Foreign Direct Investment (FDI)

Foreign Direct Investment, or FDI, is money that a foreign company or person puts into a business in another country to own a lasting share in it and have a say in how it runs. For example, when a Japanese car company builds a factory in India, or buys a big stake in an Indian company, that is FDI. The key idea is long-term ownership and control, not just buying shares to sell them later for a quick profit. FDI brings in money, and often also technology, skills and jobs.

Why do countries want FDI?

A growing country like India needs a lot of money to build factories, roads, power plants and businesses. Indians do not save enough to pay for all of it on their own. FDI fills this gap. It is also "sticky" money: a factory cannot be packed up and flown out of the country overnight. So FDI is more stable than other foreign money. It also brings things money alone cannot buy, such as new technology, modern management and access to world markets.

How is FDI different from portfolio investment?

This is the most important difference to learn. Under India's rules, the dividing line is 10%:

• If a foreign investor buys 10% or more of a listed Indian company (a company whose shares trade on the stock exchange), it counts as FDI.
• If the foreign investor buys less than 10% of a listed company, it counts as Foreign Portfolio Investment (FPI).
• Any foreign investment in an unlisted company (one not on the stock exchange) counts as FDI, whatever the share.

Think of it like this: FDI is like buying a house to live in. FPI is like buying a few gold coins that you can sell anytime. FPI money can leave India within minutes when global markets get nervous, so it is often called "hot money". If an FPI's stake crosses 10% by mistake, it gets five trading days to bring it back below 10%. If it does not, the whole investment is treated as FDI.

Where did India's FDI policy come from?

Before 1991, India was very careful about foreign companies. The Foreign Exchange Regulation Act (FERA), 1973 generally limited foreign ownership in Indian companies to 40%. In 1991, India faced a serious shortage of foreign currency and opened up its economy (the LPG reforms: Liberalisation, Privatisation, Globalisation). The New Industrial Policy, 1991 allowed up to 51% FDI automatically in selected high-priority industries. A single-window body, the Foreign Investment Promotion Board (FIPB), was set up in the early 1990s to approve other foreign investment proposals. Later:

• FEMA, 1999 (the Foreign Exchange Management Act) replaced FERA and came into force on 1 June 2000. Breaking foreign exchange rules became a civil matter (fine) instead of a criminal one (jail).
• The Union Cabinet decided to abolish the FIPB on 24 May 2017. Approvals now go to the ministry concerned, with DPIIT as the nodal department. Proposals are filed online on the Foreign Investment Facilitation Portal (FIFP).
• In October 2019, power over "non-debt instruments" (like shares) shifted from the RBI to the central government. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019, notified on 17 October 2019, now govern FDI. The RBI still regulates foreign debt (loans and bonds).

How does FDI enter India: the two routes

Every sector in India falls into one of three boxes:

1. Automatic route: The foreign investor does not need any prior government approval. It only has to inform the RBI after the money comes in. Most sectors are here, many with 100% foreign ownership allowed.
2. Government (approval) route: The investor must first get approval from the government through the Foreign Investment Facilitation Portal. This is used for sensitive sectors.
3. Prohibited sectors: FDI is not allowed at all.

Many sectors have a sectoral cap: the highest share a foreigner can own. Some sectors are split, with automatic route up to a limit and government route above it.

The key numbers to remember

Examples of sectoral rules (as of September 2026):

• Insurance: up to 100% under the automatic route, after the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025, passed by Parliament in December 2025 (earlier 74%).
• Defence manufacturing: up to 74% automatic; above 74% through the government route, where it is likely to bring in modern technology.
• Private sector banks: up to 74%. Up to 49% comes through the automatic route; from 49% to 74% needs the government route. Separately, anyone (Indian or foreign) buying 5% or more of any bank needs prior RBI approval.
• Public sector banks: up to 20%, through the government route. The government must keep at least 51% in these banks. As of October 2026, this 20% cap has not been raised.
• Single-brand retail: 100% automatic. Multi-brand retail: up to 51% through the government route.
• Prohibited sectors: lottery business, gambling and betting (including casinos), chit funds, Nidhi companies, trading in Transferable Development Rights (TDRs), real estate business and farm houses, manufacturing of cigars and cigarettes from tobacco, atomic energy and railway operations (except permitted activities).

Special rule for neighbouring countries

In April 2020, during the COVID-19 crash, many Indian companies became cheap to buy. To stop "opportunistic takeovers", the government issued Press Note 3 (2020) on 17 April 2020. It said any FDI from a country that shares a land border with India (such as China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan), or where the real owner is from such a country, must take the government route. In 2026 this rule was eased in three steps:

• The Union Cabinet approved the change on 10 March 2026.
• DPIIT issued Press Note 2 (2026) on 15 March 2026.
• The matching change to the Non-debt Instruments Rules was published in the Gazette on 2 May 2026. Only from this date did the easing actually come into force.

What did Press Note 2 (2026) change?

An investor whose beneficial ownership (the real, final owner behind the investment) from a land-border country is up to 10%, and does not give control, can now use the automatic route in sectors where it is allowed. Above 10%, or with control, government approval is still needed. Companies set up in China or any other land-border country itself still need government approval. The meaning of "beneficial owner" now follows India's anti-money-laundering law, the Prevention of Money-laundering Act (PMLA), 2002.

• The Cabinet also set a 60-day time limit for deciding proposals in some manufacturing sectors, such as capital goods and electronic components.
• Separately, investors from Pakistan and Bangladesh can invest only through the government route. Pakistani investors cannot invest in defence, space or atomic energy at all.

How is FDI counted?

This is where many students get confused. "Total FDI" in official data has three parts:

• Equity inflows: fresh money used to buy shares or set up a company.
• Reinvested earnings: profits that a foreign-owned company in India keeps and invests again in India, instead of sending home.
• Other capital: mainly loans between the foreign parent company and its Indian unit.

Also, gross FDI is all the FDI that came in. Net FDI is what is left after you subtract money that went out: foreign investors taking their money back home (repatriation) and Indian companies investing abroad (outward FDI). A country can have record gross FDI but low net FDI.

Where does India's FDI come from and go to?

Since April 2000, Singapore and Mauritius have been the two biggest sources of FDI equity into India, followed by the United States. China is a small source: about US$2.51 billion, or about 0.32% of India's total FDI equity inflows from April 2000 to March 2026 (DPIIT data). A large part of this money is from companies of other countries that route it through Singapore or Mauritius because of tax treaties and easy finance rules there.

The top sectors receiving FDI are usually computer software and hardware, services (banking, insurance, outsourcing, research), trading, telecom and automobiles. Maharashtra, Karnataka, Gujarat and Delhi usually receive the largest shares. DPIIT (Department for Promotion of Industry and Internal Trade) publishes FDI data, and the RBI publishes the balance-of-payments figures.

Commonly confused concepts

• FDI vs FPI: FDI is 10% or more in a listed company (or any stake in an unlisted one), long-term, with a say in management. FPI is less than 10% in a listed company, short-term, easy to exit. FPI is regulated mainly by SEBI; FDI policy is made by DPIIT and the Finance Ministry under FEMA.
• Greenfield vs brownfield FDI: Greenfield means building something new from empty land (a new factory). Brownfield means buying or merging with an existing company or plant. Greenfield usually creates more new jobs.
• Automatic route vs government route: Automatic needs no prior approval, only reporting to the RBI. Government route needs prior approval.
• Gross vs net FDI: Gross is total inflow. Net is inflow minus repatriation and outward FDI.
• FDI vs ODI: FDI is foreign money coming into India. Overseas Direct Investment (ODI) is Indian companies investing abroad.

Issues, criticism and the way forward

• High repatriation: In 2025-26, gross FDI was a record, but repatriation and disinvestment were also high at about $53.58 billion, so net FDI was only about $7.65 billion (RBI data). Low net FDI puts pressure on the rupee.
• Round-tripping and tax-treaty routing: Some money comes via Mauritius or Singapore mainly to save tax, or is even Indian money going out and coming back as "foreign" money. India amended its tax treaties with Mauritius (2016) and Singapore (2017) to reduce this. A newer change to the Mauritius treaty adds a Principal Purpose Test (PPT). Under it, India can refuse treaty benefits if saving tax was one of the main reasons for an investment. It was signed on 7 March 2024 and came into force on 10 August 2026. India notified it on 13 October 2026. So a shell company in Mauritius, with no real business there, may no longer get the tax benefit.
• Uneven spread: Most FDI goes to a few states and to services, not to labour-heavy manufacturing where India needs jobs.
• Security concerns: FDI from hostile countries can give them control over sensitive data, telecom or critical infrastructure, which is why screening rules like Press Note 3 exist.
• Ease of doing business: Investors still complain about slow contract enforcement, tax disputes and frequent rule changes. Experts suggest faster courts, a stable tax regime, better land availability and more trade agreements (with investment chapters) to attract long-term FDI.

Concepts to Know

• Listed company: A company whose shares are bought and sold on a stock exchange, like the BSE or NSE.
• Sectoral cap: The maximum share of a company that foreign investors are allowed to own in a given sector.
• Repatriation: When a foreign investor sells its stake or takes profits and sends the money back to its home country.
• Balance of Payments (BoP): A record of all money flowing into and out of a country in a year. FDI is part of its capital account.
• DPIIT: Department for Promotion of Industry and Internal Trade, under the Ministry of Commerce and Industry. It frames India's FDI policy and issues "Press Notes" to change it.
• Beneficial owner: The real person or entity who finally owns or controls an investment, even if it is made through other companies.
• Double Taxation Avoidance Agreement (DTAA): A tax treaty between two countries so that the same income is not taxed twice. Some investors route money through a country with a friendly treaty just to pay less tax. A Principal Purpose Test stops this: if getting the tax benefit was one of the main aims of a deal, the benefit can be denied.