India continues to attract global investors with its vast consumer base, skilled workforce, and progressive policy reforms.
FDI inflows have seen a steady rise—from USD 36.05 billion in FY 2013–14 to USD 81.04 billion (provisional) in FY 2024–25, marking a 14% increase from USD 71.28 billion in FY 2023–24.
The services sector emerged as the top recipient of FDI equity in FY 2024–25, attracting 19% of total inflows, followed by computer software and hardware (16%) and trading (8%). FDI into the services sector rose by 40.77% to USD 9.35 billion from USD 6.64 billion in the previous year.
India is also becoming a hub for manufacturing FDI, which grew by 18% in FY 2024–25, reaching USD 19.04 billion compared to USD 16.12 billion in FY 2023–24.
In this article—part of our ongoing India Entry Series—we walk you through:
- The basic legal framework governing FDI in India
- Categories of investment routes
I. Legal Framework: FEMA as the Backbone
The principal legislation regulating foreign exchange and foreign investments in India is the Foreign Exchange Management Act, 1999 (FEMA). This Act replaced the earlier FERA (Foreign Exchange Regulation Act, 1973). The replacement marked a shift towards facilitating external trade and payments while promoting the orderly development of the foreign exchange market in India.
FEMA is supported by an evolving ecosystem of:
- Rules and Regulations (e.g., Foreign Exchange Management (Non-debt Instruments) Rules, 2019), and
- Notifications, Circulars, and Directions.
II. Sectors Categories for Foreign Investment in India
Foreign investment in India is broadly classified the sectors into the following categories:
1. Prohibited Sectors
FDI is strictly prohibited in certain sectors due to strategic or security concerns. These include:
- Lottery business, including Government or private lottery, online lotteries, etc.
- Gambling and betting including casinos, etc.
- Chit funds
- Nidhi company
- Trading in Transferable Development Rights
- Real estate business or construction of farm houses (excludes development of townships, construction of residential or commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations, 2014)
- Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
- Activities prohibited for private sector participation (e.g., atomic energy, railway operations)
- Foreign technology collaborations in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for lottery business and gambling and betting activities
2. Permitted Sectors
Most sectors in India are open to foreign investment, subject to caps and conditions. These can be further divided into:
- Automatic Route: No prior approval from the government is required. The transaction needs to be reported to the RBI after the investment is made.
- Approval Route: Prior approval from the relevant ministry or department of the Government of India is mandatory before investing.
The classification into automatic or approval route depends on:
- Sector-specific caps (e.g., 51% FDI in Multi Brand Retail Trading through approval route, 100% in e-commerce marketplace model under certain conditions),
- Ownership patterns (e.g., whether the investing entity is from a country sharing land borders with India or where the beneficial owners of such investments are situated in or are citizens of such countries),
III. Investment Process: Step-by-Step Overview
For Automatic Route:
- Check sector classification to confirm eligibility under the automatic route
- Ensure compliance with applicable rules and regulations, such as pricing norms and payment modes
- Report the investment through the RBI’s FIRMS portal using the Single Master Form within the prescribed timelines
For Approval Route:
- Apply through the Foreign Investment Facilitation Portal (FIFP)
- The proposal is reviewed by the concerned ministry
- On approval, the investments are made, followed by RBI reporting and compliance under FEMA.
IV. Conclusion
India’s FDI ecosystem has evolved into a transparent, structured, and opportunity-rich framework that balances investor confidence with national interest. For foreign businesses planning their entry into India, the first step is to determine whether their investment falls under the prohibited sector, or automatic or approval route.
Once the route is clear, compliance with the applicable procedures and necessary approvals under FEMA and related laws becomes critical. This includes:
- Ensuring that the investment is made in permitted capital instruments such as equity shares, Compulsory Convertible Preference Shares, or Compulsory Convertible Debentures
- Being mindful of FDI-linked conditions in sectors like retail, telecom, and construction
- Assessing beneficial ownership, especially in cases involving investors from countries sharing land borders with India, such as China, investments from which are subject to Government approval
- Aligning with Indian legal frameworks, including the Companies Act, 2013, Income Tax Act, 1961, and sector-specific laws
With clarity on these aspects, investors can confidently navigate the Indian market and leverage its growth potential, whether in services, manufacturing, or emerging sectors such as digital infrastructure and clean energy.
🧭 Coming Up in the India Entry Series:
Stay tuned for sector-specific deep dives to help you plan a smooth and informed entry into the Indian market.
At CorpNinja Advisors, we specialize in helping foreign companies establish operations in India. From incorporation to post-setup support, we manage your legal and regulatory journey end-to-end.
📩 Reach out to us at hello@corpninjaadvisors.com for tailored support.
Disclaimer: This article is for general information purposes only and does not constitute any advice. Please get in touch with your consultant before taking any step(s). We shall not be responsible for any loss incurred due to the step(s) taken basis the information shared in this article.