Foreign Direct Investment (FDI) is a key driver of India's economic growth, and the government has progressively liberalised the FDI regime to attract global capital and technology.
If you are a foreign company or individual looking to invest in or set up a Private Limited Company in India, understanding the FDI rules is essential.
What Is FDI?
Foreign Direct Investment refers to an investment made by a foreign entity (company or individual) in an Indian company, typically by acquiring shares or subscribing to new shares. FDI is distinct from Foreign Portfolio Investment (FPI), which involves buying listed securities.
Two Routes for FDI
Automatic Route No prior approval from the Government of India or the Reserve Bank of India (RBI) is required. The investor or Indian company must only comply with reporting requirements after the investment.
Most sectors fall under the automatic route, making India highly accessible for foreign investors.
Government Route (Approval Route) Prior approval from the relevant ministry or FIPB (now replaced by relevant sectoral ministries) is required before investment. Examples include certain defence manufacturing, telecommunications, and multi-brand retail.
Key Sectoral FDI Caps (2025)
Sector | FDI Cap | Route
Prohibited Sectors
- ✓
Lottery, gambling, and betting (including online)
- ✓
Chit funds
- ✓
Nidhi companies
- ✓
Real estate (speculation, not development)
- ✓
Manufacturing of tobacco products
- ✓
Atomic energy (except with special permission)
Instrument of Investment
- ✓
Equity shares
- ✓
Compulsorily Convertible Preference Shares (CCPS)
- ✓
Compulsorily Convertible Debentures (CCDs)
- ✓
Optionally Convertible instruments are treated as external commercial borrowings (ECBs)
Pricing Guidelines
The price at which shares are issued to a foreign investor must comply with FEMA pricing guidelines. Generally, shares cannot be issued below the fair market value determined under the Income Tax Act (DCF or NAV method for unlisted companies).
Post-Investment Reporting Obligations
Form FC-GPR: Filed with the Authorised Dealer Bank within 30 days of receipt of foreign investment (for equity issuance).
Annual Return on Foreign Liabilities and Assets (FLA): Filed with RBI by July 15 each year, reporting all outstanding foreign liabilities and assets.
Form FC-TRS: Filed when shares are transferred between a resident and non-resident.
Transfer Pricing Implications
Once a foreign company holds shares in an Indian company, all transactions between the two entities (sales, services, royalties, loans) become international transactions subject to Indian Transfer Pricing regulations. An annual Transfer Pricing study and Form 3CEB certification by a CA is mandatory if international transactions exceed INR 1 crore.
How PGA & Co. Can Help
Our team specialises in FEMA compliance, FDI structuring, and transfer pricing. We have helped 100+ foreign companies navigate India's investment regulations — from initial entry to ongoing compliance.
Our CA team advises foreign companies on company setup every day. Book a free 30-minute consultation.