By Harsh Singh Dahiya, Advocate, Supreme Court of India | Partner, Sterling & Partners

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Foreign investment into India is governed by a layered regulatory framework in which the Foreign Exchange Management Act, 1999 (FEMA) serves as the primary statute, supplemented by rules framed by the Central Government and regulations issued by the Reserve Bank of India (RBI). For any Indian company receiving foreign capital — whether from a foreign venture capital fund, a strategic acquirer, or a non-resident individual — understanding and observing FEMA compliance obligations is not optional. Contraventions can result in compounding proceedings, enforcement action by the Directorate of Enforcement, and reputational damage that can obstruct future fundraising rounds.

This guide sets out the key concepts, filing requirements, prohibited pathways, and practical considerations for FEMA compliance in the context of foreign investment in Indian companies as of 2025–26.

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FDI vs. FPI: Understanding the Distinction

Foreign Direct Investment

Foreign Direct Investment (FDI) refers to investment by a person or entity resident outside India in the capital instruments of an Indian company. Capital instruments include equity shares, compulsorily convertible preference shares (CCPS), compulsorily convertible debentures (CCDs), and share warrants. FDI is intended to be long-term and strategic in nature, and the investing entity typically acquires a management interest or a significant stake.

FDI flows through two routes. The Automatic Route requires no prior approval from the Government of India or the RBI — the investor may invest upon compliance with applicable sectoral caps and conditions, and must undertake post-investment reporting. The Government Route requires prior approval from the competent ministry or department (processed through the Foreign Investment Facilitation Portal, fifp.gov.in, with the DPIIT as the nodal authority for inter-ministerial coordination). All proposals under the Government Route are examined by the relevant administrative ministry in consultation with the Ministry of Finance.

Foreign Portfolio Investment

Foreign Portfolio Investment (FPI) differs fundamentally from FDI. FPIs — registered with SEBI under the SEBI (Foreign Portfolio Investors) Regulations, 2019 — invest primarily in publicly traded securities: equity shares, debentures, bonds, and government securities. FPI investment is typically passive and diversified; there is no intent to acquire management control. An individual FPI may not acquire more than 10% of the paid-up capital of a listed company without triggering a reclassification to FDI, which carries different compliance obligations.

The distinction matters because FDI and FPI are governed by different instruments (FEMA Non-Debt Instruments Rules vs. SEBI’s FPI Regulations), different pricing norms, and different reporting mechanisms. Confusing the two categories is a common source of regulatory exposure.

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Sectoral Caps, Prohibited Sectors, and Pricing Guidelines

Permitted and Prohibited Sectors

India’s Consolidated FDI Policy, periodically updated by the DPIIT, delineates the sectors in which FDI is permitted, the applicable sectoral caps, and whether entry is via the Automatic or Government Route. Certain sectors are entirely prohibited: retail trading (with limited exceptions for single-brand retail), lottery and gambling activities, manufacturing of tobacco products and cigars, atomic energy, and railway operations (except specific permitted activities). Additionally, FDI from entities situated in countries sharing a land border with India (including China, Pakistan, Bangladesh, Nepal, Bhutan, and Myanmar) mandatorily requires Government Route approval, regardless of the sector — a restriction introduced following the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2020.

Key sectoral highlights for 2025–26 include: 100% FDI under the Automatic Route in most manufacturing activities; 100% under Government Route in defence (above 74% through the Automatic Route); 49% under the Automatic Route in insurance, with liberalised pathways for intermediaries; and continued restrictions in the e-commerce sector, where inventory-based models are prohibited and marketplace entities cannot exercise control over pricing.

Pricing Guidelines

Pricing is a critical compliance area. For FDI through the issuance of new shares, the price at which shares are issued to a non-resident must not be less than the fair value as determined by a SEBI-registered Category I Merchant Banker (for unlisted companies) or the NSE/BSE traded price or average (for listed companies). The pricing guideline exists to prevent under-valuation and illicit transfer of value outside India. Contravention of pricing norms is a FEMA contravention attracting compounding proceedings.

On exit — when shares are transferred between residents and non-residents — the price must not be less than fair value (for transfers to non-residents) and must not exceed fair value (for transfers to residents). These norms prevent artificial value extraction or acquisition across the border.

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Key Reporting Obligations: FC-GPR, FC-TRS, and Related Filings

Form FC-GPR

Form FC-GPR (Foreign Currency — Gross Provisional Return) is the primary instrument through which an Indian company reports the allotment of capital instruments to a non-resident investor. The form must be filed with the RBI through the FIRMS (Foreign Investment Reporting and Management System) portal — accessible via the RBI’s website — within 30 days of the allotment of capital instruments. FC-GPR must be accompanied by a certificate from the company’s statutory auditor (or a practising company secretary) certifying the fair valuation of shares and confirming compliance with FEMA pricing guidelines.

Failure to file FC-GPR within the statutory 30-day timeline is a technical FEMA contravention that must be compounded.

Form FC-TRS

Form FC-TRS (Foreign Currency — Transfer of Shares) is required when shares of an Indian company are transferred between a resident and a non-resident (in either direction). The obligation to file FC-TRS rests on the resident party (or the investee company, in certain circumstances). The filing must be made within 60 days of receipt of funds or transfer of capital instruments, whichever is earlier, through the FIRMS portal via an Authorised Dealer (AD) Category I bank.

Other Reporting Forms

Downstream investments — where an Indian company that has received FDI makes a further investment into another Indian company — must be reported in Form DI (Downstream Investment) within 30 days. Convertible notes issued by DPIIT-recognised startups to foreign investors must be reported in Form CN within 30 days. Annual compliance obligations include the Foreign Liabilities and Assets (FLA) Return, filed with the RBI by July 15 each year, which captures outstanding FDI and ODI positions as of March 31.

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Downstream Investments, Compounding, and Recent Developments

Downstream Investment Rules

When an Indian company that is owned or controlled by non-residents invests into another Indian company, this is treated as an indirect foreign investment — or downstream investment — and is subject to FDI sectoral conditions and caps as if the investment were made directly by the foreign investor. This prevents circumvention of FDI restrictions through Indian-incorporated holding companies. The investing company must have its investment intent reflected in its object clause, and the funds used must be from internal accruals or equity capital, not borrowed funds.

Contraventions and Compounding

FEMA contraventions are civil in nature (unlike the criminal liability under the old FERA regime). Section 13 of FEMA provides for penalties of up to three times the sum involved in the contravention, or ₹2 lakh where the amount cannot be quantified, plus a further penalty of ₹5,000 per day for continuing contraventions. The RBI and the Directorate of Enforcement are the two enforcement authorities.

Compounding — the process by which an entity voluntarily discloses and settles a contravention by payment of a compounding amount — is available for most categories of FEMA violation and is strongly advisable over waiting for enforcement action. Applications are made to the RBI’s Compounding Authority. Courts have consistently held that compounding does not constitute an admission of guilt for the purpose of other proceedings.

Recent RBI Developments (2025–26)

A significant regulatory development in 2025 is the RBI’s release of the Draft Foreign Exchange Management (Establishment in India of a Branch or Office) Regulations, 2025, published in October 2025. These draft regulations propose replacing the existing 2016 FEMA framework for foreign branch and liaison offices with a principle-based regime in which approvals are delegated to Authorised Dealer Category I banks, removing several prescriptive financial eligibility thresholds. As of December 2025, the draft had not yet been notified in the Official Gazette, but entities planning operations through branch or liaison offices should monitor the RBI website for final notification.

The RBI has also continued to update Master Directions on FDI, clarifying pricing norms for convertible instruments and the definition of “control” for downstream investment purposes.

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Key Takeaways

  • FDI flows through the Automatic Route or the Government Route depending on the sector; FPI is distinct from FDI and governed by separate SEBI regulations.
  • Investment from countries sharing a land border with India (including China) mandatorily requires Government Route approval.
  • FC-GPR must be filed within 30 days of allotment of capital instruments via the FIRMS portal, accompanied by a fair valuation certificate.
  • FC-TRS must be filed within 60 days of transfer of capital instruments between residents and non-residents.
  • Pricing norms for FDI issuances and transfers are mandatory; violation is a FEMA contravention.
  • Downstream investments by Indian entities with FDI ownership must comply with sectoral caps as if made directly by the foreign investor.
  • FEMA contraventions are civil offences; voluntary compounding is available and strongly advisable to avoid escalation.
  • Monitor RBI circulars and Master Directions for evolving guidance on FDI policy, particularly for branch offices and convertible instruments.
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About Sterling & Partners
Sterling & Partners is a Supreme Court law firm based in New Delhi, with chambers at the Supreme Court of India and an office at Greater Kailash-2. The firm advises Indian and foreign companies on FEMA compliance, FDI structuring, RBI filings, and enforcement matters including compounding applications. For advice on foreign investment compliance, contact Sterling & Partners at sterlingpartners.law.