Foreign Investment is a concept that refers to the flow of capital from a person or entity in one country into the businesses, assets, or financial markets of another country. In India, it is primarily classified into two types: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). FDI is an investment by a non-resident in an unlisted Indian company, or a stake of 10% or more in the post-issue paid-up equity capital of a listed Indian company, which implies a degree of control or influence over the enterprise. FPI is an investment of less than 10% in a listed Indian company's equity instruments, or in financial assets like bonds, where the investor seeks financial returns without management control. The earlier category of Foreign Institutional Investor (FII) was subsumed under the new Foreign Portfolio Investor (FPI) category.
The modern regime of foreign investment in India originated with the economic liberalization policies initiated in 1991. This shift was a response to a severe balance of payments crisis that had depleted India's foreign exchange reserves to dangerously low levels. The problem solved was the need for capital, advanced technology, and integration with the global economy, which the previous restrictive economic structure, often called the 'License Raj,' had prevented.
The mechanism for regulating foreign investment is primarily governed by the Foreign Exchange Management Act (FEMA), 1999, which replaced the earlier Foreign Exchange Regulation Act (FERA). FEMA's objective is to facilitate external trade and payments and promote the orderly development of the foreign exchange market. FDI can enter India through two main routes: the Automatic Route, which requires no prior government or Reserve Bank of India (RBI) approval, and the Government Route, which requires prior approval from the concerned administrative ministry or department via the Foreign Investment Facilitation Portal (FIFP). The maximum permissible foreign investment is subject to a Sectoral Cap indicated against each sector in the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
A significant recent change occurred with Press Note 3 (2020), which mandated that an entity of a country sharing a land border with India, or where the beneficial owner is from such a country, can invest only under the Government Route. Furthermore, the FDI cap in the insurance sector was recently liberalized to permit 100% FDI under the Automatic Route via Press Note No. 1 (2026 Series), removing the prior approval dependency for full foreign ownership. The overall framework of FDI policy, including the distinction between the Automatic and Government routes, has largely stayed the same, but sectoral caps have been consistently liberalized.