India has strategically established itself as a favourable jurisdiction for foreign investment due to its longstanding, liberalised and increasingly transparent Foreign Direct Investment (“FDI”) policy framework. Notwithstanding the relatively easy of entry in certain sectors, the country’s FDI regime remains sector-specific and subject to regulatory thresholds, conditionalities, and procedural stipulations.

The FDI regime has been liberalised with an approach to encourage foreign capital in priority sectors while maintaining government oversight over sensitive and strategic industries. As per the data released by Ministry of Commerce and Industry, India recorded an FDI inflow of USD 81.04 Billion in the Financial Year 2024-25, which reflects a big leap from USD 71.28 Billion in Financial Year 2023-24.

Regulatory Framework Governing Foreign Direct Investment

Foreign investments by non-resident entities and individuals are primarily governed by:

• The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“FEMA Non-Debt Rules”); and
• The Consolidated Foreign Direct Investment Policy Circular (“FDI Policy”), issued by the Department for Promotion of Industry and Internal Trade (“DPIIT”), Ministry of Commerce and Industry.

The DPIIT frames and issues the FDI Policy, and the Reserve Bank of India (“RBI”) monitors and regulates the modes of payment for foreign exchange in India. At present, the FDI Policy governing foreign investments in India is laid down in the Consolidated FDI Policy Circular of 2020 bearing F.No. 5(2)/2020 effective from October 15, 2020.

The FEMA Non-Debt Rules refer to FDI as an investment made by a person resident outside India through equity instruments in an unlisted Indian company or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. Further, Rule (2)s of the FEMA Non-Debt Rules defines ‘foreign investment’ as any investment made by a person resident outside India on a repatriable basis in equity instruments of an Indian company or to the capital of an LLP.

Setting Up of Business Operations in India Through a Company

A foreign investor intending to establish its business operations in India may do so by incorporating a Limited Liability Partnership (“LLP”) under the Limited Liability Partnership Act, 2008 or a company under the Companies Act, 2013. Depending on the business objectives, the investor entity may operate through the form of a Joint Venture or a Wholly Owned Subsidiary, ensuring compliance with the applicable entry routes, sectoral caps, and conditions mandated under the FDI Policy and the FEMA Non-Debt Rules.

Foreign companies exploring business opportunities in India often assess their nature of business and operational needs before choosing to the mode of entry. If the nature of business the foreign entity requires the presence of a separate entity, they opt to establish a company or an LLP. However, if a separate legal entity is not required, foreign companies look to set up branch/liaison/project offices to carry out their limited activities such as sales and marketing, co-ordination, etc.

Entry Routes for Investments in India

FDI by non-residents is permitted in equity shares; fully, compulsorily, and mandatorily convertible debentures; fully, compulsorily, and mandatorily convertible preference shares; and share warrants issued by Indian companies, through two routes:

• Automatic Route: The foreign investor does not require the prior approval of the RBI or the government.
• Government Route: Prior approval from the government is required.

Advantages of Foreign Direct Investment - Sector-Specific FDI Policies

As per the FDI Policy, certain sectors are permitted sectors for receiving foreign investment, whereas other sectors are prohibited. In the permitted sectors, foreign investment is allowed as per the specified limits indicated for each sector or activity, and the limits are subject to the conditions and regulations under the Foreign Exchange Management Act, 1999 (“FEMA”) and its associated rules and regulations.

The prohibited sectors are under a complete restriction and are closed to FDI to protect strategically important interests, and they include gambling and betting including casinos, lottery business (government/private/online), Nidhi company, chit funds, trading in transferable development rights, real estate (besides some exceptions), etc.

The Indian government is promoting FDI in various sectors by easing up the restrictions for the purpose of attracting investment in India. Below are some priority sectors wherein foreign investment is allowed at various levels:

1. Manufacturing Sector

India has become a favourable jurisdiction for global manufacturing setups. With foreign investment in most sub-sectors under the manufacturing sector being 100% under the automatic route, the ‘Make in India’ initiative along with numerous promotional incentives given by the Indian government, has promoted domestic manufacturing and attracted foreign investments, emerging India as global hub for manufacturing operations.

Foreign investors can set up self-owned manufacturing facilities or opt for contract manufacturing (principal-to-principal or principal-to-agent), provided all manufacturing happens within India. Also, the products manufactured in India by foreign entities can be sold through wholesale, retail, or e-commerce channels without additional approvals. Taking advantage of the same, major multinational corporations, including Siemens, GE, Samsung, Apple, etc., have established or expanded manufacturing operations in India.

2. Defence Sector

Even though foreign investment in the defence sector remains under strict government scrutiny for national security reasons, the Indian government recognizes the importance of its liberalization to promote technology transfer, self-reliance and modernization of the defence forces in India. For this, FDI under the defence sector for manufacturing is permitted up to 74% under the automatic route, with 100% foreign investment allowed with government approval in case of investments exceeding the threshold of 74%.

Major foreign players in the global defence industry, such as SAAB (Sweden), Lockheed Martin, Airbus, Boeing, Ultra Maritime, etc., have already established or expanding their defence material manufacturing operations in India.

3. Retail Sector

A sub-sector under the services sector, the retail sub-sector holds the largest share of foreign investment in India. Under this sector are two key segments, namely, Single-Brand Retail Trading (“SBRT”) and Multi-Brand Retail Trading (“MBRT”), open to FDI.

In SBRT, FDI up to 100% is permitted, with automatic approval up to 49% and anything beyond this threshold requiring government approval. Certain conditions have been imposed by the government to protect the domestic market’s survival and growth, for instance, companies must sell products under a single brand that is sold internationally under the same name and ensure that 30% of the value of goods is sourced from small industries, villages and cottage industries, etc., if foreign investment exceeds 51%.

In contrast, government approval is mandatory for any investment under MBRT and FDI is capped at 51% under the government approval route, subject to several conditions, including a minimum investment of USD 100 million, 50% of FDI to be invested in backend infrastructure within three years, and 30% sourcing of manufactured or processed products from Indian small industries.

Despite being subject to conditions, SBRT has benefitted from a more liberalised regime. The FDI Policy and other government promotional initiatives have immensely supported and facilitated the increased availability of foreign-origin products in India, enabling global brands such as Apple, IKEA, Nike to establish a strong presence in the country, while maintaining a controlled domestic environment through government oversight. On the other hand, MBRT remains more restricted due to concerns about its potential impact on small domestic retailers and traditional retail ecosystem.

4. Pharmaceutical Sector

The term ‘pharmaceutical’ has not been defined under the Indian law but is commonly understood to refer to the activities that involve drugs, cosmetics, and medical devices. Companies involved in manufacturing, developing, marketing, and selling of drugs, cosmetics, and medical devices are considered part of the pharmaceutical sector, which is governed by the Drugs and Cosmetics Act, 1940 and its rules.

While the government has relaxed the norms under this sector, some restrictions have been upheld to facilitate the growth of domestic companies.

In this sector, 100% FDI under the automatic route is allowed for new (greenfield) projects, whereas for the existing (brownfield) projects, FDI above the 74% threshold requires approval from the government. Further, for brownfield projects, certain conditionalities, such as maintaining a minimum level of production of essential medicines and expenditure on research and development is mandatory.

FDI in this sector proven to be favourable due to the enhanced R&D capabilities, access to new drug technologies, and improved public healthcare infrastructure of the country. Some of the well-established setups of foreign pharmaceutical companies operating in India include AstraZeneca, Pfizer, Novartis, and Johnson & Johnson, among others.

5. Civil Aviation Sector

FDI in civil aviation includes airports, scheduled and non-scheduled domestic passenger airlines, helicopter services/seaplane services, ground handling services, maintenance and repair organizations; flying training institutes; and technical training institutions.

For Non-Resident Indians, FDI up to 100% is allowed under the automatic route. However, foreign companies and airlines are capped at 49% ownership in Indian carriers.

One of the most recent foreign investments in India in the civil aviation sector is that of the greenfield airport project of Noida International Airport at Jewar. The Zurich Airport International AG successfully secured the bid to develop and operate the said airport and entered into a concession agreement with the Government of Uttar Pradesh. The foreign investment to be brought in for the said project is above INR 5,000 crore.

Amongst others, another notable foreign investment in this sector is of Singapore Airlines (“SIA”) and Singapore Airport Terminal Services Limited (“SATS”), wherein SIA partnered with Tata Sons to launch the Vistara airlines by holding a 49% stake in the company. In the year 2022, Vistara and Air India merged, and SIA acquired 25.1% stake in the merged entity and invested a little above INR 2,000 crore. Moreover, SATS invested in Air India SATS Airport Services Private Limited and is now providing ground handling and cargo services at major airports in India.

6. Telecommunication and Internet Services

The telecom sector includes basic, cellular, unified access services, mobile number portability services, VSAT, and Internet Service Providers with or without gateways. FDI up to 100% is allowed under this sector, with automatic approval up to 49% and government approval required beyond that limit.

Major investments in India have helped fund the 5G expansion, improved network connectivity in rural and remote areas and boosted digital transformation. Some examples of major foreign investments in India include Meta (Facebook) and Google in Jio Platforms, as well as Vodafone’s merger with Idea to form Vodafone Idea.

7. Construction Development

Construction-development projects including development of townships, construction of residential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure, townships are open to foreign investment up to 100% under the automatic route is permitted under the FDI Policy.

On the other hand, foreign investment is prohibited in the business of real estate, which includes construction of farmhouses and trading in transferable development rights.

8. Insurance Sector

While foreign investment permitted in the insurance sector is up to 74% under the automatic route, allowing foreign investors to participate without government approval up to this level, the Union Budget for 2025-26 announced further increase of FDI sectoral cap for the insurance sector from 74% to 100%, provided that the entire premium is invested in India. This step aims to attract more foreign capital into the country and provide global-level insurance services to the Indian customers.

This sector broadly includes life insurance, general insurance, reinsurance, and insurance intermediaries.

Insurance Regulatory and Development Authority of India is the regulatory body of this sector and its responsibilities ensure compliance with the regulatory framework and promotion of the government’s vision ‘Insurance for All by 2047’.

In this sector, the liberalized FDI policy has attracted several prominent investors to partner up with insurance companies in India and expand their presence, including HDFC Life, ICICI Lombard, and SBI Life Insurance.

Conclusion

Although though the FDI policy in India has played a pivotal role in driving India’s economic growth by attracting foreign capital and allowing foreign companies to increase their footprint, its intricacies and nuances remain a challenge for investors and businesses alike.

The well-calibrated approach of liberalisation of the foreign investment norms by the Indian government has given leverage to several primary sectors, while catering to the needs of the expanding domestic industries and maintaining a system of regulatory oversight in strategic sectors.

As the regulatory framework evolves, it is extremely essential for stakeholders to remain informed and compliant with latest developments in the legal domain.

At the sub-national level, Maharashtra has emerged as the undisputed leader in attracting foreign direct investment, underscoring the outsized role that state-level governance, infrastructure, and investor facilitation play alongside the broader national FDI framework. Maharashtra attracted ₹1,64,875 crore in FDI in FY 2024-25, representing 40% of the country's total inflow and marking the highest annual FDI received by the state in a decade. The cumulative FDI equity inflow into Maharashtra from October 2019 to December 2024 reached ₹6,71,863 crore, accounting for 31% of India's total FDI equity inflow during that period, outpacing competitive states such as Karnataka, Gujarat, Delhi, Tamil Nadu, and Haryana. By the close of FY 2024-25, this cumulative figure had risen to approximately ₹6.97 lakh crore, cementing the state's position as India's premier investment destination. At the heart of this remarkable performance stands Mumbai — India's financial capital and commercial nerve centre — which serves as the primary gateway through which the bulk of Maharashtra's FDI flows. Maharashtra received the highest FDI equity inflow among all states during April 2000 to September 2025, with Mumbai leading in investment value and reaffirming its position as India's foremost investment hub.As the headquarters of the Reserve Bank of India, the Bombay Stock Exchange, the National Stock Exchange, and a concentration of multinational corporations across sectors such as financial services, computer software and hardware, and infrastructure, Mumbai's regulatory ecosystem, world-class connectivity, and deep talent pool make it the preferred point of entry for global capital into India. The trajectory of FDI in Maharashtra and Mumbai illustrates that the national FDI policy framework achieves its greatest impact when complemented by strong sub-national economic ecosystems and proactive investment facilitation, offering a compelling blueprint for other states seeking to maximise the benefits of India's increasingly liberalised foreign investment regime.

This content is originally posted on ahlawatassociates.com

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