gov route | IRDAI conditions apply.
Telecom | 49% | Up to 100% gov route | Spectrum auctions apply.
Airports | 100% | N/A | Full automatic route (Greenfield/Brownfield).
Space Sector | Up to 74% | 100% gov route | Satellites manufacturing (recent liberalization).

### Background on LBC Restrictions

Land Border Countries (LBCs)—China (Including Hong Kong), Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan—were restricted under Press Note 3 (2020) (PN-3), requiring prior government approval for any direct or indirect FDI from entities/citizens of LBCs or those situated there, to safeguard national security. Press Note 2 (2026) (PN-2), issued on March 15, 2026 by DPIIT following Union Cabinet approval on March 10, 2026, amends the Consolidated FDI Policy 2020, easing these via alignment with PMLA beneficial ownership (BO) definition, effective upon NDI Rules amendment notification.

PN-2 of 2026 permitted the automatic route if the Ultimate Beneficial Owner from countries sharing a land border with India holds not more than 10% (controlling less than 10% of the investment), subject to Sectoral Norms.