Foreign Direct Investment (FDI) is an economic concept defined as an investment by a resident outside India in an unlisted Indian company, or in ten per cent or more of the post-issue paid-up equity capital of a listed Indian company. This minimum stake distinguishes it from Foreign Portfolio Investment (FPI), which involves a stake of less than ten per cent. FDI signifies a lasting interest, often involving the transfer of technology and participation in management.
The modern framework for FDI in India originated with the economic liberalization following the 1991 economic crisis. This shift replaced the restrictive Foreign Exchange Regulation Act (FERA) with the more facilitative Foreign Exchange Management Act (FEMA), 1999, which solved the problem of a closed economy where "nothing was permitted unless specifically permitted."
FDI is governed by the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and works through two mechanisms: the Automatic Route and the Government Route. The Automatic Route allows investment without prior approval from the government or the Reserve Bank of India (RBI). The Government Route requires mandatory prior approval from the respective Administrative Ministry/Department, with applications processed via the Foreign Investment Facilitation Portal (FIFP), which is administered by the Department for Promotion of Industry and Internal Trade (DPIIT).
Recently, the FDI policy has seen two key amendments. The limit for the insurance sector was increased from 74% to 100% under the Automatic Route. Furthermore, while investments from countries sharing a land border with India generally require government approval, a revised framework allows investors with non-controlling beneficial ownership of up to 10% from such countries to use the Automatic Route.