• Types:

o Backward (raw materials)

Forign Direct Investments (FDI)
o Forward (distribution)
Definition • Example:
• Investment made by foreign o Mahindra investing in auto-
investors to obtain substantial component manufacturers
interest in an enterprise located in 3. Conglomerate FDI
another country. • Entry into unrelated business sector
Criteria for FDI abroad
• Investment through capital • No technological or production
instruments by a person resident linkage
outside India in: • Usually via joint ventures
o Unlisted Indian • Objective:
companies o Diversification
o Listed Indian companies o Risk spreading
where investment is 10%
or more (OECD threshold) Sectors Where FDI Is Prohibited
• Lottery business
Components of FDI (government/private, online
1. Foreign Equity Investment lotteries)
2. Retained Earnings of foreign • Gambling and betting (including
companies (undistributed profits) casinos)
3. Intra-company debt transfers • Chit funds
• Nidhi companies

Types of FDI • Trading in Transferable

Development Rights (TDRs)
1. Horizontal FDI • Real estate business or construction
• Same business activity abroad as in
of farmhouses
home country • Manufacturing of cigars, cheroots,
• Same stage of value chain
cigarillos, cigarettes, tobacco or
• Objective:
substitutes
o Market expansion
• Sectors not open to private
o Consumer access
investment:
o Brand presence
o Atomic energy
• Example:
o Railway operations (except
o McDonald’s opening
permitted activities)
outlets in India Clarification on Real Estate
2. Vertical FDI • Real estate business does NOT
• Complementary business abroad
include:
• Different stage of production chain
o Development of townships
• Objective:
o Construction of
o Cost reduction
residential/commercial
o Supply security
premises
o Efficiency
 o Roads or bridges • Final approval → RBI reporting
o REITs regulated by SEBI
(2014)

Explicitly Prohibited Real Estate

Activities
• Buying and selling of land
• Speculative real estate trading
• Construction of farmhouses Methods of FDI
1. Greenfield Investment
Entry Routes for FDI in India • Establishment of new business
• New plants, offices, factories,
Automatic Route
infrastructure
• No prior approval from RBI or
• Full ownership and managerial
Central Government
control
• Post-investment RBI reporting
• Benefits:
required
o Capital formation
• 100% FDI allowed (subject to
o Job creation
conditions) in:
o Infrastructure development
o Agriculture & animal
• Time-consuming but preferred for
husbandry
long-term presence
o Coal and lignite
2. Brownfield Investment
o Oil & natural gas exploration
• Merger, acquisition, or takeover
o Airports (greenfield &
• Uses existing infrastructure and
existing)
workforce
o Industrial parks
• Faster market entry
o Telecom services
• Lower setup cost
o Trading
• Limited employment generation
o Insurance (conditional)
• Common in high entry-barrier
• Nearly 90% of FDI inflows come
sectors
through this route
Government Route
FDI Regulatory Framework in India
• Prior approval of govt is required
• Governing law: FEMA, 1999
• Sector-specific caps and conditions
• Regulator: Reserve Bank of India
apply
• Policy issuer: DPIIT
• Used for sensitive/strategic sectors

Net FDI Concerns

National Single Window System
• RBI cited:
• Investor → NSWS Portal → DPIIT
o High repatriation
→ Administrative Ministry
o Rising outward FDI
• If required:
• FPI turned negative in December
o MHA + sector ministries
2025 (–$2.3 billion till Dec 18)
o RBI consultation
 • Reasons:
o India–US trade uncertainty
o High domestic valuations
Repatriation
• Profits, dividends, or capital sent
back to home country by foreign
firms

India’s Outward FDI Pattern

• Nearly 60% goes to low-tax
jurisdictions Gross FDI vs Net FDI
• Top destinations: • Gross FDI:
o Singapore: 22.6%
o Total inflows before any
o Mauritius: 10.9%
outflow
o UAE: 9.1%
• Net FDI:
• Other hubs: o Inward FDI – (Repatriation
o Netherlands
+ outward FDI)
o UK
• Net FDI can turn negative when
o Switzerland
outflows exceed inflows

Why Indian Firms Use Low-Tax

Jurisdictions (Beyond Tax)
1. Platforms for third-country
investments
2. Stable and predictable tax regimes
3. Operational and financial
flexibility
4. Joint ventures and strategic
partnerships
o ~60% are joint ventures
(RBI, July 2025)
5. Risk insulation for parent
companies

Rupee Weakness – Core Reason

• Negative net foreign investment
increases dollar demand
• Capital account surplus cushion is
shrinking
• Weak FDI + FPI = vulnerable
rupee despite GDP growth
 • Telecom
• Construction development
Impact of Outward FDI from India
• Automobile
• Capital drain • Chemicals
• Pressure on Balance of Payments • Pharmaceuticals
• Reduced domestic capacity
• Job creation impact
State-wise FDI Share
• Technology and R&D offshoring
risk • Maharashtra – 39%
• Lower tax revenues • Karnataka – 13%
• Increased vulnerability during • Delhi – 12%
global shocks

Top Sources of FDI into India

• Singapore – 30%
• Mauritius – 17%
• USA – 11%
• Netherlands – 7%
• Japan – 6%
• UK – 5%
Key FDI Reforms
Border-Sharing Country Rule (Since
2020) • 2014–19:
• Mandatory government approval o Higher caps in defence,

for FDI from: insurance, pensions

o China o Liberalisation in construction,

o Pakistan aviation, SBRT

o Bangladesh • 2019–24:
o Nepal o 100% automatic in coal

o Bhutan mining, contract

o Myanmar manufacturing
o Afghanistan • Budget 2025:
• Objective: o Insurance FDI raised from

o Prevent opportunistic 74% to 100%

takeovers
o Protect national security FPI to FDI Reclassification
Threshold
Major Sectors Attracting FDI • FPI limit: <10%
• Services – 19% • Above 10% → reclassification to
• Computer software & hardware – FDI
16% RBI Framework
• Trading – 8% • Not allowed in prohibited sectors
 • Approval needed for land-border • IT, tourism, gems & jewellery
countries
• Investee company consent required FDI in E-Commerce
• Must comply with:
o Entry routes Inventory-Based Model
o Sectoral caps • Company owns inventory
o Pricing guidelines • Controls pricing and delivery
• Governed by FEMA Non-Debt • FDI not permitted
Instruments Regulations, 2019 • Example: BigBasket
Marketplace-Based Model
Insurance Sector • Platform connecting buyers and
• 2025: 100% FDI allowed sellers
• Condition: • No inventory ownership
o Entire premium to be • 100% FDI allowed (automatic)
invested in India • Examples: Amazon, Flipkart

World Investment Report 2025

• DAnnual flagship report published

by the United Nations Conference
on Trade and Development
(UNCTAD)
Key Highlights
• Global FDI declined by 11% in
2024 ($1.5 trillion)
100% FDI (Automatic Route) –
• USA: Largest recipient
Strategic Sectors
• India: Rank 16
• BFSI
• Africa: +75% (Egypt mega-project)
• Mining & refining
• Latin America & Caribbean: –12%
• Manufacturing
• China: –29%
• Civil aviation
• Structural shift towards digital &
• Telecom
strategic sectors
• Pharmaceuticals
• Infrastructure
• Biotechnology

Other 100% Automatic Route Sectors

• Agriculture, food processing
• Financial services (ARCs, CICs,
ATMs)
• Healthcare & medical devices
• Trade & e-commerce marketplace
• Infrastructure & energy
• Media (non-news)
 • Treasury bills
• Derivatives

UNCTAD
• Established: 1964
• Part of the UN Secretariat
• Reports to: UN General Assembly,
Economic and Social Council Eligible Government Securities for FPIs
• (ECOSOC) • G-Secs
• HQ: Geneva, Switzerland • SDLs
• Focus: • T-Bills
o Trade • FAR securities
o Investment Investment Limits
o Technology • FPIs can invest in G-Secs within
o Digital economy limits prescribed by the RBI.
• Reports to: • G-Secs: 6%
o UNGA • SDLs: 2%
o ECOSOC • Corporate bonds: 15%
• Flagship reports:
o World Investment Report
o Trade and Development
Report
o Digital Economy Report
o Technology and Innovation
Report

Foreign Portfolio Investment (FPI)

Definition
Fully Accessible Route (FAR)
• Passive investment in financial
assets of another country • Introduced by RBI
Criteria • Unrestricted FPI investment
• Investment <10% in listed Indian • Long-term G-Secs (10, 20, 30 year)
company
Instruments
• Equity shares
• Corporate bonds
• Government securities
 • Share settlement remains gross
• STT and stamp duty unchanged
SEBI Disclosure Reform
• Applies only to outright
• Threshold raised from ₹25,000 transactions
crore to ₹50,000 crore
• Above ₹50,000 crore → disclose
SWAGAT-FI
beneficial ownership
Reason • Unified FPI + FVCI registration
• Reduce compliance burden • Reduced paperwork
• Attract capital • Risk-based regulation
• Align with global practices • Objective:
o Ease of doing business
Beneficial ownership • o Long-term capital inflows
• A beneficial owner is a person
who enjoys the benefits of Securities and Exchange Board
ownership of an asset, which is of India (SEBI)
held on their behalf by a custodian
or broker • Statutory regulator of India’s
• As per SEBI, NRIs, PIOs and securities market
OCIs cannot be “beneficial • Established: 1988 (statutory 1992)
owners” of an FPI • Objectives:
o Investor protection
o Market regulation
Netting of FPI Cash Transactions
o Fraud prevention
Definition • Powers:
• T+1 (T+2, T+3) are abbreviations o Civil court-like
that refer to the settlement date of o Penalties, bans, inspections
security transactions.
• T denotes the Transaction Date— Reasons for FPI Exit (2025)
the day a trade is executed on the • Global trade tensions

stock exchange. • Strong US dollar

• High Indian valuations
• The settlement cycle (T+1 / T+2 /
• Currency depreciation (~5%)
T+3) specifies how many business
days after T the actual transfer of
securities and money takes place. Other FPI Investment Avenues
• Sovereign green bonds
• India follows a T+1 settlement
• Mutual funds
cycle in the cash market.
• AIFs
• T+1 settlement cycle means trades
• ADRs/GDRs
are finalised (securities move to
• F&O segment
buyer, funds to seller) one business
day after the transaction date (T).
• Proposal: Same-day fund netting
• Only fund settlement changes
Participatory Notes (P-Notes)
• Issued by registered FPIs
• For offshore investors without
SEBI registration
• Underlying assets: Indian securities
• Subject to SEBI due diligence

ADRs / GDRs
• Issued by foreign banks against
Indian company shares
• ADR: US market
• GDR: Multiple countries
• Denominated in USD/Euro