FDI in India:
FEMA and NDI Rules Advisory for Foreign Investors and Indian Companies
Authored by R & D Law Chambers LLP | Practice led by Ravish Bhatt, Advocate, Bar Council of Gujarat (Enrolment G/504/2008) | Solicitor of the Senior Courts of England and Wales (SRA No. 492 477) | ADIT, Chartered Institute of Taxation, London | Published: 11 August 2026 | Last reviewed: 11 August 2026 |
IN BRIEF Foreign direct investment into India is governed by the Foreign Exchange Management Act, 1999 and the FEM (Non-Debt Instruments) Rules, 2019, administered by the Central Government, the RBI and DPIIT. Most sectors permit 100% FDI under the Automatic Route without prior approval. R & D Law Chambers LLP advises on entry routes, Press Note 3 assessments, structuring, pricing and post-closing reporting. |
On this page: Who regulates FDI | Entry routes and sectoral limits | Land-border country investment (Press Note 3 to Press Note 2 of 2026) | Qualifying instruments and structures | Pricing and valuation | Reporting and timelines | Missed filings, LSF and compounding | GIFT City IFSC gateway | Illustrative scenario | Services we provide | FAQs | Related insights
Who regulates foreign direct investment in India?
Three authorities share the FDI framework. The Central Government makes the FEM (Non-Debt Instruments) Rules, 2019 under section 46 of FEMA. The RBI prescribes payment modes and reporting through the 2019 Reporting Regulations and its Master Direction on Foreign Investment. DPIIT frames sectoral policy through press notes and processes government-route approvals. |
The Foreign Exchange Management Act, 1999 treats the issue and transfer of equity instruments to persons resident outside India as capital-account transactions. Since October 2019, the substantive rulebook is the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, notified vide S.O. 3732(E) dated 17 October 2019, which superseded the earlier FEMA 20(R) regime. The companion Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, made by the Reserve Bank of India, govern how consideration moves and how each transaction is reported. The Department for Promotion of Industry and Internal Trade (DPIIT) issues the Consolidated FDI Policy and sector-specific press notes; where the policy and the Rules diverge, the Rules prevail as the statutory instrument.
The Foreign Investment Promotion Board (FIPB) was abolished in 2017. Proposals under the government route are now filed on the Foreign Investment Facilitation Portal (FIFP) and examined by the administrative ministry concerned, with DPIIT as coordinator. Standard processing takes roughly 8 to 12 weeks; proposals above the notified threshold go to the Cabinet Committee on Economic Affairs. In day-to-day practice, the Authorised Dealer (AD) bank is the operational gatekeeper: it verifies pricing, documentation and reporting before any filing reaches the RBI.
India recorded FDI inflows of approximately USD 94.53 billion in FY 2025-26, per DPIIT data, the strongest year on record. The regulatory framework has moved quickly alongside: the NDI Rules were amended in August 2024 (cross-border swaps), June 2025 (bonus issues in prohibited sectors) and three times between May and June 2026 (land-border investment, insurance, and portfolio investment by foreign individuals).
Which entry route applies: Automatic Route or Government Route?
Sectors not listed in Schedule I to the NDI Rules and not prohibited are open to 100% foreign investment under the Automatic Route, with no prior approval from the RBI or the Government. Listed sectors carry their own caps, conditions or approval requirements, and a short prohibited list remains closed entirely. |
The entry route follows the sector of the Indian investee, not the identity of the investor (subject to the land-border rules below). Under the Automatic Route the investor remits, the company allots, and compliance is achieved through pricing conformity and post-facto reporting. Under the Government Route, prior approval through the FIFP is a condition of the investment itself.
Prohibited sectors
FDI is not permitted in: lottery business; gambling and betting including casinos; chit funds; Nidhi companies; trading in transferable development rights; real estate business or construction of farm houses (excluding development of townships and construction of residential or commercial premises, and excluding SEBI-regulated REITs; real estate broking is separately open at 100% Automatic); manufacturing of cigars, cigarettes and tobacco substitutes; and activities closed to private investment such as atomic energy and core railway operations. Since the NDI (Amendment) Rules, 2025 (11 June 2025), companies in prohibited sectors may issue bonus shares to existing non-resident shareholders, provided the non-resident shareholding percentage does not increase.
Sectors with caps or conditions: common traps
E-commerce illustrates how sector classification decides everything: the marketplace model is open at 100% Automatic subject to specific conditions, while the inventory-based model is not open to FDI at all. Uploading or streaming of news and current affairs through digital media is capped at 26% under the Government Route. Insurance moved to 100% under the Automatic Route by the NDI (Second Amendment) Rules, 2026 (S.O. 2186(E) dated 2 May 2026), with intermediaries included. Defence, brownfield pharmaceuticals, multi-brand retail and print media retain approval requirements or conditions. The Schedule I residual entry does not extend to financial services activities regulated by a financial sector regulator, which follow their own entries.
What changed for investment from land-border countries in 2026?
Press Note 3 (2020) required prior Government approval for any FDI from a country sharing a land border with India, or where the beneficial owner was from such a country. Press Note 2 (2026), notified into Rule 6(a) of the NDI Rules from 2 May 2026, replaces the blanket test with a threshold and control based beneficial-ownership framework. |
Rule 6(a), as substituted by the FEM (Non-debt Instruments) (Amendment) Rules, 2026 (S.O. 2174(E) dated 1 May 2026), keeps three triggers for the Government Route: first, the investor is itself an entity or citizen of a land-border country (LBC); second, the beneficial owner of the investment is an LBC citizen, or beneficial ownership is vested in an LBC; third, an LBC person can exercise control over the investor entity, or ultimate effective control over the Indian investee, in any manner. Beneficial ownership takes its meaning from the Prevention of Money-laundering Act, 2002 read with Rule 9(3) of the PML (Maintenance of Records) Rules, 2005: broadly, more than 10% of ownership rights or entitlements (15% for unincorporated bodies), held directly or indirectly, individually or cumulatively. For individuals the test is citizenship, not residence: a Chinese citizen resident in Singapore is within the rule.
Direct investment by an LBC entity continues to require approval irrespective of percentage. For non-LBC investors, LBC interests below the thresholds and without control no longer force the Government Route, but they trigger a reporting obligation: the proviso to Rule 6(a) subjects such investments to reporting in the manner specified by the Reserve Bank, and the DPIIT Standard Operating Procedure of 4 May 2026 contemplates an intimation before the transaction is consummated where the sector is under the Automatic Route. Investments by multilateral banks or funds of which India is a member are excluded from country attribution. The countries treated as sharing a land border are China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan; market practice conservatively treats Hong Kong and Macau as part of China for this purpose, and we advise on that footing absent a specific DPIIT clarification.
The 2026 SOP also introduces a 60-day fast-track for LBC-linked proposals in identified priority sectors (including capital goods, electronic components, polysilicon and ingot-wafer, advanced battery components and rare earth processing), conditioned on majority shareholding and control remaining at all times with resident Indian citizens or Indian entities owned and controlled by them.
Which instruments and structures qualify as FDI?
FDI must come through equity instruments: equity shares, fully and compulsorily convertible preference shares (CCPS), fully and compulsorily convertible debentures (CCDs), and share warrants. Optionally or partially convertible instruments are debt and fall under the external commercial borrowing regime, not the NDI Rules. |
The compulsory-conversion line is the most common structuring error we correct. An optionally convertible preference share or debenture issued to a foreign investor is not FDI; it is a debt instrument governed by separate regulations with different caps, end-use restrictions and reporting. Share warrants may be issued with at least 25% of the consideration received upfront and the balance within 18 months. DPIIT-recognised startups may raise foreign investment through convertible notes, subject to the minimum ticket of INR 25 lakh and Form CN reporting within 30 days.
Beyond a straight subscription, the NDI Rules accommodate: rights and bonus issues to existing non-resident shareholders (Rule 7); cross-border swaps, where equity instruments of an Indian company are issued or transferred against equity instruments of another Indian company or equity capital of a foreign company, expressly enabled by the Fourth Amendment of 16 August 2024 (Rule 9A read with the Overseas Investment Rules, 2022); and deferred consideration on transfers, where up to 25% of the total consideration may be deferred, held in escrow or covered by seller indemnity for up to 18 months from the transfer agreement (Rule 9(6)), with the final price still conforming to pricing guidelines. FDI in LLPs is permitted under the Automatic Route where the LLP operates in a sector open to 100% Automatic FDI without FDI-linked performance conditions.
How is the price of shares determined for FDI?
For an unlisted Indian company, shares issued to a foreign investor cannot be priced below fair value determined by an internationally accepted pricing methodology on an arm’s length basis, certified by a Chartered Accountant, a SEBI-registered Merchant Banker or a practising Cost Accountant (Rule 21(2) of the NDI Rules). The certified value is a floor on issue and a ceiling on the foreign investor’s exit to a resident. |
Pricing under the NDI Rules is directional. When a non-resident buys (fresh issue or purchase from a resident), the price must be at or above fair value. When a non-resident sells to a resident, the price must be at or below fair value. This asymmetry is also why assured-return exit structures fail: equity FDI must carry entrepreneurial risk, and a pre-agreed exit price above fair value is unenforceable under the exchange-control framework. The Rules prescribe no express validity period for the valuation certificate, but AD bank practice generally requires a certificate proximate to allotment (commonly treated as within 90 days), so the valuation exercise should be sequenced against the closing timetable. The certificate travels with the Form FC-GPR filing.
What must be reported after the investment, and by when?
Shares must be allotted within 60 days of receiving the money. Form FC-GPR must be filed within 30 days of allotment on the RBI FIRMS portal. Transfers between residents and non-residents are reported in Form FC-TRS within 60 days. Every entity with foreign investment also files the annual FLA return by 15 July. |
Two clocks run in sequence and are routinely confused. The 60-day allotment window runs from receipt of the inward remittance; the 30-day FC-GPR window runs from the date of allotment. The filing is made through the Single Master Form on the FIRMS portal and requires the FIRC and KYC report from the AD bank, the valuation certificate, and a company secretary certificate; registration of the company in the RBI Entity Master is a practical precondition. Since July 2025, the portal supports bulk CSV uploads and real-time validation against sectoral caps. The Single Master Form subsumes nine reporting forms, including FC-GPR, FC-TRS, LLP(I) and LLP(II), CN, ESOP, DRR, InVi and Form DI for downstream investment.
Where an Indian company that is foreign-owned or controlled invests further into another Indian company, the downstream investment framework under Rule 23 applies, with Form DI reporting and sectoral conformity at each level. The January 2026 update to the RBI Master Direction on Foreign Investment clarified, among other points, that the deferred-consideration facility extends to downstream acquisitions. We deal with downstream and indirect foreign investment in a separate detailed note.
A practical map of the three portals: FIRMS for transaction reporting (FC-GPR, FC-TRS, Form DI); FLAIR for the annual Foreign Liabilities and Assets return; PRAVAAH for compounding applications. Each requires separate registration, and a missed registration is one of the most frequent causes of avoidable late filing.
What happens if a FEMA filing was missed? LSF and compounding
Reporting delays can be regularised by paying a Late Submission Fee of INR 7,500 plus 0.025% of the amount involved per year of delay, capped at 100% of that amount, for up to three years from the due date (RBI A.P. (DIR Series) Circular No. 16 of 30 September 2022). Older or substantive contraventions require compounding under section 15 of FEMA. |
The LSF is an administrative alternative to compounding, available only for reporting delays. Beyond the three-year window, or where the contravention is substantive rather than procedural (for example, a pricing breach, an unreported downstream investment, or investment received in a capped sector beyond the cap), the route is a compounding application under section 15 of FEMA read with the FEM (Compounding Proceedings) Rules, 2024, filed on the PRAVAAH portal. Section 13 of FEMA permits penalties of up to three times the amount involved, and section 42 extends liability to officers in default, so early regularisation is almost always the economical course. We advise on quantification, prepare the compounding application, and appear in the proceedings.
How does GIFT City IFSC change the FDI analysis?
A unit in GIFT City IFSC is treated as a person resident outside India for FEMA purposes. Investment by a foreign investor into an IFSC unit is therefore outside the NDI Rules and governed by the IFSCA framework, while an IFSC entity investing into a domestic Indian company enters through the ordinary FDI, FPI or FVCI gates. |
This two-directional treatment makes GIFT City both an entry vehicle and a separate destination. A foreign financial services group establishing in the IFSC deals with the International Financial Services Centres Authority, not with Schedule I caps. Conversely, an IFSC fund or holding entity deploying capital into companies in mainland India is a non-resident investor for that leg, and everything on this page (entry route, Rule 6(a), pricing, FC-GPR) applies. R & D Law Chambers practises extensively in GIFT City IFSC, including ship and aircraft leasing structures and IFSCA regulatory work; see our dedicated GIFT City practice at giftcitylawyers.com for the IFSC side of the analysis.
Illustrative scenario
A European strategic investor proposes to subscribe to 99.98% of the equity of an Indian software company by fresh issue. The sequence: the target’s activities are confirmed as IT services, falling in the Schedule I residual entry at 100% Automatic; the investor’s ownership chain is traced to ultimate natural persons and confirmed free of land-border country interests at any level, so Rule 6(a) is not engaged and no pre-closing intimation arises; a valuation certificate under Rule 21(2) sets the pricing floor; consideration arrives by inward remittance, shares are allotted within 60 days, and Form FC-GPR is filed within 30 days of allotment with the FIRC, KYC and valuation certificate. No approval from the RBI or the Government is required at any step. Change one fact (a 12% Hong Kong shareholder three levels up the investor’s chain, or a pivot into digital news content) and the route, the filings and the timetable all change. That is why the sectoral and beneficial-ownership analysis comes first.
FDI services we provide
Formal legal opinions on Automatic Route eligibility, sectoral classification and Press Note 3/Press Note 2 (2026) beneficial-ownership assessment, including reliance-grade opinions for boards, counterparties and AD banks. Transaction structuring: instrument selection, swap structures, deferred consideration and escrow mechanics, rights and bonus issues, and FDI in LLPs. Government Route approvals: preparation and prosecution of FIFP applications, including fast-track priority-sector proposals. AD bank coordination: pricing certificates, KYC and remittance documentation, and resolution of AD bank queries. Reporting: Entity Master registration, FC-GPR, FC-TRS, Form CN, Form DI and annual FLA. Regularisation: LSF computation and compounding applications under the FEM (Compounding Proceedings) Rules, 2024. FDI due diligence on Indian targets for foreign acquirers, and FEMA-compliance reviews for Indian companies with existing foreign shareholding.
Frequently asked questions
Is prior RBI approval required for FDI into India under the Automatic Route?
No. Under the Automatic Route, neither the Reserve Bank of India nor the Central Government approves the investment in advance. Compliance is achieved through conditions attached to the investment itself: the sectoral cap, the pricing floor under Rule 21 of the NDI Rules, receipt of funds through permitted banking channels, allotment within 60 days of receipt, and post-facto reporting in Form FC-GPR within 30 days of allotment. Prior approval is required only where the sector is under the Government Route or where the land-border provisions of Rule 6(a) are engaged.
What is the difference between the Automatic Route and the Government Route?
Under the Automatic Route, a foreign investor may invest up to the sectoral cap without any prior approval; obligations are limited to entry conditions, pricing and reporting. Under the Government Route, prior approval of the competent administrative ministry is a precondition, applied for through the Foreign Investment Facilitation Portal and typically processed in 8 to 12 weeks. The route is fixed by Schedule I to the FEM (Non-Debt Instruments) Rules, 2019 for the investee’s sector, and can be overridden to the Government Route by the land-border country provisions in Rule 6(a) regardless of sector.
Does Press Note 3 of 2020 still apply in 2026?
Yes, in revised form. The blanket approval requirement of Press Note 3 (2020) was recalibrated by Press Note 2 (2026), given statutory effect from 2 May 2026 through an amendment to Rule 6(a) of the NDI Rules. Direct investment by an entity or citizen of a land-border country still requires Government approval at any percentage. For other investors, approval is required only where a land-border country person holds beneficial ownership above the PMLA thresholds (broadly 10%) or exercises control; smaller land-border interests are permitted under sectoral conditions but attract a reporting obligation before closing.
What is the deadline for filing Form FC-GPR and what if it is missed?
Form FC-GPR must be filed on the RBI FIRMS portal within 30 days from the date of allotment of the shares, supported by the FIRC and KYC report from the AD bank, the valuation certificate and a company secretary certificate. The shares themselves must have been allotted within 60 days of receipt of the money. A missed FC-GPR can be regularised within three years of the due date by paying the Late Submission Fee of INR 7,500 plus 0.025% of the amount involved per year of delay; beyond that, a compounding application under section 15 of FEMA is required.
Can optionally convertible instruments be issued to a foreign investor as FDI?
No. Only fully and compulsorily convertible instruments qualify as equity instruments under the NDI Rules: equity shares, compulsorily convertible preference shares, compulsorily convertible debentures and share warrants. Optionally or partially convertible preference shares and debentures are debt instruments and fall under the external commercial borrowing framework, which carries different eligibility, end-use and reporting requirements. Issuing an optionally convertible instrument on FDI assumptions is a common and expensive structuring error, usually surfacing only when the AD bank refuses the FC-GPR filing.
Can a startup raise foreign investment through convertible notes?
Yes, if it is a DPIIT-recognised startup. A convertible note is an instrument acknowledging money received initially as debt, repayable or convertible into equity at the holder’s option on specified events. Foreign investors may subscribe to convertible notes of an eligible startup for a minimum ticket of INR 25 lakh in a single tranche, with reporting in Form CN within 30 days. The conversion window is fixed by the definition in Rule 2 of the NDI Rules. Companies that are not DPIIT-recognised startups cannot use this instrument for foreign investment and must issue equity instruments instead.
Do the FDI rules apply to investment into a GIFT City IFSC unit?
No. A unit set up in GIFT City IFSC is treated as a person resident outside India for FEMA purposes, so a foreign investor’s investment into the IFSC unit is not governed by the NDI Rules or Schedule I caps; it is governed by the IFSCA framework and the applicable IFSCA regulations. The FDI rules re-enter the picture when an IFSC entity invests into a company in mainland India: for that leg, the IFSC entity is a non-resident investor and the ordinary entry route, pricing and FC-GPR requirements apply.
Who can certify the valuation for a fresh issue of shares to a foreign investor?
For an unlisted Indian company, the valuation must be carried out under an internationally accepted pricing methodology on an arm’s length basis and certified by a Chartered Accountant, a Merchant Banker registered with SEBI, or a practising Cost Accountant, under Rule 21(2) of the NDI Rules. The certified fair value is the minimum issue price to a non-resident. AD banks expect the certificate to be proximate to the allotment date, and it forms part of the Form FC-GPR documentation, so the valuation should be commissioned against the closing timetable rather than in advance.
Related insights and services
Corporate and M&A advisory | GIFT City IFSC practice | Cross-border dispute resolution and arbitration | International tax and transfer pricing
This page provides general information on the law as at the date of last review and is not legal advice. Foreign investment regulation changes frequently; specific transactions require specific advice. Contact R & D Law Chambers LLP, Ahmedabad, for advice on your matter. |