Prohibited Sectors for Foreign Direct Investment (FDI) in India
Overview :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.
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.
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 anIndian Subsidiaryor 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
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.
Conclusion
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.
FAQ's
No — because of PN-3 (2020) such investments (where the investor/beneficial owner is from a land-bordering country) require government approval, regardless of sectoral caps that would otherwise permit automatic investment.
Under the Automatic Route no prior government approval is needed if the sectoral FDI limit and conditions are met. Under the Government (approval) Route the investor must seek prior approval from the government/competent authority. Which route applies depends on sectoral rules, quantum of investment and specific policy notes (e.g., PN-3).
Yes — REITs registered under SEBI’s REIT Regulations (2014, amended periodically) are a regulated route and have specific rules on foreign investment, reporting and investor eligibility; they are not treated the same as general “real-estate business” for FDI prohibition purposes.
No — the prohibition is on foreign investment into the activity itself. Even structuring through a JV/subsidiary normally won’t permit fresh foreign ownership/control of a prohibited activity. Existing legacy situations are a different (fact-sensitive) area and typically require legal advice.
The list is issued in the Consolidated FDI Policy but the government updates policy via press notes, FEMA notifications and circulars — so the list evolves (examples: PN-3 in 2020; PN-2 in 2025; occasional sectoral relaxations such as certain rules for the space sector). Investors should check DPIIT/MoCI, RBI and SEBI updates frequently.
Author Bio
Editorial Team | in
Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.