Prohibited Sectors for Foreign Direct Investment (FDI) in India

India’s dynamic economy presents a fertile ground for Foreign Direct Investment (FDI), with its open-market policies driving growth and job creation. While the country largely embraces foreign capital, it also judiciously safeguards its strategic and public interests. This balancing act is evident in the FDI policy, which, while welcoming in many sectors, imposes absolute prohibitions in a few.

This article aims to provide a comprehensive list of sectors that are completely prohibited by the Indian government for the purpose of Foreign Direct Investment (FDI). It also discusses Press Note 3 of 2020 and briefly differentiates between the automatic route and the government route of FDI.

The latest Consolidated FDI Policy Circular, dated 15-10-2020, outlines these restrictions, demarcating sectors where FDI remains a non-starter. Understanding these nuances is essential for foreign investors considering setting up an Indian Subsidiary or entering into a Joint Venture with any other company. This piece aims to unravel these prohibited sectors, offering clarity on the intricate tapestry of India’s FDI landscape

List of Prohibited Sectors for FDI in India

1. Lottery Business including Government/private lottery, online lotteries, etc.
2. Gambling and Betting, including casinos etc.
3. Chit funds d) Nidhi Company
4. Trading in Transferable Development Rights (TDRs)
5. Real Estate Business or Construction of Farm Houses ‘Real estate business’ shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.
6. Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
7. Activities/sectors not open to private sector investment, e.g. (I) Atomic Energy and (II) Railway operations (other than permitted activities mentioned in permitted sectors).
8. Foreign technology collaboration in any form, including licensing for franchise, trademark, brand name, or management contract, is also prohibited for Lottery Business, Gambling and Betting activities.​
FDI policy categorises industrial sectors into Prohibited and Permitted Sectors. In Prohibited Sectors, foreign investment is strictly prohibited. Even in Permitted Sectors, there may be restrictions. FDI is currently restricted in specific sectors by placing a cap on the percentage of FDI allowed or by imposing restrictions through PN-3. This note restricts FDI from countries such as China and Bangladesh that share a land border with India.

Note on Press Note 3 (PN-3):

Press Note 3 of 2020 restricts FDI from countries that share a land border with India, such as China, Pakistan, Bangladesh, Afghanistan, etc. Investments from these countries require government approval, regardless of the FDI cap in the sector concerned. This directive aims to prevent opportunistic takeovers or acquisitions of Indian companies during times of economic vulnerability. For investors from these neighbouring countries, understanding the implications of Press Note 3 is essential for navigating the FDI process in India.

Automatic Vs Government Route of FDI

It is important to note that two methods exist for processing FDI in the permitted sector. Applications that fall within the allowed limit of FDI and are not affected by Press Note 3 are processed automatically without prior permission. On the other hand, all other cases for FDI in permitted sectors, such as those that exceed the allowed FDI percentage or are affected by PN-3, are processed through the Government Route, also known as the approval route. In such cases, prior permission from the central government is required. You can also read the comparison between automotive and government routes of FDI.

India's FDI policy balances attracting foreign investment and safeguarding its interests. This article provides a list of prohibited sectors for FDI in India and an overview of the FDI processing method. Foreign investors must navigate the FDI process carefully to tap into India's dynamic economy.