Foreign Direct Investment (FDI) is an economic concept and mechanism where an entity from one country makes an investment in a business in another country, typically by acquiring a significant equity interest or at least a 10% stake, which provides a notion of direct control. This distinguishes it from Foreign Portfolio Investment (FPI), which is passive.
The history of FDI in India is rooted in the economic crisis of 1991, which led to the introduction of the New Economic Policy (NEP). Prior to this, foreign investment was heavily restricted, leading to the exit of companies like IBM and Coca-Cola in the late 1970s. The liberalization solved the problem of a severe balance of payments crisis and the need for capital, technology, and management expertise to drive economic growth.
FDI in India is governed by the Foreign Exchange Management Act, 1999 (FEMA) and the Consolidated FDI Policy issued by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry. The mechanism operates through two routes: the Automatic Route, where no prior government or Reserve Bank of India (RBI) approval is needed, and the Government Route, which requires prior approval from the concerned administrative ministry/department via the Foreign Investment Facilitation Portal (FIFP).
A significant recent change occurred on April 17, 2020, with the introduction of Press Note 3 (2020), which mandated prior government approval for all FDI from countries sharing a land border with India to curb opportunistic takeovers. However, in March 2026, this policy was eased for minority investments, allowing investments where land-bordering entities hold non-controlling beneficial ownership of up to 10% to proceed under the Automatic Route. Additionally, the FDI limit in the insurance sector was raised from 49% to 74% in 2021.