Legislative Architecture: Governing the Flow of Capital
India’s Foreign Direct Investment (FDI) regime is structured through a dual framework of executive policy and statutory law, designed to ensure transparency and legal enforceability. At the foundation is the Foreign Exchange Management Act, 1999 (FEMA), which regulates all cross-border capital transactions. The operational directives for non-debt capital flows are codified under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), notified by the Department of Economic Affairs (DEA). These rules set out the permitted instruments, sectoral caps, pricing guidelines, and reporting formats applicable to foreign direct investment.
Policy pronouncements on sectoral caps and permitted routes are issued by the Department for Promotion of Industry and Internal Trade (DPIIT) through the Consolidated FDI Policy, most recently updated in 2020, with amendments made via periodic Press Notes, including Press Note No. 2 (2025 Series). However, DPIIT announcements acquire legal force only upon corresponding amendments to the NDI Rules and related FEMA notifications issued by the Reserve Bank of India (RBI) and DEA, creating a bifurcated but synchronized framework.
Entry Channels: FDI Automatic Route vs Government Approval
Foreign capital entry into India follows two distinct pathways, defined by the necessity of obtaining prior governmental authorization before the capital infusion. Foreign investors may invest through two principal routes: the Automatic Route and the Government Approval Route.
The Automatic Route permits non-residents to invest without prior governmental approval, provided the sector allows it and the investment remains within the prescribed cap. This route now accounts for more than 90% of total FDI inflows into India, and is preferred for sectors like manufacturing, telecom, insurance (up to 74%), oil & gas, and fintech.
The Government Approval Route is reserved for sectors where policy concerns or national security mandates pre-investment scrutiny. Applications under this route are submitted through the National Single Window System (NSWS), managed by DPIIT, and reviewed in consultation with sectoral ministries and, where applicable, the Ministry of Home Affairs.
A critical override to this mechanism is Press Note 3 (2020 Series), which imposes mandatory prior government approval for any FDI originating from or beneficially owned by entities in countries sharing land borders with India. This applies regardless of sector or investment value and is aimed at preventing hostile takeovers in strategic sectors. Countries covered by this mandatory screening include Pakistan, Bangladesh, China, Nepal, Myanmar, Bhutan, and Afghanistan. Notably, a citizen of Pakistan or an entity incorporated there, faces an additional prohibition, being barred from investing in defense, space, atomic energy, and other prohibited sectors.
Foreign Investment Limits India: Sectoral Caps and Strategic Liberalization
Sectoral caps represent the highest percentage of equity ownership that foreign entities are legally permitted to hold in an Indian entity operating within a specific industry. The Central Government has demonstrated a consistent intent to relax FDI limits in key sectors like insurance, defense, telecom, and oil & gas to attract long-term capital and promote technological modernization. These sectoral caps are binding ceilings defined under Schedule I of the NDI Rules, 2019 and DPIIT press notes.
In the insurance sector, FDI limits were increased to 74% under the Automatic Route in 2021. The Union Budget 2025-26 proposes a further increase to 100%, subject to conditions including full reinvestment of collected premiums within India. This change allows wholly-owned foreign insurers to enter the market, subject to regulatory conditions by Insurance Regulatory and Development Authority of India (IRDAI).
In the defense sector, 74% FDI is permitted under the Automatic Route for new licensees. Government approval is required for foreign investment beyond this threshold, particularly where access to modern or sensitive technologies is involved.
The telecommunications sector has been fully liberalized, allowing 100% FDI under the Automatic Route. However, security clearance from the Ministry of Home Affairs remains mandatory for substantial acquisitions and infrastructure investments.
For oil & gas, private sector refining allows 100% FDI under the Automatic Route, while public sector refining is capped at 49% FDI, with the stipulation that no disinvestment occurs. FDI in exploration, LNG infrastructure, pipelines, and retail distribution is fully permitted.
In digital services and fintech, there is no unified FDI cap. Instead, investment rules are dictated by underlying sectoral regulators such as RBI and SEBI. For example, non-banking financial companies (NBFCs) and payment startups can take up to 100% foreign investment. Similarly, financial platforms such as payment gateways and wallet providers are governed by RBI payment system regulations rather than FDI limits.
Post-Investment Compliance under FEMA
All post-investment transactions must adhere strictly to the reporting timelines prescribed under FEMA. Issuance of shares to non-residents must be reported in Form FC-GPR within 30 days of allotment. Any transfer of shares between residents and non-residents requires Form FC-TRS to be filed within 60 days of receipt or remittance of consideration. These filings are submitted via the FIRMS portal and monitored by the RBI.
Valuation for issuance and transfer of shares is governed by Rule 21 of the NDI Rules, 2019. For unlisted companies, valuation must be certified by a Securities and Exchange Board of India (SEBI)-registered merchant banker or a chartered accountant using internationally accepted methodologies such as the Discounted Cash Flow method. Transactions must meet the floor price in case of a non-resident buyer, and ceiling price in case of a non-resident seller, thereby safeguarding both capital valuation and regulatory fairness.
Regulatory Refinements: DPIIT Press Note No. 2 (2025 Series)
DPIIT issued Press Note 2 (2025 Series) on April 7, 2025, addressing a compliance ambiguity in sectors prohibited from receiving fresh FDI. It clarified that Indian companies operating in prohibited sectors like lottery or tobacco may issue bonus shares to existing non-resident shareholders, provided that the issuance does not alter the shareholding pattern. Since bonus shares are a capitalization of reserves, not a fresh inflow, this rule safeguards existing ownership rights without breaching FDI prohibitions. This measure was incorporated into the NDI Rules and took effect from June 11, 2025.
Evolving Compliance Climate: Decriminalization and Procedural Ease
The Jan Vishwas (Amendment of Provisions) Act, 2023 decriminalized several technical violations under FEMA and related statutes, replacing imprisonment clauses with monetary penalties. This aligns with RBI’s 2024 update to compounding guidelines, which eased penalties for first-time and procedural contraventions.
Further, procedural simplifications through the NSWS portal and industrial licensing reforms (Press Note 1/2025) have reduced transaction friction. License validity for defense manufacturing has been extended to 15 years, and Industrial Entrepreneur Memorandum (IEM) thresholds have been raised to align with revised MSME norms, streamlining FDI entry in capital-intensive and technology sectors.
Conclusion
India’s FDI policy in 2025 reflects a deliberate effort to balance strategic national interests with the facilitation of global capital. While the automatic route continues to dominate inflows, mandatory government approval remains critical for sensitive sectors and investments from bordering nations. Relaxation of sectoral caps in insurance, telecom, defense, and oil & gas underscores a progressive approach to foreign capital integration. With a synchronized statutory and policy apparatus, transparent pricing norms, and robust post-investment compliance procedures, India offers a predictable and legally sound destination for foreign direct investment.