FDI inflows have risen steadily, from USD 36.05 billion in FY 2013–14 to USD 81.04 billion (provisional) in FY 2024–25, a 14% increase on USD 71.28 billion in FY 2023–24.
The services sector was the top recipient of FDI equity in FY 2024–25, drawing 19% of total inflows, followed by computer software and hardware (16%) and trading (8%). FDI into services rose 40.77% to USD 9.35 billion, from USD 6.64 billion a year earlier.
India is also becoming a hub for manufacturing FDI, which grew 18% in FY 2024–25 to USD 19.04 billion, from USD 16.12 billion in FY 2023–24.1
This article covers the basic legal framework governing FDI in India and the categories of investment route.
I. The legal framework: FEMA as the backbone
The principal legislation regulating foreign exchange and foreign investment in India is the Foreign Exchange Management Act, 1999 (FEMA). It replaced the earlier Foreign Exchange Regulation Act, 1973 (FERA), marking a shift towards facilitating external trade and payments while promoting the orderly development of the foreign exchange market.
FEMA is supported by an evolving ecosystem of:
- rules and regulations, such as the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019;
- notifications, circulars, and directions.
II. Categories of foreign investment
Foreign investment in India is broadly classified into the following categories.
1. Prohibited sectors
FDI is prohibited in certain sectors on strategic or security grounds. These include:
- lottery business, including government and private lotteries and online lotteries;
- gambling and betting, including casinos;
- chit funds;
- Nidhi companies;
- trading in Transferable Development Rights;
- real estate business or the construction of farm houses (this excludes the development of townships, the construction of residential or commercial premises, roads, or bridges, and Real Estate Investment Trusts registered and regulated under the SEBI (REITs) Regulations, 2014);
- the manufacture of cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutes;
- activities not open to private-sector participation, such as atomic energy and railway operations.
Foreign technology collaboration in any form, including licensing for franchise, trademark, brand name, or management contract, is also prohibited for lottery, gambling, and betting activities.
2. Permitted sectors
Most sectors are open to foreign investment, subject to caps and conditions. They divide into:
- Automatic Route. No prior government approval is required; the transaction is 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 required before investing.
Whether an investment falls under the automatic or the approval route depends on:
- sector-specific caps (for example, 51% FDI in multi-brand retail trading through the approval route, and 100% in the e-commerce marketplace model under certain conditions);
- ownership patterns (for example, whether the investing entity is from a country sharing a land border with India, or whether the beneficial owners are situated in, or are citizens of, such countries).
III. The investment process, step by step
Automatic Route
- Check the sector classification to confirm eligibility under the automatic route.
- Ensure compliance with the applicable rules, 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.
Approval Route
- Apply through the Foreign Investment Facilitation Portal (FIFP).
- The proposal is reviewed by the concerned ministry.
- On approval, the investment is made, followed by RBI reporting and compliance under FEMA.
IV. Conclusion
India’s FDI framework has evolved into a transparent, structured, and opportunity-rich system that balances investor confidence with national interest. For a foreign business planning its entry, the first step is to determine whether the investment falls within a prohibited sector, the automatic route, or the approval route.
Once the route is clear, compliance with the applicable procedures and approvals under FEMA and related laws becomes critical. This includes:
- ensuring 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 such as retail, telecom, and construction;
- assessing beneficial ownership, especially where investors are from countries sharing a land border with India, such as China, investment from which requires government approval;
- aligning with Indian legal frameworks, including the Companies Act, 2013, the Income-tax Act, 2025 (which replaces the Income-tax Act, 1961 from 1 April 2026), and sector-specific laws.
With clarity on these points, investors can navigate the Indian market with confidence, whether in services, manufacturing, or emerging sectors such as digital infrastructure and clean energy.
At CorpNinja Advisors, we help foreign companies establish operations in India, from incorporation through to ongoing support.