The Prime Minister of India on July 21, 2020 in his virtual address at the 2020 India Ideas Summit organized by the US-India Business Council (India Ideas Summit) has said that India has attracted a foreign investment of over $20 billion between the months of April and July1 and while due to the unprecedented spread of the COVID-19 pandemic there has been a massive slowdown in the world economy with India being no exception to it, the Government of India had been making a series of announcements in the area of foreign direct investment in order to give a boost to the foreign investors' confidence and attracting more investments in India.

This article aims to focus on the changes that have been brought about in the foreign direct investment regime of India and aims to analyze the potential these change in policy holds particularly in the wake of the global pandemic.


In the next half of the year, it has been projected that the Indian economy will likely rebound from the impact of the COVID-19 pandemic and grow by 6.7 per cent in the next financial year, according to IHS Markit.

As per the World Investment Report 2020 released by UN Conference on Trade and Development (UNCTAD), economic growth in India would be positive, albeit lower in a post-COVID-19 period. In 2019, the Foreign Direct Investment (FDI) inflows into the country had jumped to 51 billion USD due to which India from 12th position in 2018 jumped to the 9th position in 2019 among the world's largest FDI recipient countries2.


  • FDI is a major source for a non-debt resource for the economic development of the country. Inflow of FDI to a country not only brings the required injection of money into domestic industries but also brings in the inflow of technology, knowledge, skills and expertise that enhances capacities and competitive capabilities of domestic businesses.
  • The influx of Investment into India has hugely improved since the LPG (Liberalisation, Privatisation and Globalisation) reforms of 1991 when GOI opened up the Indian economy for expanding the role of private and foreign investments. Since then, India has now become an attractive FDI destination becoming one of the top five host economies for FDI in the developing Asia region.
  • With the aim of promoting investments, the Foreign Exchange Regulation Act 1973 (FERA) was enacted which gave power to the Reserve Bank of India (RBI) to act as the statutory governing body for regulation and control. Over time, for better management, GOI brought in force the Foreign Exchange Management Act 1999 (FEMA).
  • In India the FDI inflows are regulated by the Foreign Exchange Management (Transfer or Issue of security by a person resident outside India) Regulations, 2000 which works in accordance with the FEMA. As per its provisions a foreign investor which is a person who is residing outside India and who happens to be a citizen of a foreign state or a body corporate registered outside India can undertake investments in India.


  • The Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, (formerly known as Department of Industrial Policy and Promotion) focuses on the facilitation of FDI into the country by issuing Consolidated FDI Policy that governs the limit at which foreign investors can invest in the different sectors of the economy. Prescribed sectorial caps are issued from time to time by DPIIT regulating or de-regulating investment that comes in India.
  • As per the quarterly statistics of DPIIT, the data with regard to inflow of FDI in 2019-20 has shown that:

- During the said period, India received the maximum FDI inflow from Singapore (14.67 billion USD), followed by Mauritius, Netherlands, USA and Japan.

- The top tier sectors attracting the most FDI's are:

a) Services sector attracting the highest FDI equity inflow of 7.85 billion USD.

b) Computer Software and Hardware closely follows the above with 7.67 billion USD inflow;

c) Telecommunications sector is at 4.44 billion USD, and

d) Trading at 4.57 billion USD.

  • While the FDI inflow into India has significantly increased over time where the top FDI attractive states are Maharashtra, Karnataka, Delhi and Gujarat but the increase in FDI flows have also been coupled with strong regional concentrations. As per the findings of an expert study3, the states which are already rich in FDI investments tend to receive more equity inflows, making it all the more difficult for the states with laggard history of attracting FDI inflows to get fresh investments.


  • There are two routes for bringing FDI into the country:
  1. Automatic Route - No approval or prior permission is required by the private foreign investor (for both non-resident and the Indian company) either from the RBI or GOI.
  2. Government Route - Through this route no investment can come forth without first undertaking the prior approval of the GOI. Seeking approval is mandatory for which the company will have to file an application through Foreign Investment Facilitation Portal, which facilitates single-window clearance. As per the process, the application for FDI is thereafter forwarded to the respective ministry, which in turn may approve or reject the application in consultation with DPIIT.
  • FDI rates are not uniform in India. Certain industries have been allowed 100% FDI which means the entire funds of a business can be from FDI inflow. Some other common rates vary from 26%, 49%, 51% and 74%. There are certain strategic industries where FDI has been prohibited under any of the routes.
  • Procedure and timeline for approval: The application is to be filed at which initiates the internal procedure of approvals involving DPIIT which identifies concerned Ministry or Department and thereafter circulates the proposal within two days.

- Once the proposal has been received the same would be circulated to RBI within two days for its comments from a FEMA perspective. (Any FDI proposed from Pakistan and Bangladesh would require a clearance from the Ministry of Home Affairs)

- DPIIT would be required to provide its comments within four weeks from receipt of an online application, & Ministry of Home Affairs, if applicable, to provide comments within six weeks.

- Pursuant to the above, additional information / clarifications may be required from the applicant which is to be provided within a week.

- Once the internal diligence is complete, the application for FDI gets approved within eight to ten weeks' time.



  • Manufacturing: To realize the ambition of growth in this sector there needs to be a conscious and coordinated effort both at the National and also at the State government levels for ensuring States attract more FDI flows.
  • It has been seen that for attracting FDI's, the State's with a sizeable manufacturing sector itself will attract more FDI flows implying foreign investors' preference for states with a strong industrial base.
  • Recent Policy actions - the DPIIT in 2019 released "Press Note 4" for notifying new changes to the FDI policy circular 2017, by which:

a) For Coal and Lignite Mining, 100% FDI under the automatic route has been granted in Indian entities engaged in coal and lignite mining. The above same has also been provided in Indian entities engaged in the sale of coal, coal mining activities including associated processing infrastructure but subject to the provisions of the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957.

The aim and objective behind the policy change is to attract international businesses to Indian coal market, making it efficient and globally competitive.

b) Contract Manufacturing, FDI in manufacturing was already under the 100% automatic route, however Press Note 4 had clarified that investments in Indian entities engaged in contract manufacturing is also permitted under the 100% automatic route provided it is undertaken through a legitimate contract.

The amendment may give the necessary boost to domestic manufacturing.

  • In addition to the above, the National Manufacturing Policy can give a high priority for States with lower industrial base which in turn will help them in revamping their manufacturing sectors.
  • Services: This sector of the Indian economy attracts the most FDI investments while also creating the largest job opportunities in the recent period. Services like IT / BPO has been a better driver of growth more than manufacturing industries. Coupled with boosting investments in the manufacturing sector, it is therefore, equally important, if not more so, to provide a boost to the Services sector as well.
  • The Services sector including (Financial, Banking, Insurance etc.) provides the necessary value chain of services which ranges from low-end services to the most sophisticated services.
  • This sector also provides for competitive intellectual property based services and accordingly a complimentary services policy compatible with the manufacturing policy is needed.


  • GOI has recently undertaken easing of the FDI norms across various sectors of the economy such as:
  1. Aviation - In Union Budget 2019-20, GOI had proposed opening up aviation for FDI in consultation with all stakeholders. In pursuance of the above, and for the strategic disinvestment of M/s Air India Limited, the Finance Ministry on July 27, 2020 notified changes in FDI rules to permit non-resident Indians (NRIs) to acquire upto 100% in Air India.

Before the change, only Indian citizens could bid for a 100 % stake of Air India while investments by anyone else, including by foreign airlines is up to the limit of 49%. Now, in case the person is NRI then GOI permits 100% investment under the automatic route.

This change in policy is more attractive for investors as with the change of FDI norm, GOI has advertised that a 100% share of Air India is up for sale.

  1. Insurance - India has raised FDI cap for investment in insurance to 49%.

Also now, there has been relaxation of foreign investment limit for insurance intermediaries with 100% FDI being permitted.

  • In the past months, the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 20204 were notified to take effect from April 27, 2020. The significant change that was introduced vide this Amendment is the increase in the limit of the foreign equity investment cap to the insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, surveyors and loss assessors and such other entities, as may be notified by the IRDAI to 100%. The limit was increased from 49% to 100% vide this Amendment. However, it is to be noted that this was not for the first time that such move has been announced by the government. In 2019, the Finance Minister Nirmala Sitharaman in her Union Budget had announced that the government would allow 100% foreign investment for insurance intermediaries.
  • Subsequently, the Indian Insurance Companies (Foreign Investment) Amendment Rules 2019 were issued in order to amend the Indian Insurance Companies (Foreign Investment) Rules, 2015. Vide the April 27, 2020 notification an amendment corresponding to the previous announcements were made in the foreign exchange management rules as well.
  • The Amended rules however, caps the total foreign investment in the paid up equity capital of an Indian Insurance Company to 49%. The foreign investment up to 49% of the total paid-up equity though allowed on the automatic route is subject to approval or verification by the IRDAI. The amended rules further mandates that the ownership and control of an Indian Insurance Company remains at all times in the hands of resident Indian entities and the composition of the board of directors and key management persons of insurance intermediaries will be as specified by the IRDAI. Further, the insurance intermediary that has a majority shareholding of foreign investors are required to be compliant with the following conditions:

a) the insurance intermediary should be incorporated as a limited company under the Companies Act, 2013;

b) at least one from among the chairman of the board of directors or the CEO or principal officer or managing director of the insurance intermediary must be a resident Indian citizen;

c) has to take permission of IRDAI for repatriating dividend;

d) has to bring in the latest technological, managerial and other skills;

e) shall not be permitted to make payments to the foreign group, promoter, subsidiary, interconnected or associate entities beyond what is necessary or permitted by IRDAI;

f) has to make disclosures in a format specified by IRDAI of all payments made to its group, promoter, subsidiary, interconnected or associate entities; and

g) the composition of the board of directors and key management persons of the insurance intermediaries shall be as specified by the concerned regulators.

  • The move is expected to bring a substantial amount of foreign direct investment into the country through the insurance sector. The regulation of the insurance intermediaries with the majority shareholding by the IRDAI has a potential of providing a level playing field to all the players. The future will tell that how the market participants and the global insurance players will react to the changes in the framework of the foreign investment.
  1. Defence - In May 2020, GOI increased FDI in Defence manufacturing under the automatic route from 49% to 74%. India has also established two defence corridors to encourage production of defence equipment & platforms.
  2. Digital - In December 2019, GOI permitted 26% FDI in digital sectors. The sector has particularly high return capabilities in India as favourable demographics, substantial mobile and internet penetration, massive consumption along with technology uptake provides great market opportunity for a foreign investor.
  • GOI has recently undertaken certain restrictions from investments from land bordering countries:
  • India revised its foreign direct investment policy vide "Press note 3" and Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 20205 imposing certain stricter norms on foreign investments in companies in India from an investor who is based out of a country land bordering India. As per the Press note, the changes in the Consolidated FDI Policy, 20176 was for an aim to curb opportunistic takeovers/ acquisition of Indian companies when they have been severely affected due to COVID-19 pandemic.
  • By this move, the investors from China, Pakistan, Bangladesh, Nepal, Bhutan, and Myanmar are to face restriction and can only invest under the government route. The revised policy also includes in its ambit a beneficial owner of an investment situated in or who is a citizen of any of the aforementioned countries. The policy states that for all such categories of investors, the investment can only be made under the government route.
  • Further, in the event of a transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/ purview of the bordering countries, such subsequent change in beneficial ownership will also require a government approval. The restriction takes out all potential funding from new investors as well as supplementary funding from a beneficial owner from India's land border-sharing countries from the automatic route.
  • The move does not aim in the restriction of the foreign investment from the land bordering countries but only intends to regulate the future foreign investments or transfer of existing investments to beneficial owners located in bordering countries in India.
  • Having said that, the announcement of the Press Note has also brought ongoing transactions to a halt. The Indian companies receiving foreign investments have been forced to conduct regressive diligence exercises before the finalization of their transactions. The absence of the threshold limits and the non-clarity in the definition of 'beneficial ownership' have made the position and application of the Press Note 3 somewhat unclear.
  • In the present form, since a 'perceived' restriction of government approval has been imposed on any form of investment by a land bordering nation's entity, the possibility of some delay in the ongoing transactions cannot be ruled out. However, such a policy action has been used for the sole purpose of avoiding opportunistic takeovers of Indian companies with a limited coverage to the land-bordering countries around India. In the present circumstances of a raging COVID-19 pandemic rendering many Indian entities vulnerable the Government's move is directly in line with public welfare and national security interests.


  • GOI in the recent past has pro-actively facilitated reforms in the ecosystem to realize India's FDI potential. India's ranking in the Ease of Doing Business 2020 survey is an indication of that as India climbed 14 rungs in the survey undertaken by the World Bank, to stand at number 63 among 190 countries, making it one of the world's top 10 most improved countries for the third consecutive time. Some of the improvements undertaken by the GOI are related to resolving insolvency; making the process of obtaining building permits more efficient; making it easier to undertake importing and exporting with the creation of a single electronic platform for trade stakeholders, upgrading port infrastructure and advancement in electronic submission of documents among other improvements citied by the survey.
  • India also partakes in investing in other major economies of the world as according to the Confederation of Indian Industry (CII) survey report7 released in June 2020, titled 'Indian Roots, American Soil' Indian companies have pumped in over 22 billion USD worth of FDI into the US and has also created about 125,000 jobs covering all of its 50 states as per the report which surveyed 155 Indian companies in the US.
  • In the recently concluded India Ideas Summit, the Prime Minister of India therefore has invited businesses of the US to seize investment opportunities in India as well as the country offers openness, numerous opportunities and myriad options for investments. The potential of growth of certain sectors such as healthcare, infrastructure, defence, energy, civil aviation and insurance are particularly high with capacity for greater returns and dividends for a foreign investor.


In the case of India which is an open, transparent and a development oriented democracy, it is essential that like-minded developed nations such as the US and certain members in the European Union (EU), provide a lending hand to the GOI in its efforts to bridge gaps within the domestic system while building on commonalities which allows a free flow of investments to India. The country has high growth prospects along with the potential and requisite capacities to help turn around the dwindling economies of the world affected by the COVID-19 pandemic. A robust and easily accessible FDI regime therefore, will also evolve India in becoming a new manufacturing capital while also providing an alternative for the world's shaken up value chains to be based in.


3. Regional Inequality in Foreign Direct Investment Flows to India: The Problem and the Prospects (Reserve Bank of India Occasional Papers Vol. 32, No. 2, Monsoon 2011)

7. You can download the Report here -

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