Foreign Direct Investment (FDI) is investment by a person resident outside India in the equity instruments of an Indian company or LLP, governed by the Foreign Exchange Management Act, 1999 (FEMA), read with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and the Consolidated FDI Policy issued by the DPIIT. FDI enters India either through the automatic route, which needs no prior approval, or the government route, which does.
Definition
Under the FEM (Non-Debt Instruments) Rules, 2019, FDI is an investment by a person resident outside India in the equity instruments of an unlisted Indian company, or in 10% or more of the post-issue paid-up equity capital, on a fully diluted basis, of a listed company. Below that 10% threshold, a listed-company holding is treated instead as Foreign Portfolio Investment (FPI), reflecting that FDI carries a lasting management interest.
Governing Provision
The Foreign Exchange Management Act, 1999, is the parent statute. The FEM (Non-Debt Instruments) Rules, 2019 (notified 17 October 2019) define the eligible instruments and conditions, and the FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 govern payment and reporting. The Consolidated FDI Policy Circular dated 15 October 2020, issued by the DPIIT and amended through Press Notes, fixes the entry routes and sectoral caps.
Key Features
FDI is shaped by the entry route, the sectoral cap, the instruments allowed, pricing discipline and post-investment reporting. Most sectors permit 100% FDI under the automatic route; a few have lower ceilings or conditions, and a short list of prohibited sectors bars FDI entirely. A company’s Authorised Dealer (AD) bank verifies each transaction before sending the records to the Reserve Bank. The defining features are:
| No | Key Features | Particulars |
|---|---|---|
| 1 | Entry routes | The automatic route needs no prior approval; the government route requires approval via the Foreign Investment Facilitation Portal before issuance. |
| 2 | Sectoral caps | Most sectors allow 100% FDI; insurance is now 100% automatic, and defence is 74%. Lottery, gambling, and chit funds are prohibited. |
| 3 | Eligible instruments | Equity shares, compulsorily convertible preference shares (CCPS), compulsorily convertible debentures (CCDs) and share warrants. |
| 4 | Pricing | The issue price to a non-resident must be at or above fair value certified by a chartered accountant or merchant banker. |
| 5 | FC-GPR reporting | Form FC-GPR is filed on the RBI FIRMS portal within 30 days of allotting the equity instruments. |
Related Terms
- Small LLP — LLPs eligible to receive FDI under the automatic route.
- Small Company — a company class that can hold foreign investment.
- Director Identification Number — DIN held by an investee company’s directors.
- Company Name — naming the Indian company that receives FDI.
- Digital Signature Certificate — used to sign the investee company’s statutory filings.
Frequently Asked Questions
Is FDI the same as Foreign Portfolio Investment (FPI)?
Which sectors are prohibited for FDI?
Where is FDI reported after shares are issued?
References
- Foreign Exchange Management Act, 1999
- FEM (Non-Debt Instruments) Rules, 2019: S.O. 3732(E), 17 October 2019
- FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019
- Consolidated FDI Policy Circular, 15 October 2020 (DPIIT), as amended by Press Notes
- Press Note 1 of 2026 (DPIIT): Insurance FDI raised to 100% under the automatic route
In This Article
Author Bio
Meet Sanjeev Kumar, a distinguished advocate before the Supreme Court of India, High Courts, and National Tribunals. Founding Partner of Juriskps Law Offices, a premier law firm, he specializes in commercial, corporate, tax, arbitration, and IPR matters. His incisive legal insights enrich Setindiabiz’s blog with expert commentary.
