Foreign Direct Investment (FDI)

By Manu Rao | Updated March 2026

What Is Foreign Direct Investment?

Foreign Direct Investment, or FDI, is a capital inflow from a person or entity resident outside India into an Indian company. Unlike portfolio investment where a foreign investor buys publicly traded shares, FDI means acquiring a direct stake in an unlisted or listed company with the intent of long-term participation in management.

India received $71.3 billion in FDI during FY 2022-23, according to the Department for Promotion of Industry and Internal Trade (DPIIT). The figure dipped to $44.4 billion in FY 2023-24, but India remains among the top 5 global FDI destinations.

Legal Basis

FDI into India is governed by the Foreign Exchange Management Act, 1999 (FEMA), specifically FEMA 20(R) — Foreign Exchange Management (Non-debt Instruments) Rules, 2019. The Reserve Bank of India (RBI) and DPIIT jointly administer FDI policy through the Consolidated FDI Policy, updated periodically via press notes.

Key regulatory documents include:

• FEMA Section 6 — Capital account transactions
• FEMA Notification No. 20/2019-RG dated October 17, 2019
• DPIIT Consolidated FDI Policy (effective October 15, 2020)
• Press Note 3 of 2020 — restrictions on investments from countries sharing a land border with India

FDI Routes: How Foreign Capital Enters India

There are two routes for FDI in India:

1. Automatic Route

No prior government approval needed. The Indian company simply issues shares to the foreign investor and reports the transaction to the RBI within 30 days using Form FC-GPR filed through an Authorized Dealer bank. Most sectors fall under this route.

2. Government Approval Route

Certain sectors require prior approval from the concerned ministry or the DPIIT. The foreign investor must apply through the Foreign Investment Facilitation Portal (FIFP) before the Indian company can issue shares. Processing typically takes 8-10 weeks.

Learn more about each route: Automatic Route | Government Approval Route

Sector-Wise FDI Caps

Not every sector allows 100% foreign ownership. Here is a breakdown of major caps:

Some sectors are entirely prohibited for FDI: lottery, gambling, chit funds, real estate business (excluding construction development), manufacturing of cigars and tobacco, and atomic energy.

How FDI Applies to Foreigners and NRIs

If you are a foreign national looking to register a company in India, FDI rules determine how much of your own company you can own. For most technology and services businesses, you can hold 100% equity through the automatic route.

NRIs and OCI cardholders investing on a repatriation basis follow the same FDI route and caps. On a non-repatriation basis, their investment is treated as domestic — no FDI cap applies.

One critical rule: citizens of Pakistan, Bangladesh, China, Myanmar, Nepal, Bhutan, and Afghanistan face extra restrictions under Press Note 3 of 2020. All FDI from these countries, regardless of sector, requires government approval.

Process for Making an FDI Investment

1. Check the FDI policy — Confirm that your sector allows foreign investment and identify the applicable cap and route.
2. Incorporate or identify the Indian entity — A Private Limited Company is the most common vehicle. You need at least one resident director in India.
3. Open a bank account — The Indian company must have a bank account with an Authorized Dealer (AD) bank.
4. Remit funds — Transfer investment funds from your overseas bank to the Indian company's bank account. The AD bank issues a Foreign Inward Remittance Certificate (FIRC).
5. Issue shares within 60 days — The Indian company must allot shares to the foreign investor within 60 days of receiving funds.
6. File FC-GPR — Report the share allotment to the RBI through Form FC-GPR within 30 days of allotment via the FIRMS portal.
7. Obtain government approval (if needed) — For government route sectors, apply on FIFP before step 4.

Common Mistakes

These errors cause delays, penalties, or rejection:

• Missing the 30-day FC-GPR deadline. Late filing attracts compounding fees from RBI. The penalty can run into several lakhs.
• Not issuing shares within 60 days. If shares are not allotted within 60 days of receiving funds, the money must be refunded to the foreign investor.
• Incorrect valuation. Shares issued to foreign investors must be priced at or above Fair Market Value determined by a SEBI-registered merchant banker or a practicing Chartered Accountant using DCF or NAV methods.
• Ignoring Press Note 3. Investors from China, Hong Kong, or Bangladesh often assume they can use the automatic route. They cannot — all investments require prior government clearance.
• Mixing repatriation and non-repatriation. NRIs sometimes invest through the wrong account type, creating complications when they want to send profits back home.

Practical Example

Sarah, a US citizen, wants to start a software development company in India. She plans to own 100% of the equity. IT services allow 100% FDI under the automatic route, so she does not need government approval.

She incorporates a Private Limited Company with herself and an Indian resident director. She remits $50,000 from her US bank to the Indian company's account with HDFC Bank (an AD bank). The company allots shares within 60 days and files FC-GPR within 30 days of allotment. Sarah now legally owns her Indian subsidiary.

Had Sarah been a Chinese citizen, the same investment would require prior government approval under Press Note 3, adding 8-10 weeks to the timeline.

Key Takeaways

• FDI is governed by FEMA 20(R) and the DPIIT Consolidated FDI Policy
• Most service sectors allow 100% FDI under the automatic route
• Share allotment must happen within 60 days; FC-GPR filing within 30 days after that
• Valuation must be at or above Fair Market Value
• Press Note 3 adds government approval for investors from 7 bordering countries

Need help with FDI compliance for your Indian company? View our services or reach out to Beacon Filing for a consultation.