How NRIs Can Invest in Indian Companies Through Foreign Direct Investment (FDI)

If you live outside India and want to invest directly in Indian companies, the Foreign Direct Investment (FDI) framework gives you a clear path to do so. The rules come from two main sources: the Consolidated FDI Policy announced by the Government of India (through the Department for Promotion of Industry and Internal Trade, or DPIIT) and the Foreign Exchange Management Act (FEMA), 1999, which the Reserve Bank of India (RBI) enforces.

The government continuously reviews and liberalizes FDI policy to keep India attractive as an investment destination. Between 2014 and 2026, India rolled out wave after wave of reforms, opening up sectors like defense, insurance, coal mining, contract manufacturing, petroleum, energy, and deep tech to higher levels of foreign investment. The July 2025 Consolidated FDI Policy is the latest version, and the Union Cabinet approved further amendments in March 2026 that update the rules for investments from countries sharing a land border with India. This guide reflects all of those updates.

Let us walk through everything you need to know.

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Two Routes to Invest: Automatic and Government

India offers two entry routes for FDI:

1. Automatic Route

You do not need any prior approval from the RBI or the Government of India. You simply make the investment, follow the pricing and reporting rules, and you are good to go. Most sectors fall under this route, and the trend over the past decade has been to move more and more sectors into this category.

2. Government Route

For certain sensitive or strategic sectors, you need prior approval from the concerned Administrative Ministry or Department of the Government of India before you invest.

> Note: The Foreign Investment Promotion Board (FIPB), which previously handled government route approvals, was abolished in 2017. Approvals now go through the relevant Administrative Ministry or Department, coordinated by DPIIT.

The sector you want to invest in determines which route applies. Always check the latest Consolidated FDI Policy Circular published by DPIIT to confirm.

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Who Can Invest Under the FDI Scheme?

NRIs and Other Non Residents

Any person resident outside India (other than a citizen of Pakistan) or any entity incorporated outside India (other than one incorporated in Pakistan) can invest in India, subject to the FDI Policy.
Citizens of Bangladesh or entities incorporated in Bangladesh can invest, but only with prior Government approval.
NRIs living in Nepal and Bhutan, as well as citizens of Nepal and Bhutan, can invest in shares and convertible debentures of Indian companies on a repatriation basis. The key condition: you must pay for the investment through inward remittance in free foreign exchange via normal banking channels.
NRIs (including Persons of Indian Origin, or PIOs, now largely OCI cardholders) can invest on par with residents under the automatic route up to sectoral caps, with repatriation benefits subject to RBI guidelines.

Land Border Country (LBC) Rules: The Beneficial Ownership Test

India introduced Press Note 3 (PN3) of 2020 during the COVID 19 pandemic to prevent opportunistic takeovers by investors from countries sharing a land border with India. These countries include China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and others. Originally, even minimal shareholding by an LBC entity or citizen in the investing entity triggered mandatory government approval.

In March 2026, the Union Cabinet approved significant amendments to these guidelines. Here is what changed:

#### The New Beneficial Ownership (BO) Threshold The government now applies a clear Beneficial Ownership test at the investor entity level. If the non controlling LBC beneficial ownership in the investing entity stays at or below 10%, the investment can proceed under the automatic route, subject to the applicable sectoral caps, entry routes, and attendant conditions. The investee entity (the Indian company receiving the investment) must report the relevant details to DPIIT.

This is a meaningful relaxation. Previously, any LBC shareholding in the investor entity, no matter how small, could force the entire investment through the government approval process.

#### The BO Definition The beneficial ownership definition aligns with the Prevention of Money Laundering Rules, 2005, ensuring international compatibility and consistency across Indian regulatory frameworks.

#### Expedited Approval Timeline for Strategic Sectors For investments that still require prior government approval (for example, where LBC beneficial ownership exceeds 10% or the sector itself requires government route clearance), the government has introduced a 60 day expedited decision timeline for specified strategic manufacturing sectors. These sectors include:

Capital goods
Electronic capital goods
Electronic components
Polysilicon and ingot wafer production

This timeline gives investors much greater certainty and reduces the open ended waiting periods that previously discouraged some investments.

#### What This Means for NRIs

If you hold stakes in overseas investor entities that plan to invest in India, you must ensure the LBC beneficial ownership (for example, Chinese ownership) stays below 10% for automatic route eligibility. If it exceeds 10%, the investment needs government approval, though the new 60 day timeline applies for eligible strategic manufacturing sectors.

NRIs receiving such FDI in their Indian companies must comply with DPIIT reporting via the Standard Operating Procedure (SOP), alongside the usual sectoral FDI limits. This does not alter NRI specific FDI permissions, which generally allow 100% under the automatic route in most sectors per the Consolidated FDI Policy. But if your investor chain includes LBC linked entities, you now have clearer thresholds to work with.

Practical tips:

Verify the beneficial ownership structure of your investor entities before making or receiving investments to avoid delays.
Report promptly to DPIIT for automatic route investments involving LBC beneficial ownership at or below 10%.
Failing to report can attract penalties under FEMA, so treat this as a compliance priority.
For NRI led startups and deep tech ventures, this policy opens up a wider pool of global investors, since many venture capital and private equity funds have some degree of LBC shareholding that previously triggered the government route.

> Context: China's share of total FDI inflows into India from 2000 to 2025 was just 0.32%. The updated policy aims to unlock greater FDI inflows, particularly for startups and deep tech sectors, while maintaining national security safeguards. Majority Indian control remains a requirement for fast track approvals.

The effective date for these amendments is the date of the corresponding FEMA notification, following the Cabinet approval around March 10, 2026. Check the latest FEMA notification for the exact effective date.

What About Overseas Corporate Bodies (OCBs)?

OCBs lost their special status as a class of investors in India on September 16, 2003. If you previously operated through an OCB structure, here is what you need to know:

An erstwhile OCB incorporated outside India (and not on the RBI adverse list) can still make fresh investments, but it must get prior approval from the Government (for Government Route sectors) or from the RBI (for Automatic Route sectors).
Before making any fresh investment, the OCB must obtain a one time certification from the RBI (through its Authorised Dealer bank) confirming it is not on the adverse list.
OCBs can only maintain NRO current accounts, and these accounts cannot fund any fresh investments in India.
If an OCB is on the RBI adverse list, its existing NRE, FCNR, and NRO accounts stay frozen with the respective Authorised Dealer bank.

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What Instruments Can You Invest In?

Under the FDI scheme, Indian companies can issue the following instruments to non resident investors:

Eligible Instruments

1. Equity shares of Indian companies 2. Fully and mandatorily convertible debentures that convert into equity within a specified time 3. Fully and mandatorily convertible preference shares

All three count as equity under the FDI Policy.

Instruments That Follow ECB Rules Instead

If a company issues preference shares that are non convertible, optionally convertible, or only partially convertible, those do not count as FDI equity. They fall under External Commercial Borrowing (ECB) guidelines instead, which means different rules, limits, and compliance requirements apply.

Key Takeaway

Only instruments that fully and mandatorily convert into equity qualify as FDI. Anything else gets treated as debt.

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Pricing Guidelines

When an Indian company issues fresh shares to a person resident outside India, the price must follow SEBI (Securities and Exchange Board of India) guidelines. The idea is simple: the government wants to make sure shares go to foreign investors at fair market value, not at artificially low prices.

For listed companies, the pricing typically follows SEBI's formula based on market prices. For unlisted companies, a fair valuation by a qualified professional (such as a chartered accountant or a merchant banker) determines the price.

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Modes of FDI Investment

There are several ways your FDI investment can take shape:

A. Fresh Issuance of Shares

The Indian company issues brand new shares to you. This is the most straightforward route.

B. Transfer of Existing Shares

You acquire shares from an existing shareholder (who may be a resident or non resident). Different rules and approvals may apply depending on the nature of the transfer.

C. Rights and Bonus Shares

If you already hold shares in an Indian company, you can receive rights shares or bonus shares just like any other shareholder.

D. Employee Stock Option Plans (ESOPs)

If you work for or are associated with an Indian company, you may receive shares through an ESOP scheme.

E. Conversion of ECB, Royalty, or Other Payables into Equity

In certain cases, outstanding amounts like External Commercial Borrowings, lump sum fees, royalty payments, or import payables can convert into equity shares.

F. ADR and GDR Issues

Indian companies can issue shares to non residents through American Depository Receipts (ADRs) or Global Depository Receipts (GDRs), which trade on international stock exchanges.

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Petroleum, Natural Gas, and Energy: A Sector NRIs Should Know About

India's petroleum, natural gas, and energy sector is one of the most open sectors for FDI, and the July 2025 Consolidated FDI Policy confirms generous caps and easy routes for NRI investors. Here is the breakdown:

Exploration of Oil and Natural Gas Fields

FDI cap: 100%
Route: Automatic (no prior government approval needed)
You simply invest, notify the RBI after the fact, and comply with FEMA reporting.

Infrastructure for Marketing of Petroleum Products and Natural Gas

FDI cap: 100%
Route: Automatic
This covers pipelines, storage, distribution networks, city gas distribution (CGD), and related marketing infrastructure.

Petroleum Refining by Public Sector Undertakings (PSUs)

This is where the rules get a bit more nuanced:

PSUs without disinvestment or dilution of domestic equity: FDI capped at 49%, and you need to go through the Government route (prior approval required).
PSUs approved for disinvestment (like ONGC, GAIL, or IOC): Up to 100% FDI is permitted. The first 49% goes through the automatic route, and anything above 49% requires Government route approval. Security and licensing conditions apply.

Ethanol, Compressed Biogas (CBG), and City Gas Distribution (CGD)

While the July 2025 policy does not carve out separate FDI rules specifically for ethanol blending (E20), CBG, or CGD, these activities fall under the broader energy and petroleum marketing infrastructure categories. That means:

100% FDI under the automatic route generally applies.
NRIs must ensure their specific activity does not fall under restricted categories (like agricultural or plantation activities) and must route funds through NRE, FCNR, or NRO accounts.
Security clearances may apply for upstream oil and gas activities.

What This Means for NRIs

If you want to invest in India's booming energy sector, whether it is upstream exploration, gas distribution, refining, or biofuels, the doors are wide open. For most activities, you do not need prior approval. Just invest through proper banking channels, notify the RBI, and keep your compliance in order.

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Key FDI Reforms from 2014 to 2026

The government has steadily liberalized FDI rules over the past decade. Here are some highlights that matter for NRIs:

| Period | Reform Highlights | |---|---| | 2014 to 2019 | Defense FDI cap raised to 74% automatic (for new licenses). Insurance raised to 74% automatic. Liberalizations in construction, civil aviation, and single brand retail. | | 2019 to 2024 | 100% FDI permitted under automatic route in coal mining, contract manufacturing, and insurance intermediaries. | | 2025 onwards | Angel tax abolished (effective 2025 to 2026), benefiting startup linked energy ventures like biogas companies. Plantation sector: compulsory 26% divestment to Indian partners within 5 years deleted. Asset reconstruction companies (ARCs): up to 100% FDI (49% automatic, rest government route). Commodity exchanges: 49% cap (FDI plus FII combined). | | March 2026 | Land border country (LBC) investment rules updated. Beneficial ownership test introduced: non controlling LBC BO up to 10% allowed under automatic route. 60 day expedited approval timeline for strategic manufacturing sectors (capital goods, electronic capital goods, electronic components, polysilicon and ingot wafer production). BO definition aligned with Prevention of Money Laundering Rules, 2005. |

These reforms make India one of the most open large economies for foreign investment.

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Portfolio Investment Scheme (PIS): A Different Path

Besides FDI, NRIs can also invest in listed Indian companies through the Portfolio Investment Scheme. Here is a quick overview:

NRIs and Foreign Institutional Investors (FIIs) can buy and sell shares of listed Indian companies on recognized stock exchanges.
You need a designated account with an Authorised Dealer Category I bank.
The RBI and AD banks monitor investment positions to ensure sectoral caps are not breached.
FIIs can participate in exchange traded derivative contracts, engage in short selling (within rules), and use securities as collateral.
FII limits in companies can go up to 24% (with board or special resolution, up to the sectoral cap).
The RBI maintains a Caution List (when investment in a company approaches its sectoral cap) and a Ban List (when the cap is reached and no further purchases are allowed).

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Foreign Venture Capital Investments

Foreign Venture Capital Investors (FVCIs) registered with SEBI can invest in Indian venture capital undertakings and venture capital funds. This is a specialized route for those looking to back early stage or high growth Indian companies, including energy and deep tech startups. NRI investment in VCFs is allowed under the automatic route, subject to pricing and reporting norms.

The March 2026 LBC policy relaxation is particularly relevant here. Many global venture capital and private equity funds have some degree of LBC shareholding (for example, a Chinese limited partner). Under the old rules, even a tiny LBC stake in the fund triggered mandatory government approval for any investment into India. Now, as long as the non controlling LBC beneficial ownership stays at or below 10%, the fund can invest under the automatic route. This opens up a wider pool of global capital for NRI led startups and deep tech ventures in India.

> Important: Trusts that are not registered as Venture Capital Funds cannot receive FDI.

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Investing in Partnership Firms and Proprietary Concerns

NRIs and Persons of Indian Origin (PIOs) can also invest in Indian partnership firms and proprietary concerns. Here is the breakdown based on the July 2025 policy:

On a non repatriation basis: NRIs and PIOs can make capital contributions to partnership firms and proprietary concerns using funds from NRE, FCNR, or NRO accounts. You cannot invest in agricultural or plantation activities, real estate, or print media through this route.
With repatriation benefits: You need prior RBI permission, granted in consultation with the Government of India.
Non residents other than NRIs/PIOs: Different rules and restrictions apply.

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Reporting Requirements You Must Follow

Reporting is not optional. The RBI requires detailed reporting for all foreign investments:

| Type of Investment | What to Report | |---|---| | Fresh issuance of shares (FDI) | File the FC GPR form with the RBI | | Transfer of shares | File the relevant transfer reporting forms | | Annual compliance | File the Annual Return on Foreign Liabilities and Assets (FLA) |

Additional Reporting for LBC Linked Investments (Effective March 2026)

If your Indian company receives an investment under the automatic route where the investor entity has non controlling LBC beneficial ownership of up to 10%, you must report the relevant details to DPIIT via the Standard Operating Procedure (SOP). This reporting requirement is immediate and applies alongside the usual RBI filings.

Failing to report can attract penalties under FEMA, so treat every reporting obligation as a compliance priority.

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Practical Checklist for NRI Investors

1. Identify your sector and check the latest Consolidated FDI Policy Circular from DPIIT for the applicable FDI cap and entry route. 2. Verify the beneficial ownership structure of any overseas investor entity involved, especially for LBC connections. Keep LBC BO at or below 10% for automatic route eligibility. 3. Choose the right instrument: equity shares, fully and mandatorily convertible debentures, or fully and mandatorily convertible preference shares. 4. Route your funds through proper banking channels (NRE, FCNR, or NRO accounts). 5. Follow pricing guidelines: SEBI formula for listed companies, fair valuation for unlisted companies. 6. File all reports on time: FC GPR with RBI, FLA returns, and DPIIT reporting for LBC linked investments. 7. Seek professional advice if your investment involves government route sectors, LBC beneficial ownership above 10%, or complex structures like ECB conversions.

India wants your investment, and the rules keep getting simpler and more transparent. Stay informed, stay compliant, and make the most of the opportunities available to you.