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Home · CORE by PRERANA · Economy · 14. Foreign Investment
CORE ECONOMY · TOPIC 14

14. Foreign Investment

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14. Foreign Investment

14.1 Forms of Foreign Capital

Form

Key Point

Foreign Direct Investment (FDI)

Long-term investment in a business with a lasting interest and usually some say in management

Foreign Portfolio Investment (FPI)

Investment in shares and bonds for financial returns, without control; easy to enter and exit

External Commercial Borrowings (ECBs)

Loans taken by Indian companies from foreign lenders

NRI deposits

Deposits by non-resident Indians in accounts such as FCNR(B), NRE and NRO

ADRs, GDRs and FCCBs

Instruments through which Indian companies raise money abroad; FCCBs are foreign currency convertible bonds



FDI versus FPI

Feature

FDI

FPI

Nature

Long term and stable

Short term and volatile; "hot money"

Control

Gives control or influence over the company

No control

Stake

10% or more of paid-up equity in a listed company

Less than 10% in a company

Regulator

DPIIT sets policy; RBI regulates under FEMA

SEBI, with RBI limits

Brings

Capital, technology and management skills

Money and liquidity for markets



14.2 Legal Framework

  • FEMA, 1999 is the governing law. The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 govern foreign investment in equity.

  • The Department for Promotion of Industry and Internal Trade (DPIIT) issues the Consolidated FDI Policy; the RBI regulates and monitors FDI.

  • FDI can be greenfield (a new venture is set up) or brownfield (an existing business is acquired through merger or acquisition).

  • The Foreign Investment Promotion Board (FIPB) was abolished in 2017; proposals are now handled through the Foreign Investment Facilitation Portal (FIFP) by the concerned ministries.

Routes for FDI

Route

Meaning

Automatic route

No prior government approval is required; the investor only informs the RBI after the investment

Government route

Prior approval from the Government is required, through the concerned administrative ministry



14.3 Sectoral Limits

FDI limits differ by sector and change from time to time. The positions below are the main ones in the FDI policy.

Sector

Position

Insurance

100% under the automatic route. It was raised from 74% by the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025, notified on 21 December 2025 and in force from 5 February 2026

Defence

Up to 74% automatic; beyond that through the Government route

Telecom

100% under the automatic route

Single-brand retail

100% automatic

Multi-brand retail

51% with Government approval

E-commerce

100% for the marketplace model; inventory-based e-commerce is not allowed, with a limited export-focused exception added in 2026

Private sector banks

74% in total (automatic up to 49%). For public sector banks the limit is 20%

Pension

74%

Coal mining

100% automatic



Prohibited sectors

  • Lottery and gambling (including casinos and betting).

  • Chit funds and Nidhi companies.

  • Real estate business and construction of farmhouses (but not construction development of townships and infrastructure).

  • Manufacture of cigars, cigarettes and tobacco products.

  • Atomic energy and railway operations (except certain infrastructure activities).



14.4 Investment from Land Border Countries

  • Press Note 3 (April 2020) made prior Government approval compulsory for FDI from any country sharing a land border with India (China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan), or where the beneficial owner is from such a country.

  • It was meant to stop opportunistic takeovers of Indian companies during the COVID-19 slowdown.

  • Press Note 2 (2026), approved on 10 March 2026, defined beneficial ownership for the first time. It eased minority, non-controlling investments (up to 10% beneficial ownership by such entities) so they need only prior intimation, while other proposals still need approval.

14.5 Foreign Portfolio Investment

  • In 1992, India allowed Foreign Institutional Investors (FIIs) to invest in the stock market. The SEBI (FPI) Regulations, 2014 merged FIIs, sub-accounts and Qualified Foreign Investors into a single class, FPIs.

  • FPIs are regulated by SEBI under the FPI Regulations, 2019, which have two categories of registration.

  • Each FPI can hold less than 10% of the paid-up capital of an Indian company; above that, the holding is treated as FDI.

  • The Fully Accessible Route (FAR) (2020) lets foreign investors buy specified government bonds without limits. The Voluntary Retention Route (VRR) (2019) encourages longer-term debt investment.

  • Participatory Notes (P-Notes) are issued by registered FPIs to overseas clients who are not registered with SEBI.

14.6 Other Channels

Channel

Key Point

ECB framework

Regulated by the RBI under FEMA; sets limits on the lender, the borrower, the cost and the end-use of funds

NRI deposits

FCNR(B) deposits are in foreign currency and protect the NRI from exchange risk; NRE and NRO accounts are in rupees

Overseas Direct Investment (ODI)

Investment by Indian entities in foreign firms, under the Overseas Investment Rules, 2022

Foreign Venture Capital Investors (FVCIs)

Foreign investors who invest in unlisted start-ups and venture funds, registered with SEBI



14.7 Investment Promotion and Treaties

Measure

Key Point

Invest India

National investment promotion and facilitation agency, set up in 2009 under DPIIT

National Single Window System (2021)

A single online platform for approvals and clearances for investors

Double Taxation Avoidance Agreements (DTAAs)

Prevent the same income from being taxed twice in two countries; the 2016 protocol with Mauritius let India tax capital gains on shares bought after 1 April 2017

GAAR (2017)

General Anti-Avoidance Rules: stop arrangements whose main purpose is to avoid tax

Bilateral Investment Treaties (BITs)

Protect investors of each country; India issued a Model BIT in 2016 and ended many older treaties

Retrospective tax

The 2012 law taxing past transactions was withdrawn in 2021, to restore investor confidence



Trends

  • Services, computer software and hardware, telecom and trading have been among the largest FDI receiving sectors.

  • Singapore and the United States are among the leading sources of FDI in recent data; Mauritius has long been a major source because of its tax treaty.

  • Round-tripping is when Indian money goes out and comes back as foreign investment to take tax or other benefits.



Quick Recall

  • FDI: 10% or more of a listed company; FPI: less than 10%.

  • Routes: automatic (inform RBI later) and Government approval (FIFP; FIPB abolished in 2017).

  • FEMA 1999; NDI Rules 2019; DPIIT issues the FDI Policy; FPIs are regulated by SEBI.

  • Insurance FDI: 100% from 5 February 2026 (earlier 74%).

  • Press Note 3 (April 2020): approval needed for land border countries; eased by Press Note 2 (March 2026).

  • FIIs allowed in 1992; merged into FPIs in 2014; FAR for government bonds from 2020.

  • FCNR(B) deposits protect the NRI from exchange rate risk.

  • Prohibited sectors include lottery, gambling, chit funds, tobacco and atomic energy.


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