Foreign Direct Investment (FDI) is an economic concept and a type of investment where an entity from one country makes a lasting interest investment in a business in another country. This investment typically involves acquiring a significant ownership stake, defined in India as 10% or more of the post-issue paid-up equity capital of a listed Indian company, or any investment in an unlisted Indian company. FDI is distinct from Foreign Portfolio Investment (FPI) because it implies a notion of direct control and participation in the management and operations of the Indian entity.
The origin of the modern FDI regime in India is rooted in the economic liberalisation policy initiated in 1991, which was a response to the severe balance of payments crisis. Before this, India's policy was restrictive, culminating in the late 1970s with rules that forced foreign companies to limit their shareholding to a maximum of 40%. The liberalisation solved the problem of capital scarcity and the need for technology and modern management practices to accelerate economic growth.
FDI in India is primarily governed by the Foreign Exchange Management Act (FEMA), 1999, which is administered by the Reserve Bank of India (RBI). The operational guidelines are set out in the Consolidated FDI Policy issued by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry. The mechanism works through two main routes: the Automatic Route, which allows foreign investors to invest without prior government or RBI approval, and the Government Route, which requires prior approval from the concerned administrative Ministry or Department. The investment limits, known as sectoral caps, vary by sector; for example, 100% FDI is allowed under the Automatic Route in sectors like manufacturing, while defense allows up to 74% via the Automatic Route and beyond that through the Government Route.
A significant recent change occurred on April 17, 2020, when the government amended the FDI policy, making the Government Route mandatory for any entity or beneficial owner from a country that shares a land border with India. This amendment, often referred to as Press Note 3, was introduced to curb "opportunistic takeovers/acquisitions" during the COVID-19 pandemic. However, a recent relaxation allows non-Chinese companies with Chinese investors holding less than 10% in a non-controlling capacity to invest through the Automatic Route, provided they are not registered in a land-border sharing country. The core regulatory framework under FEMA, 1999, and the two-route mechanism have stayed the same, but the conditions for using the Automatic Route have been tightened for specific countries.