Routes through which FDI can be made in India

Foreign Direct Investment, or FDI, can happen when an investor from another country invests in a business that's also in their country. An investor could be any number of entities: an individual, a firm, or even a company. Generally, an investor will expand into other countries by acquiring assets of the business or establishing operations in a foreign country. This is different than buying equity in foreign companies, which is known as portfolio investment.

Automatic Route - The Automatic Route allows a foreign entity to invest in shares or capital instruments without any form of prior approval. Foreign investment undertaken under this route is relaxed and does not require the government's consent, and there are no restrictions on the rate of investment. The extent of the investment is also not restricted, and caps will also need to be taken into consideration.

Government Route - Government route is also known as approval route. This route is available to foreign companies that will invest in India. When using this route, the government approves investments based on what industry they are going to be invested in per their area regulations. The Government of India considers this method as the preferred form of approval for sensitive areas because it requires a higher volume of monitoring for foreign investment projects.

Eligibility criteria for FDI in India

Foreign Direct Investment (FDI) must adhere to these eligibility criteria under the approval route –

  • Investors who can't use the automatic route.
  • Neighbour countries like China, Nepal, Bhutan, Pakistan, Afghanistan & Bangladesh
  • Investment in those sectors/activities which are not prohibited
  • A company, trust and partnership firm incorporated outside India and owned and controlled by NRIs can invest in India under the same provisions as a non-resident Indian.
  • Foreign citizens can invest/trade in Indian companies with the help of a registered broker on recognized Indian Stock Exchanges.
Prohibition on investment - For foreign investments, no form is permitted to be made in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as Trusts) which is engaged or proposes to engage in the illegal activities.Post-1991, after the economic reforms, it became easier for people and companies to invest in India. There are instances when a country's domestic sources are not enough to fill the gaps between domestic savings and investments. Foreign investment is one of the tools that help this by providing capital and developing the necessary infrastructure. But as with any process there have been regulations put in place with liberalization.