Foreign investment in India is governed by codified foreign exchange and corporate laws that define clear entry routes, sectoral caps and compliance obligations. The cornerstone is the Foreign Exchange Management Act, 1999 (FEMA), which (through its NonDebt Instruments Rules, 2019) provides the statutory framework for all Foreign Direct Investment (FDI) and related transactions.
The Department for Promotion of Industry and Internal Trade (DPIIT) issues consolidated FDI policy circulars and Press Notes that liberalize or restrict sectors, but legally these are effected as amendments to FEMA (NDI) Rules. This ensures that all foreign investment norms are embedded in statute, giving investors legal certainty while enabling the Government to update policy via formal rule-making.
Under these rules, FDI is distinguished from Foreign Portfolio Investment (FPI) based on ownership thresholds. FDI generally means a foreign investor holds 10% or more of a company’s equity. An FPI (such as a foreign institutional investor) is limited to less than 10% of equity in a listed company. If an investor exceeds the 10% FPI threshold, Reserve Bank of India (RBI) requires divestment or reclassification of the entire stake as FDI within five days.
Recent RBI guidance (Nov 2024) makes this reclassification rigorous: it must follow all FDIrules, secure any required government approvals and obtain the investee company’s concurrence. This process includes freezing further purchases until approvals are in place, closing any loopholes that would let a large stake evade FDI conditions.
FDI Routes and Sectoral Restrictions
India’s FDI policy classifies sectors into Automatic Route, Government Approval Route, or prohibited. Automatic Route investment requires no prior government approval and is available in most industries. Under this route, foreign investors can invest directly by complying with prescribed reporting (e.g. filing Form FC-TRS and FLA returns).
By contrast, the Government Route mandates prior clearance from the Department for Promotion of Industry and Internal Trade before any investment. Government approval is required in sensitive or strategic sectors such as multi-brand retail, defense (above 74% stake), print media beyond 26%, certain power and financial services sectors, and broadcasting, among others. Crucially, Press Note 3 (2020) bars all investments by entities from any country sharing a land border with India from the Automatic Route; such investments must always go through the Government Route.
Certain areas remain fully prohibited from any FDI. These include lottery businesses, gambling and betting, chit funds, Nidhi companies, trading in transfer development rights, and most real estate activities. FDI is also barred in atomic energy and in activities outside the purview of private investment. Moreover, foreign technology collaborations for any of the prohibited activities are also banned.
The Government has, however, actively liberalized key sectors to attract technology and capital. For example, in February 2024 India’s Cabinet approved sweeping reforms for the space sector. Now up to 100% FDI under the Automatic Route is allowed in the manufacturing of satellite components, ground segments and related systems. Satellite manufacturing and operations may have up to 74% foreign ownership on the Automatic Route (beyond which approvals are required), and launch vehicle production up to 49%.
Similarly, the defense sector now permits up to 74% FDI under Automatic Route for companies seeking new industrial licenses, up from 49%. Beyond 74%, proposals still require government clearance, and additional national security scrutiny applies. Telecommunications services are fully open to 100% FDI. Insurance companies can admit up to 74% foreign equity, and pension funds up to 49%. These liberalizations reflect India’s policy goal of using foreign capital and technology to build advanced infrastructure and industries.
Entity Options for Market Entry
Once sectoral eligibility is confirmed, a foreign investor must choose its legal presence. The preferred mode is to establish a Wholly Owned Subsidiary (WOS) in India. A WOS is an Indian company, often a private limited company under the Companies Act, 2013 whose entire equity is owned by the foreign parent. As a domestic company, the WOS is subject to Indian law but enjoys limited liability for the parent. It can own property, enter contracts, and conduct business in India on the same footing as any Indian firm.
Importantly, no minimum capital is prescribed for a WOS and the parent need not demonstrate any prior profits or net worth. Under current policy, a foreign entity can invest 100% FDI through a private limited company via the automatic route. This structure is administratively straightforward and provides maximum flexibility for commercial operations.
Alternatives to a WOS are nonincorporated offices governed by FEMA and RBI directions. A Liaison Office (LO) can be set up by RBI permission to conduct only non-commercial. An LO cannot earn income or engage in substantive trade. A Branch Office (BO) can also be established with RBI approval by a foreign company to conduct limited business operations in India, such as export/import, consultancy, or technical services, if the parent has been profit-making with a minimum net worth. A Project Office (PO) may be formed to execute a specific project awarded by an Indian entity. These foreign offices are extensions of the parent and are not separate Indian companies.
All such offices require RBI’s approval or general permission under FEMA and must register with the Registrar of Companies under the Companies Act once established. Recent draft FEMA reforms propose relaxing historical eligibility criteria such as the five-year profit test for setting up BOs/POs to ease market entry, but those are still under consideration.
Corporate Governance and Statutory Compliance
An incorporated subsidiary in India must comply fully with the Companies Act, 2013. A private company must appoint at least two directors. Crucially, the Act mandates at least one Director who is “resident in India”, i.e. present in India for 182 days or more in the prior year. This ensures the company has a local director responsible for compliance. The subsidiary’s board should typically meet at least four times a year if it is not a small company. At least one annual general meeting (AGM) must be held by September of each year for companies, and this triggers annual filings.
After each AGM, the subsidiary must file its financial statements with the Registrar of Companies (RoC) using Form AOC-4, typically within 30 days of the AGM. It must also file an Annual Return (Form MGT-7) with details of shareholders, directors, and share capital, usually within 60 days of the AGM. These filings promote transparency of ownership and finances and are public records.
Even a nonincorporated office creates corporate obligations. The Companies Act (Section 2(42)) defines a “Foreign Company” as any body corporate incorporated outside India that has a place of business in India. Once a foreign company establishes any office or branch in India, it must file Form FC-1 with the RoC within 30 days, and then an annual Form FC-4 detailing its Indian operations and financials. Thus, RBI’s branch/liaison regulations intersect with corporate law, a foreign company not only needs FEMA permission to set up shop, but also formal registration and reporting as a foreign company under the Companies Act (Chapter XXII). This corporate registration is distinct from tax registration (PAN, TAN) but both follow from establishing a business presence.
Tax Considerations and Permanent Establishment Risks
Taxation is often the decisive factor in choosing entity type. Indian subsidiaries enjoy concessional tax rates under Sections 115BAA/115BAB of the Income Tax Act, 1961. As of AY 2025–26, a domestic company can elect to pay tax at 22% under Section 115BAA, or at 15% (plus surcharge and cess) under Section 115BAB if it is a new manufacturing company incorporated after 1 Oct 2019. Without these elections, standard rates apply.
Crucially, under these special regimes the companies are exempt from Minimum Alternate Tax. By contrast, a foreign company with a Permanent Establishment (PE) in India faces a much higher base rate: the CIT rate for non-resident companies is 35%. Thus, in practice, a WOS is overwhelmingly more tax-efficient than operating through a foreign branch or PO, making the subsidiary structure mandatory for any significant long-term investment.
Foreign enterprises must also guard against inadvertently creating a PE under the Income Tax Act, since a PE triggers tax liability on business profits. Indian law (Sec. 92F(iii)) and India’s DTAAs (most follow OECD standards) define a PE as a fixed place of business through which the enterprise’s operations are wholly or partly carried on.
Examples include a place of management, branch, office, factory, workshop, or a construction site lasting over 12 months. Even business agents can create a PE: a dependent agent empowered to negotiate and conclude contracts on behalf of the foreign company will constitute a PE.
Once a PE exists, the foreign firm must file Indian tax returns on the profits attributable to that PE, register for PAN/TAN, and withhold tax under domestic rules. To avoid PE status, foreign companies often limit activities in India to purely preparatory or auxiliary work by independent service providers, while channeling commercial transactions through Indian subsidiaries.
Repatriation of Capital and Exit Controls
FEMA tightly controls capital account outflows, so repatriating investment and profits requires compliance. RBI rules stipulate that the sale proceeds of any shares held on repatriation basis must be remitted outside India promptly. In practice, an Authorized Dealer Category–I bank will allow remittance only if it is satisfied that the investment originally complied with entry conditions and that all Indian taxes are paid.
Specifically, banks demand a No Objection Certificate (NOC) or tax clearance from the Income Tax Department before remitting share sale proceeds to a foreign seller. Similarly, under RBI’s rules for liquidation, winding-up proceeds (shareholder exit) may be remitted only after an NOC from tax authorities and auditors’ certificates confirming all Indian liabilities have been discharged. These interlocking requirements ensure that capital gains and dividend taxes are settled in India before exit. For example, an authorized dealer can remit sale proceeds net of taxes if and only if the seller provides the requisite tax clearance certificate.
Recent FEMA amendments have also expanded payment flexibility. Since January 2025, RBI allows certain FDI transactions to be settled in Indian Rupees via Special Non-Resident Rupee (SNRR) and Special Rupee Vostro (SRVA) accounts. A person resident outside India may now invest (or receive investment returns) using a repatriable Rupee account instead of an NRE/NRO account. This change aims to internationalize the rupee and simplify cross-border settlements for trade and investment. Nonetheless, when it comes to actual outward remittances of capital or profits, the mandate remains: transactions must be routed through an authorized dealer with full documentation, and repatriation is subject to FEMA’s conditions and RBI’s oversight.
Conclusion
Foreign companies planning to invest in India must carefully align their strategy with the country’s layered legal regime. The Wholly Owned Subsidiary is effectively mandatory for sustained investments, as it combines full business scope with favourable tax treatment under the Income Tax Act, outweighing the burdens of Companies Act compliance. Non-incorporated offices may be useful for initial liaison or project execution, but they carry strict usage limits and face a 35% tax rate plus PE risk.
Throughout the investment’s lifecycle, entry, operation, and exit, one must navigate FEMA (via NDI Rules) for capital flows, sectoral caps under FDI policy, and Companies Act requirements. Finally, all capital repatriation is conditional on obtaining Indian tax clearance, meaning the Income Tax Department effectively has final approval power at exit. Meticulous planning of entity structure and compliance processes is thus essential: by combining the statutory entry routes (Automatic vs Government) with the subsidiary model, foreign investors can achieve both regulatory approval and tax efficiency in India.