Foreign Direct Investment In India: History And Timeline

India has been increasingly open to foreign direct investment (FDI) since 1991, with the country's economic liberalisation bringing relaxations in several key sectors. FDI is a major catalyst for India's economic growth, with the country ranking as the world's eighth-largest recipient of FDI in 2023. The Indian government has implemented a range of policies and initiatives to enhance FDI in the country, including the Make in India campaign, which focuses on simplifying procedures and promoting a favourable investment climate across sectors.

FDI into India is primarily governed by the 1999 Foreign Exchange Management Act (FEMA) and rules and regulations issued by the Reserve Bank of India (RBI), along with the Consolidated Policy on FDI and press notes and circulars issued by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry.

There are two routes governing FDI into India: the automatic route and the government approval route. Under the automatic route, FDI is allowed without the need for approval from the government, with the amount of investment depending on the sector. For example, sectors such as manufacturing, telecoms and financial services allow foreign investors to invest up to 100% in an Indian entity.

Certain sectors fall under the government approval route, requiring prior approval from the government, the RBI, or both. Key sectors that require government approval include multi-brand retail trading and the brownfield pharmaceutical sector. Some sectors, such as lottery businesses and the manufacture of tobacco or tobacco substitutes, are prohibited from receiving FDI.

In 2020, the Indian government amended the FDI policy to protect Indian companies from opportunistic takeovers/acquisitions during the COVID-19 pandemic. This meant that FDI from countries sharing a land border with India would be subject to scrutiny from the Ministry of Commerce and Industry.

India's FDI policy

FDI into India is governed by the 1999 Foreign Exchange Management Act (FEMA) and rules and regulations issued by the Reserve Bank of India (RBI), along with the Consolidated Policy on FDI and press notes and circulars (FDI Policy) issued by the Department for Promotion of Industry and Internal Trade under the Ministry of Commerce & Industry (DPIIT).

The FDI Policy sets out the entry routes for different sectors (i.e. automatic or government approval), investment limits for the different sectors, conditions for investment, and eligible instruments, among other matters.

There are three categories of sectors for the purposes of FDI inflow:

• Prohibited sectors – prohibited from receiving FDI. Includes atomic energy, real estate business, lottery business, manufacturing tobacco products, gambling and betting.
• Automatic route – no prior approval required from the government for receiving FDI. Includes airports, construction, industrial parks, mining, manufacturing and IT.
• Government approval route – prior approval required from the government for receiving FDI. Includes air transport services, satellites, print media and public sector banks.

The FDI Policy imposes sector-specific FDI thresholds based on the sensitivity of the sector, regardless of whether the sector falls under the automatic or the government approval route. These are, generally:

• Up to 100% FDI allowed (includes manufacturing, construction and IT).
• Up to 74% FDI allowed (includes pharmaceuticals and defence).
• Up to 49% FDI allowed (includes air transport services and private sector banking).
• Up to 26% FDI allowed (print media).

If the NDI Rules and FDI Policy do not specifically prescribe any conditions for any sector, 100% FDI under the automatic route is allowed for that sector.

On 17 April 2020, the Indian government amended the FDI Policy, making it mandatory to obtain government approval for FDI received from countries that “share a land border” with India, including China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan. This was ostensibly to curb opportunistic takeovers and acquisitions, but the intention was widely held to be a move to limit the inflow of Chinese investments.

However, India has been on a path of liberalisation since 1991. Even as recently as 2021, the government brought about relaxations in several key sectors, including:

• Insurance – the FDI limit in the insurance sector was raised from 49% to 74% under the automatic route.
• Defence – the FDI limit in the defence sector was significantly liberalised by raising the FDI limit for investment under the automatic route from 49% to 74%.
• Telecoms – the government increased the FDI limit into the sector from 49% to 100% under the automatic route.
• Oil and gas – while the overall cap for FDI into the oil and gas sector continues to remain at 49% under the automatic route, a window has been created for 100% FDI in oil and gas public sector undertakings (PSU) that have obtained 'in-principle approval' from the government for strategic disinvestment.

Automatic route

India has a complex history of foreign direct investment (FDI) regulations, with policies evolving over time to balance economic growth and national interests. The automatic route is a crucial aspect of India's FDI policy, offering a streamlined path for investors to enter the Indian market.

The automatic route for FDI was introduced in India in the early 1990s as part of economic liberalisation reforms. This route allows foreign investors to invest in specific sectors without prior approval from the Government of India or the Reserve Bank of India (RBI). Sectors eligible for the automatic route are specified in the FDI policy, which is updated and circulated by the Department for Promotion of Industry and Internal Trade (DPIIT).

Under the automatic route, the investor only needs to notify the RBI of their investment within a prescribed time frame, usually within 30 days from the date of receipt of funds or the issue of shares to the non-resident investor, whichever is earlier. This notification is done through the Foreign Investment Facilitation Portal (FIFP), an

Government route

Under the Government Route, prior approval from the Government of India is required before investment. Proposals for foreign direct investment under the Government Route are considered by the respective Administrative Ministry/Department.

The Indian company receiving FDI either under the automatic route or the government route is required to comply with the provisions of the FDI policy, including reporting the FDI and issue of shares to the Reserve Bank of India.

The following sectors require Central Government approval:

• Tea sector, including plantations – 100%.
• Mining and mineral separation of titanium-bearing minerals and ores, its value addition and integrated activities – 100%.
• FDI in enterprise manufacturing items reserved for the small-scale sector – 100%.
• Defence – up to 49% under FIPB/CCEA approval, beyond – 49% under CCS approval (on a case-to-case basis, wherever it is likely to result in access to modern and state-of-the-art technology in the country).
• Teleports, Direct-to-Home, Cable Networks, Mobile TV, and Headend-in-the-Sky Broadcasting Service – beyond 49% and up to 74%.
• Broadcasting Content Services: uplinking of news and current affairs channels – 26%, uplinking of non-news and current affairs TV channels – 100%.
• Publishing/printing of scientific and technical magazines/specialty journals/periodicals – 100%.
• Print media: publishing of newspapers and periodicals dealing with news and current affairs – 26%, publication of Indian editions of foreign magazines dealing with news and current affairs – 26%.
• Terrestrial Broadcasting FM (FM Radio) – 26%.
• Publication of facsimile editions of foreign newspapers – 100%.
• Airports – brownfield – beyond 74%.
• Non-scheduled air transport service – beyond 49% and up to 74%.
• Ground-handling services – beyond 49% and up to 74%.
• Satellites – establishment and operation – 74%.
• Private security agencies – 49%.
• Single-brand retail – beyond 49%.
• Asset Reconstruction Company – beyond 49% and up to 100%.
• Banking private sector (other than WOS/Branches) – beyond 49% and up to 74%, public sector – 20%.
• Insurance – beyond 26% and up to 49%.
• Pension Sector – beyond 26% and up to 49%.
• Pharmaceuticals – brownfield – 100%.

The Government Route is also allowed in sectors which have 100% FDI allowed under the automatic route and without any conditions.

Prohibited sectors

India's business sectors may be divided into three categories for the purposes of foreign direct investment (FDI) inflow: prohibited sectors, the automatic route, and the government route.

The following sectors are prohibited from receiving FDI:

• Atomic energy
• Real estate business
• Lottery business
• Manufacturing tobacco products
• Gambling and betting
• Trading in Transferable Development Rights (TDR)
• Manufacturing of cigars, cheroots, cigarillos, and cigarettes (tobacco or tobacco substitutes)
• Sectors not open to private sector investments – atomic energy and railway operations (other than permitted activities mentioned under the consolidated FDI Policy)

Additional Notes on Prohibited Sectors

• Foreign technology collaboration in any form, including licensing for franchise, trademark, brand name, or management contract, is also prohibited for Lottery Business and Gambling and Betting activities.
• Real estate brokering services are excluded from the definition of "real estate business," and 100% foreign investment is allowed under the automatic route.

FDI inflows

India has been increasingly open to foreign direct investment (FDI) since 1991, bringing about relaxations in several key economic sectors. FDI inflows have consistently increased since 2014-15, when they stood at $45.14 billion, reaching the highest ever annual FDI inflow of $84.83 billion in 2021-22. The total FDI inflows in the country in the last 24 years (Apr 2000 to June 2024) are $1,013.4 billion, while the total FDI inflows received in the last 10 years (Apr 2014 to June 2024) were $689.88 billion, which amounts to nearly 67% of the total FDI inflow in the last 24 years. In the first half of the 2022-23 financial year, FDI equity inflow to India was approximately $27 billion.

FDI into India is primarily governed by the 1999 Foreign Exchange Management Act (FEMA) and rules and regulations issued by the Reserve Bank of India (RBI). The most significant RBI rules include the 2019 Foreign Exchange Management (Non-Debt Instruments) Rules and the 2019 Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations (together, the NDI Rules). The NDI Rules permit investment into equity shares, convertible debentures, preference shares, and share warrants.

There are two routes governing FDI into India: the automatic route and the government approval route. The route taken depends on the sector in which the investee entity falls and the quantum value of the investment. Under the automatic route, FDI is allowed without the need for approval or a license from the government. The amount of investment permitted depends on the sector. For example, sectors such as manufacturing, telecoms, and financial services allow foreign investors to invest up to 100% in an Indian entity.

Certain sectors fall under the government approval route and require prior approval from the government, the RBI, or both. These include the multi-brand retail trading sector, where FDI of up to 51% is permissible if certain regulatory conditions are met, and the brownfield pharmaceutical sector, where any FDI above 74% must obtain government approval. Some sectors, such as lottery businesses and the manufacture of tobacco or tobacco substitutes, are prohibited from receiving FDI.

Government approval is also required when an investor is incorporated in any country sharing a land border with India (China, Afghanistan, Nepal, Myanmar, Bhutan, Pakistan, and Bangladesh) or when the beneficial owner of any investment into India is situated in or is a citizen of any of these countries.

The Indian government has broad discretion to grant or reject a proposal. The Department of Promotion of Industry and Internal Trade (DPIIT) and competent authorities consider factors such as the reputation of the foreign investor, their history of owning and operating similar investments, national security, and the overall impact of the proposed investment on the national interest. The DPIIT's standard operating procedure on FDI applications provides an indicative timeline of eight to 12 weeks from the date of application to the date of approval.

Frequently asked questions