Introduction
The foreign investment has been one of the key pillars of the Indian economic growth story. The nation has transitioned within the last 10 years in its more ad hoc model of regulation to one that is less so, more organized and more transparent aimed at having global capital inflow and protecting the national interests. The current situation of cross-border investment in India is in a hybrid system where one aspect is under the liberalisation process and the other aspects are under the national security basis and the others are under modern statutory and policy reforms.
This paper gives a concise and useful overview of the legal environment of foreign investment in India, in respect to the regulations, modes of entry, industry limits, compliance requirements, taxation, and the major regulatory agencies. This is to make global investors and multinational corporations appreciate how the cross-border investment regime of India operates in reality.
1. Policy Formation: FDI, FPI, FVCI, and ODI Rules
The investment in India by foreign investors is generally regulated by the Foreign Exchange Management Act of 1999 (FEMA). In FEMA, the department of Promotion of Industry and Inside Trade (DPIIT), Reserve Bank of India (RBI) and the Ministry of Finance together manage various types of foreign investment:
Foreign Direct Investment (FDI)
- Long term capital investment in Indian companies in forms of equity.
- The FDI Policy, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and specific regulation in the sector are the main policies governing FDI.
Foreign Portfolio Investment (FPI)
- Investment in the form of listed securities, mutual funds and debt instruments.
- SEBI regulating this by FPI Regulations, 2019, and some RBI rules.
Foreign Venture Capital Investment (FVCI)
Special regime to foreign VC funds investing in startups and early-stage Indian firms.
Overseas Direct Investment (ODI)
Outbound investments by the Indian companies and individuals in the foreign entities under the ODI Rules and Regulations, 2022.
The norms of entry, norms of reporting, and the norms of taxation in each category are different and an investor ought to consider these aspects when developing their India strategy.
2. Entry Routes and Sectoral Caps to FDI
Foreign investment in India is allowed in two major channels:
| Route | Description | Examples |
|---|---|---|
| Automatic Route | It does not need any previous governmental approval. | Manufacturing, IT, e-commerce marketplace, infrastructure, renewable energy, logistics, fintech (non-licensable), services |
| Government Approval Route | Approval required from respective ministry or department. | Defence, aerospace, telecom, national security technologies, print media, multi-brand retail, satellites & broadcasting |
Investment by the countries bordering India also requires approval.
The typical range of sectoral caps is 26 to 100 percent according to industry. To organize an acquisition or joint venture, investors have to examine the limits that are applicable.
3. Beneficial Ownership and Neighbouring Country Restrictions
The 2020 amendment introduced a significant change:
- Any foreign investment, direct or indirect, originating from countries sharing a land border with India requires prior government approval.
This was designed to prevent opportunistic takeovers of Indian businesses, especially during market volatility. The rule also applies if the beneficial owner is located in such countries.
4. Modes of Investment: Equity, Convertible Instruments, and M&A
Foreign investors can invest through multiple instruments:
- Equity Shares: Traditional shareholding giving voting rights.
- Compulsorily Convertible Debentures (CCDs) and Preference Shares (CCPS): Popular for structured investments because they convert into equity and qualify as FDI.
- Share Transfers in M&A Deals: Acquisitions, share swaps, inbound mergers, and slump sale transactions are permitted under FEMA with specific pricing guidelines and reporting requirements.
- Rights and Bonus Issues: Existing foreign shareholders can subscribe if terms comply with FEMA.
Pricing guidelines, especially minimum and fair valuation norms, play an essential role in structuring these transactions.
5. Compliance, Reporting, and FEMA Filings
Investment transactions trigger multiple RBI filings, including:
- Form FC-GPR – for issuing shares to foreign investors
- Form FC-TRS – for transfer of shares between resident and non-resident
- Form LLP(I) / LLP(II) – for FDI in LLPs
- DI and InVi Forms – for downstream investments
- Annual Return on Foreign Liabilities and Assets (FLA Return)
Failure to file these on time may result in compounding proceedings and penalties under FEMA.
6. Taxation Framework for Cross-Border Investment
Tax planning remains a crucial part of foreign investment structuring. Key considerations include:
- Corporate Taxation: India offers multiple tax regimes (e.g., 22% for domestic companies and 15% for new manufacturing units).
- Capital Gains Tax: Taxability depends on:
- type of security
- holding period
- residency status
- source of investment (treaty vs non-treaty jurisdiction)
- Withholding Tax on Dividends & Royalties: Subject to applicable Double Taxation Avoidance Agreement (DTAA) benefits.
- Indirect Transfer Provisions: Share transfers of foreign entities may trigger Indian tax if they derive substantial value from Indian assets.
- Transfer Pricing: Cross-border transactions between group entities must comply with arm’s-length norms.
7. Sector-Specific Regulatory Considerations
Many industries have parallel regulatory frameworks:
- Financial Services: RBI and SEBI approvals may be required for NBFCs, payment aggregators, and fintech models.
- E-Commerce: Marketplace model allowed under FDI; inventory model prohibited for foreign investors.
- Defence: FDI beyond 74% requires government approval.
- Real Estate: FDI is restricted in real estate business, but allowed in construction development and REITs.
- Telecom: FDI up to 100% permitted; beyond 49% requires government approval.
Investors must evaluate these layered regulations before choosing a sector.
8. Dispute Resolution and Exit Mechanisms
Foreign investors typically prefer strong exit rights and dispute-handling frameworks. Common structures include:
- Share buyback and call/put options
- IPO-linked exits
- Mergers or asset transfers
- Contractual dispute resolution through arbitration (India is a signatory to the New York Convention)
Recent reforms, including recognition of emergency arbitration by Indian courts, have strengthened investor protection mechanisms.
9. Emerging Trends in India’s Cross-Border Investment Landscape
A few trends are reshaping foreign investor participation:
- National security screening for tech & data-based investments
- Liberalisation of manufacturing and clean energy sectors
- Rise of joint ventures in digital infrastructure
- Increasing focus on ESG compliance
10. Conclusion
India’s legal framework for cross-border investment is a blend of liberalised policy, national security considerations, and sector-specific compliance. The country offers significant growth opportunities for global investors, provided they navigate FEMA, tax regulations, sectoral caps, and procedural filings with accuracy. Foreign investments today require not only commercial evaluation but also a precise understanding of regulatory expectations, corporate structuring, and risk mitigation measures.
For multinational corporations, financial institutions, and global founders, the Indian market remains strategically essential, dynamic, expanding, and increasingly transparent from a regulatory standpoint.
Reference
This article is part of a research series compiled by Corrida Legal, a corporate & employment law firm based in India (www.corridalegal.com).
