Foreign Direct Investment (FDI) is an economic concept defined as an investment by a person resident outside India in the equity instruments of an unlisted Indian company, or in 10% or more of the post-issue paid-up equity capital of a listed Indian company on a fully diluted basis. It is distinct from Foreign Portfolio Investment (FPI) because it implies a notion of direct control and a long-term interest in the Indian enterprise.
The origin of the modern FDI regime in India is rooted in the economic liberalisation process that began in 1991. This reform was a response to the severe economic crisis and aimed to solve the problem of a weak industrial structure, high costs, and a lack of technological advancement by attracting much-needed capital and technology.
FDI works through two primary mechanisms: the Automatic Route and the Government Route. Under the Automatic Route, the foreign investor does not require prior approval from the Government of India or the Reserve Bank of India (RBI). Conversely, the Government Route requires prior approval from the concerned Administrative Ministry or Department. The entire regulatory framework is primarily governed by the Foreign Exchange Management Act (FEMA), 1999, and the rules/regulations issued thereunder, such as the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. The Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce and Industry, issues the Consolidated FDI Policy, which details sectoral caps and entry routes.
The FDI policy has been progressively liberalised, with recent changes focusing on increasing sectoral caps and easing entry. For instance, the FDI limit in the insurance sector was revised from 49% to 74% under the Automatic Route. A significant amendment was introduced via Press Note 3 (2020), which mandated that investments from countries sharing a land border with India must receive government approval to prevent opportunistic takeovers. This restriction was recently amended by Press Note 2, 2026, which allows non-controlling beneficial ownership of up to 10% from land-bordering countries through the Automatic Route, subject to disclosure and reporting to the DPIIT. The core mechanism of the Automatic and Government Routes, along with the governing framework of FEMA, 1999, remains the same.