Foreign Direct Investment (FDI) is an economic concept that represents an investment made by a foreign entity into a business in India with the intention of establishing a lasting interest and significant influence over its management. Unlike Foreign Portfolio Investment (FPI), which is passive and short-term, FDI is typically classified when a foreign investor acquires 10% or more of the post-issue paid-up equity capital of a listed Indian company.
The policy's modern form originated from the 1991 economic crisis, when India adopted the New Economic Policy (NEP) to solve a severe balance of payments crisis and attract foreign capital. This liberalization replaced the restrictive Foreign Exchange Regulation Act (FERA) with the more liberal Foreign Exchange Management Act (FEMA), 1999, which now governs foreign exchange transactions.
FDI is regulated by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry. The investment mechanism operates through two primary routes: the Automatic Route, which permits investment without prior government approval in most sectors, and the Government Route, which requires prior approval from the concerned Administrative Ministry/Department for restricted sectors.
A significant recent change occurred in April 2020 with an amendment (Press Note 3) that mandated government approval for all investments from countries sharing a land border with India, a measure intended to curb opportunistic takeovers. However, the Union Cabinet has recently approved a calibrated change, allowing investments where entities from land-bordering countries hold non-controlling beneficial ownership of up to 10% to be permitted through the Automatic Route in specific manufacturing sectors. Furthermore, sectoral caps have been liberalized, such as raising the FDI limit in Insurance and Pension to 74% via the automatic route.