Foreign investment in India has always been a sensitive subject till LPG reforms. After independence, India adopted a highly regulated approach through the Foreign Exchange Regulation Act, 1973 (FERA), which aimed to tightly control and conserve foreign exchange. However, with the economic reforms of the early 1990s (the LPG reforms), the focus gradually shifted from conservation to promotion. This change in outlook led to the enactment of the Foreign Exchange Management Act, 1999 (FEMA), designed to facilitate rather than restrict foreign exchange and investment.
Today, foreign exchange in India is governed by FEMA, which also lays the foundation for different routes of foreign investment. Broadly, these are: Foreign Direct Investment (FDI), Foreign Venture Capital Investment (FVCI), Foreign Portfolio Investment (FPI), and Alternative Investment Funds (AIFs).
This post marks the beginning of the Foreign Investment Series. In Part 1, I will focus on FDI and Downstream Investment, and conclude with a discussion on the reporting obligations linked to them
What is Foreign Direct Investment?
Foreign Direct Investment (FDI) refers to an investment made by a person resident outside India into an Indian entity through equity instruments. Such an investment can be:
- in an unlisted company, or
- in a listed company by subscribing to more than 10% of the post-issue paid-up share capital on a fully diluted basis.
A defining feature of FDI is that it is strictly limited to equity instruments, namely:
- equity shares,
- fully and compulsorily convertible preference shares, and
- fully and compulsorily convertible debentures.
Unlike other forms of investment, FDI typically reflects the investor’s intention to acquire a degree of control over the management and policy decisions of the Indian investee company. Recognizing this, the Government of India (GoI) has laid down a comprehensive FDI Policy to regulate and oversee such investments.
Regulation of FDI in India
FDI in India is governed by multiple regulations, including the FDI Policy Circular of 2020, Press Notes (PNs) and notifications issued by the Department for Promotion of Industry and Internal Trade (DPIIT), the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, RBI Master Directions, and relevant SEBI Circulars.
Under this framework, foreign investors are permitted to invest in most sectors, with certain exceptions. The policy prohibits FDI in sectors considered harmful to public morality (e.g., gambling, lottery, cigars, tobacco) or those that may endanger resident savings (e.g., chit funds, Nidhi companies).
Beyond these prohibited areas, FDI is allowed in all other sectors—referred to as permitted sectors. Within permitted sectors, investments can be made through either:
- the automatic route, or
- the approval route.
To better understand these routes, refer to the following table:
| Automatic Route – No prior RBI/GoI approval needed; may require nod from sectoral regulators (SEBI, IRDAI, etc.); must comply with RBI/GoI guidelines. | Automatic Route with Limit – Investment allowed up to a specified cap; beyond that, GoI/regulator’s approval required. | Approval Route Prior GoI approval required for sectors specified under policy. |
| FDI up to 100% is permitted in most sectors under the automatic route—including agriculture and animal husbandry, plantations, mining, coal and lignite, manufacturing, broadcasting carriage services, airports, construction development, industrial parks, trading, pharmaceuticals, and railway infrastructure, among others. The rationale behind liberalising these sectors is to encourage competition and innovation. Foreign investors contribute significantly by improving manufacturing processes and bringing in technical expertise. | Insurance: FDI can be made upto 74% limit under automatic route, subject to verification by IRDAI. The insurance intermediaries however can receive 100% FDI. | Print Media: 26% FDI (govt approval) for newspapers/periodicals/Indian editions of foreign magazines on news & current affairs; 100% FDI (govt approval) for scientific/technical journals, specialty magazines, and facsimile editions of foreign newspapers. |
| Other Financial Services – 100% FDI allowed, subject to sector-specific conditions (e.g., RBI net owned funds for NBFCs, SEBI net worth for merchant bankers/underwriters/PMs, IRDAI solvency norms, NHB capital adequacy, etc.). | Infrastructure Company in Securities Market (Such as Depositories, Stock Exchanges etc.): FDI upto 49% via automatic route subject to approval by SEBI | Multi-Brand Retail (MBRT): 51% FDI (govt approval) allowed provided, min. $100m investment; 50% of first $100m in backend infra within 3 years; outlets only in states permitting MBRT; 30% sourcing from Indian MSMEs (plant & machinery ≤ $2m). |
| Telecom Services: 100% FDI permitted under automatic route (PN 2 of 2021), subject to security compliances. Earlier cap was 49%. The liberalisation was likely aimed at easing debt stress of telecom players like Vodafone and Idea. | Power Exchanges: FDI upto 49% via automatic route subject to compliance with SEBI regulations and other applicable regulations. | Terrestrial Broadcasting & Uplinking of News/Current Affairs TV: Up to 49% FDI permitted (govt approval) subject to broadcasting sector guidelines. |
| E: Commerce: 100% FDI permitted under automatic route. Only the marketplace model (platform acts as a facilitator between buyers and sellers) is allowed; the inventory model (platform stocks and sells its own inventory) is prohibited. If a seller on the marketplace sources 25% or more of its stock from the marketplace or its group companies, it is deemed inventory model. Notably, controversies like Amazon’s stake in a Future Retail group entity highlighted regulatory scrutiny. The intent is to safeguard domestic sellers from unfair competition by deep-pocketed conglomerates. | Pension Sector: FDI upto 74% is permitted via automatic route. | |
| Single Brand Retail (SBRT): 100% FDI allowed under automatic route, subject to conditions: products must be of a single brand, sold under the same brand internationally, and branded at manufacture. Investment can be by the brand owner or under a legal agreement. Where FDI >51%, at least 30% sourcing from India (preferably MSMEs/artisans) is required. SBRT entities may also sell online, even before opening physical stores. |
What is Indirect Foreign Investment?
Indirect Foreign Investment, commonly known as Downstream Investment (DI), refers to an investment made by an Indian entity owned or controlled by a non-resident into another Indian entity that is not owned or controlled by a non-resident. The Indian entity receiving DI must comply with the applicable FDI policy conditions—including sectoral caps, pricing guidelines, and entry routes. This framework is based on the principle that what cannot be done directly must not be done indirectly.
| Step | Who is acting? | What Happens Next? | Effect |
| I. | Foreign Investor | Make sizeable investment in Company A and becomes the owner/or attains control. | Company A is owned or controlled by non-resident. It is Foreign Owned or Controlled Company (FOCC) |
| II. | Company A (Indian Company) | Uses that money (or its own profits) to invest in Company B (another Indian company). | Company B has received foreign investment, which is a downstream investment. Since Company B is a telecom company, 100% FDI under the automatic route is permitted, subject to security clearance. This has to be adhered by Company A while making the investment |
| III. | Company B (Indian Telecom Company) | If it invests in Company C further… | It will be treated as a foreign investment. Downstream Investment layer 2. |
Conditions for Downstream Investment
- The FOCC shall attain Board of Directors’ approval and must comply with obligations under the Shareholders’ Agreement (SHA) if any.
- While investing in an Indian entity, the FOCC should utlise funds obtained from abroad or from accumulated profits. It should not use domestically borrowed funds for this purpose.
- The first level entity making downstream investment is responsible for all the compliances. A simplified explanation is as follows:
| Who | What they must do | When | What if something goes wrong? |
| First-level Indian company making downstream investment (e.g., Company A) | Ensure that its downstream investment (into Company B) complies with all NDI Rules (sectoral caps, entry route, pricing, etc.). | At the time of making the investment. | If compliance is not ensured auditor may flag it in report. |
| Same rule applies to next level (e.g., Company B investing into Company C) | Each level is responsible for its own downstream investment compliance. | Every time it makes a downstream investment. | Responsibility keeps passing down the chain. |
| Statutory Auditor | Issue a certificate each year confirming whether the company complied with downstream investment rules. | Annually | If compliance is doubtful, auditor issues a qualified report |
| Company’s Board / Directors | Mention the downstream investment compliance (based on auditor’s certificate) in the Director’s Report of the annual report. | Annually (with financial statements) | If auditor’s report is qualified, Board must escalate to RBI. |
| Company (if auditor gives a qualified report) | Immediately inform the RBI Regional Office where its registered office is located, and obtain an acknowledgement. | Immediately on receipt of qualified audit report. | Failure to inform RBI can be treated as a regulatory violation |
Investment Instruments
- The downstream investments can be made via equity instruments such as subscribing to equity shares, fully compulsorily and mandatorily convertible preference shares, and fully compulsorily and mandatorily convertible debentures.
- In January 2025, RBI updated its master direction on foreign investments to clarify structuring of downstream investments by way of deferred consideration and share swaps.
Pricing Requirements
FEMA regulates the entry and exit price of FDI, the intention of RBI behind this is to ensure that foreign investors don’t get shares too cheap (which could mean undervaluation and money siphoning) and, Indian residents don’t overpay when buying back from foreigners (which could mean disguised capital outflow). So, FEMA sets a floor price for inbound investments and a ceiling price for outbound transfers. The pricing guidelines are as follows:
- Unlisted companies:
- Foreign investor buying → price not below Fair Value.
- Foreign investor selling → price not above Fair Value.
- (Fair Value = certified by CA / SEBI merchant banker / cost accountant).
- Listed companies (off-market transfer):
- Price must follow SEBI formula:
- 90-day volume-weighted average, or
- 10-day volume-weighted average (as applicable).
- Same rule for both buying and selling.
- Price must follow SEBI formula:
- Listed companies (on-market transfer):
- Price = prevailing market price on the stock exchange.
- Cash flow rule:
- Foreign investor’s money must be brought into India before or at the time of purchase or subscription.
DealDox: FDI Forms
| Form | Trigger Event | Timeline | Who Files | Where | Key Documents Required | Legal Reference / Rationale | Common Pitfalls / Law Firm Watchlist |
| Entity Master | Initial creation of company/LLP profile in RBI FIRMS before any FDI reporting | One-time (before first FDI filing) | Indian Company / LLP | RBI FIRMS Portal (SMF) | CIN/LLPIN, PAN, Company docs, Authorized signatory details | RBI Circular dt. 21 Jun 2018; Master Direction on Reporting under FEMA | Clients often miss this step — without Entity Master, FC-GPR/FC-TRS filings cannot be done |
| FC-GPR | Issue/allotment of capital instruments (equity shares, CCPS, CCDs, share warrants, partly-paid shares) to a non-resident | 30 days from date of allotment | Indian Investee Company | RBI – FIRMS (SMF) | FIRC, KYC report, Valuation certificate (CA/Merchant Banker), Board/EGM resolutions, PAS-3 acknowledgement | Rule 9(2), FEMA NDI Rules 2019; Reg. 4, FEMA (Mode of Payment & Reporting of NDI) Regs. 2019 | Using incorrect valuation methodology; mismatch in allotment date vs PAS-3; delays → Late Submission Fee (LSF) |
| FC-TRS | Transfer of capital instruments between resident ↔ non-resident (sale, gift, buyback, capital reduction) | 60 days from transfer / receipt of consideration | Resident transferor/transferee (depending on inflow/outflow) | RBI – FIRMS (SMF) | FIRC (if inflow), Bank KYC, Share Transfer Agreement, Board resolutions, Form SH-4 (if applicable) | Rule 9(4), FEMA NDI Rules; Reg. 5, FEMA (Mode of Payment & Reporting of NDI) Regs. 2019 | Incorrect party filing (should be resident side); pricing guideline checks missed; mismatch with ROC filings |
| LLP(I) | Receipt of capital contribution or profit share by LLP from non-resident | 30 days from receipt of funds | Indian LLP | RBI – FIRMS (SMF) | FIRC, KYC, LLP Agreement (amended), Valuation certificate if applicable | Rule 23, FEMA NDI Rules; FEMA (Mode of Payment & Reporting of NDI) Regs. 2019 | Often ignored since LLPs are less common; AD banks sometimes unclear on LLP procedures |
| LLP(II) | Transfer of capital contribution / profit share between resident ↔ non-resident | 60 days from receipt of consideration | Resident transferor/transferee | RBI – FIRMS (SMF) | Transfer agreement, KYC, FIRC, amended LLP Agreement | Same as above | Timeline confusion; treated similar to FC-TRS |
| ESOP | Issue of ESOPs / sweat equity / shares under ESOP to non-residents | 30 days from date of issue | Indian Company | RBI – FIRMS (SMF) | ESOP scheme, Board/Shareholder approvals, Valuation report | Rule 9(5), FEMA NDI Rules; FEMA (Mode of Payment & Reporting of NDI) Regs. 2019 | Companies forget ESOP reporting to RBI; filings delayed |
| DI (Downstream Investment) | When an Indian entity with foreign ownership/control makes further investment into another Indian entity | 30 days from date of allotment of securities | Investing Indian Co. / Investment Vehicle | RBI – FIRMS (SMF) | Board resolution, Valuation certificate, Share subscription docs | Rule 23, FEMA NDI Rules; FEMA (Mode of Payment & Reporting of NDI) Regs. 2019 | Confusion on “ownership/control” test; missed in VC structures; double reporting with investee |
| InVI | Issue of units by Investment Vehicle (REIT, InvIT, AIF Cat I/II/III) to non-residents | 30 days from issue of units | Investment Vehicle | RBI – FIRMS (SMF) | Trust deed, FIRC, KYC, unit allotment list | Rule 22, FEMA NDI Rules | Often overlooked in fund structures; SEBI filings confused with FEMA filings |
| CN (Convertible Note) | Issue or transfer of Convertible Notes by a startup to non-resident | 30 days from issue / transfer | Issuer / resident transferor-transferee | RBI – FIRMS (SMF) | FIRC, KYC, Note Purchase Agreement, Startup recognition certificate | Rule 19, FEMA NDI Rules; FEMA (Mode of Payment & Reporting of NDI) Regs. 2019 | Confusion whether note qualifies as “Convertible Note” under DPIIT definition; missed filings |
| DRR | Issue or transfer of Depository Receipts (sponsored/unsponsored) | 30 days from close of issue/program | Domestic Custodian | RBI – through DRR filing mechanism | Custodian agreement, FIRC, DR details | Depository Receipts Scheme 2014; FEMA (DR) Regs. | Rare in practice; banks/custodians usually lead |
| FLA Return | Annual reporting of foreign liabilities and assets if company/LLP has FDI/ODI outstanding | 15 July each year (unaudited can be filed, revised post audit) | Indian Company/LLP | RBI – FLAIR Portal (separate from FIRMS) | Balance sheet, details of foreign shareholding, ODI details | FEMA 20(R), RBI circulars; RBI FLA guidelines | Clients often miss this (esp. startups); filing unaudited but not revising later |
CompliQ: Compliance Timelines
| Stage | Compliance | Form / Filing | Timeline | Responsible Party | Authority / Portal | Key Documents Required | Legal Reference / Rationale | Common Pitfalls (Law Firm Watchlist) |
| Pre-investment | Check sectoral caps, entry route (automatic vs. approval), PN3 restrictions (beneficial ownership from bordering countries) | – | Before receipt of funds | Company + Counsel | DPIIT FDI Policy, FEMA NDI Rules | Sectoral list, Press Notes, NDI Rules, Investor shareholding structure | NDI Rules, 2019; Consolidated FDI Policy | Missing PN3 check (esp. for Hong Kong/Singapore holding entities with China BO); assuming automatic route without verification |
| Valuation of securities | – | Pre-investment | Company | – | Valuation certificate (CA/Merchant Banker/Cost Accountant) | Rule 21, FEMA NDI Rules | Using book value instead of internationally accepted valuation methodology | |
| Corporate approvals (board/EGM) | Resolutions | Before issue | Company | MCA | Board resolution, EGM notice, minutes | Sec. 42, 55, 62, 179 CA, 2013 | Missing special resolution for preferential allotment/CCPS; not authorising non-resident investors properly | |
| Filing of special resolution (if preferential issue/CCPS/CCDs) | MGT-14 | Within 30 days of resolution | Company | MCA | Resolution, explanatory statement, altered AoA if required | Sec. 117 CA, 2013 | Failure to file MGT-14 makes PAS-3 defective | |
| Draft Share Subscription Agreement / SHA | – | Pre-investment | Company + Investors | – | Draft SSA/SHA | Contractual basis; FEMA doesn’t require, but regulators may request | Boilerplate agreements missing pricing / indemnity / exit rights | |
| Funds received | Receipt of FDI funds | Inward Remittance via AD Bank | On receipt | Investor & Company | Through AD Bank | FIRC, KYC Report from remitting bank | FEMA (Mode of Payment & Reporting of NDI) Regs., 2019 | Funds routed via improper channel (not normal banking route); missing KYC delays filing |
| Post-receipt (Allotment) | Allotment of securities | PAS-3 (Return of Allotment) | Within 30 days of allotment | Company | MCA Portal (V3) | Board resolution for allotment, list of allottees, valuation, PAS-4/5 (if private placement) | Sec. 39, 42, 62 CA, 2013 | Delay triggers penalty under CA even if FEMA filing is timely |
| Reporting of FDI allotment | FC-GPR | Within 30 days of allotment | Company | RBI – FIRMS (SMF) | FIRC, KYC, valuation, SSA, board resolution, PAS-3 acknowledgement | FEMA (Mode of Payment & Reporting) Regs., 2019 | Delay → Late Submission Fee; incorrect valuation certificate | |
| Stamp duty on share certificates | – | Within 30 days of issue | Company | State Stamp Authority | Share certificates, stamp challan | Indian Stamp Act, State Stamp Act | Forgetting electronic stamping; undervaluation of duty | |
| Issue of Share Certificates | – | Within 2 months of allotment | Company | – | Share certificates (duly stamped) | Sec. 56 CA, 2013 | Non-issuance leads to shareholder disputes & ROC penalties | |
| Entry in Register of Members | – | Continuous | Company | – | Statutory register (Form MGT-1) | Sec. 88 CA, 2013 | Often missed for foreign shareholders | |
| Annual / ongoing | FLA Return | FLA | By 15 July each year | Company / LLP | RBI – FLAIR Portal | Balance sheet, foreign asset & liability details, ODI info if any | RBI Circular, FEMA 20(R) | Missed if only ODI or small FDI; unaudited filing not updated later |
| Statutory audit reporting | CARO / audit report disclosures | Annual | Auditor | MCA | Statutory auditor’s report | Companies Auditor’s Report Order | Auditor qualifications if FDI not reported | |
| Disclosure in Financial Statements | Notes to accounts (shareholding pattern, FDI disclosure) | Annual | Company | MCA (AOC-4) | Shareholding registers, FC-GPR copies | Schedule III to CA, 2013 | Non-disclosure of foreign ownership % |
Press Notes
| Press Note & Series | Date | Sector / Area Impacted | Key Change Introduced | Legal / Regulatory Basis | Commercial / Compliance Implications (Why it matters) |
| PN 1 (2020 Series) | 21-Feb-20 | Insurance intermediaries (brokers, surveyors, TPAs, etc.) | Raised FDI cap from 49% to 100% under automatic route. | Amended Consolidated FDI Policy para 5.2.21 | Foreign insurance brokers can establish WOS in India without approval; enhances competition; law firms must ensure FEMA filings (FC-GPR) are done promptly. |
| PN 2 (2020 Series) | 19-Mar-20 | Civil Aviation | Amended rules for investment caps in civil aviation sub-sectors (notably MRO, ground handling). | DPIIT Policy para 5.2.9 | Clarified limits in sensitive aviation sub-sectors; lawyers must check if downstream JVs need approval vs automatic. |
| PN 3 (2020 Series) | 17-Apr-20 | All sectors – investments from countries sharing a land border with India | Made Government approval mandatory for all FDI (direct or indirect) from such countries; also applies if beneficial owner is resident of such countries. | FEMA NDI Rules, read with Consolidated FDI Policy | Designed to curb opportunistic Chinese takeovers during COVID. Compliance check required on beneficial ownership (not just immediate investor). Law firms must vet all shareholding structures carefully. |
| PN 4 (2020 Series) | 17-Sep-20 | Defence | Raised FDI limit from 49% to 74% under automatic route; beyond 74% → government route. | DPIIT Policy para 5.2.6 | Encourages global OEMs to set up majority-owned Indian JVs; law firms must advise on security clearances and industrial licence requirements. |
| PN 1 (2021 Series) | 19-Mar-21 | NRI Investments | Clarified that investments by NRIs on a non-repatriation basis are treated as domestic investment, not FDI. | FEMA NDI Rules 2019 (Rule 23(3)) | Avoids double counting as indirect foreign investment; structuring tool for PE/VC using NRI funds. |
| PN 2 (2021 Series) | 14-Jun-21 | Insurance sector | Allowed 74% FDI in insurance companies (up from 49%); 100% in intermediaries reaffirmed. | Insurance Act amendments, read with Consolidated FDI Policy | Alters control dynamics in JVs; board composition & solvency margin obligations must be tracked. |
| PN 2 (2025 Series) | 07-Apr-25 | All sectors (including prohibited) | Permitted issue of bonus shares to existing non-resident shareholders, even if the company is in a prohibited sector (e.g., tobacco, lottery). | DPIIT Notification, aligned with FEMA NDI | Removes ambiguity where bonus issuance was earlier blocked in prohibited sectors; legal teams must confirm sectoral caps are not breached. |
| DPIIT Amendment (2025) | Jul-25 | Prohibited sector bonus issuances allowed | Retrospective sanction given to bonus issuances in prohibited sectors. | Subsequent DPIIT circular (aligned with PN 2/2025) | Cleans up past non-compliance risk; helps companies regularise earlier bonus allotments. |
| Proposed FOCE Rules (Expected 2025-26) | Pending | Foreign-owned & controlled entities | Government considering classifying Indian companies indirectly controlled by foreigners as FOCE, even if incorporated in India. | Draft policy under discussion (sources: Reuters May 2025) | If enacted, may trigger fresh approval requirements for intra-group restructurings, downstream investments. Important for legal due diligence. |
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