FDI in India: Automatic vs Approval Route Explained

A foreign fund wants to lead your round. Before you get to term sheets and valuation, one question decides how the money can legally come in: does your sector let a non-resident invest without asking the government first, or does it not? That single fork sets your timeline.

FDI in India, foreign direct investment, is governed by FEMA and the consolidated FDI policy, and it flows in through one of two doors. The automatic route lets a non-resident invest without any prior approval, which covers most sectors and most startups at up to 100%. The government or approval route requires clearance from the relevant ministry before the money comes in. This guide explains both routes, the sectoral caps, the prohibited sectors, Press Note 3 for investors from land-bordering countries, and how the pricing guidelines set the floor price when you issue shares to a foreign investor.

1 What FDI actually means under FEMA

FDI in India is a non-resident putting money into an Indian company by subscribing to or buying its capital instruments, with a lasting interest rather than a quick trade. Under FEMA, the permitted capital instruments are equity shares, compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCDs). These are the instruments a startup normally issues to a foreign investor.

Two points trip founders up early. First, only compulsorily convertible instruments count as FDI. An optionally convertible or redeemable instrument is treated as debt (an external commercial borrowing), not equity, and follows the ECB rules instead. Second, a US-style SAFE is not a permitted instrument under FEMA. If a foreign angel or fund offers you a SAFE, you structure the India leg as CCPS or CCDs instead. Our note on convertible instruments under FEMA walks through this in detail.

Every inbound FDI is then reported to the Reserve Bank of India. There is no approval to obtain for automatic-route sectors, but there is a filing: Form FC-GPR within 30 days of issuing the shares, on the RBI’s FIRMS portal.

2 The automatic route: no prior approval

The automatic route is the default and the one almost every funded startup uses. A non-resident can invest and the Indian company can issue capital instruments without any prior approval from the government or the RBI. The only obligation is to report the investment afterwards through the FIRMS portal.

Most sectors sit on the automatic route at up to 100%, which covers the vast majority of what Indian startups do:

• Software, SaaS, IT and IT-enabled services.
• Manufacturing (subject to the specific product rules).
• Ecommerce in the marketplace model (not inventory-based B2C ecommerce).
• Most professional, consulting and business services.
• Single-brand retail trading (100% automatic, with sourcing conditions past a level).

Because there is no approval step, the automatic route is fast. The discipline is entirely on the back end: correct instrument, a valuation that supports the price, and the FC-GPR filed on time.

3 The government (approval) route

Some sectors are not open on the automatic route. For these, the investment needs prior approval from the concerned administrative ministry or department before it comes in. There is no single central FIPB any more; each proposal goes to the ministry that owns the sector, routed through the online Foreign Investment Facilitation Portal.

The approval route typically applies to sensitive or strategic sectors, and often only above a threshold. Common examples include:

If your startup is in a plain automatic-route sector, you will likely never touch this route. But if you are in media, defence tech, or a regulated financial activity, confirm the exact route and cap before you sign a term sheet, because the approval timeline can run into months.

4 Sectoral caps and prohibited sectors

Two more layers sit on top of the route. The sectoral cap is the maximum foreign investment allowed in a sector, whether by the automatic route, the government route, or a mix. In most startup sectors the cap is 100%. In others it is lower: insurance is capped at a defined level, and some sectors allow, say, 49% automatic and the balance up to a higher cap only with approval.

A short list of sectors is completely prohibited for FDI. No route, no cap, the answer is simply no:

• Lottery business, including government, private and online lotteries.
• Gambling and betting, including casinos.
• Chit funds and Nidhi companies.
• Trading in Transferable Development Rights (TDRs).
• Real estate business or construction of farmhouses (real estate business excludes development of townships and REITs, which are permitted).
• Manufacturing of cigars, cheroots, cigarettes and tobacco substitutes.
• Activities not open to private investment, such as atomic energy and railway operations (other than the specifically permitted activities).

5 Press Note 3: investors from land-bordering countries

Press Note 3 of 2020 is the rule that catches founders off guard. It requires prior government approval for any investment where the investing entity is from a country that shares a land border with India, or where the beneficial owner of the investment is situated in, or is a citizen of, such a country. The land-bordering countries are China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan.

Three things make Press Note 3 sharp. It applies regardless of the sector and regardless of the amount. It overrides the automatic route, so even a 100%-automatic sector needs approval if the investor is caught by it. And it looks through to the beneficial owner, so a fund domiciled in Singapore or Mauritius can still be caught if its ultimate beneficial ownership traces back to a land-bordering country.

6 Pricing guidelines: the floor price for issuing to a non-resident

Once the route is clear, price is regulated. Under the FEMA pricing guidelines, when an Indian company issues capital instruments to a non-resident, the price cannot be lower than the fair value of those instruments, worked out on an internationally accepted valuation methodology and certified in a valuation report by a SEBI-registered merchant banker or a chartered accountant.

The logic runs both ways. On issue to a non-resident, fair value is a floor: the foreign investor must pay at least fair value, so money is not brought in cheaply. On a transfer or exit back to a resident, fair value is a ceiling: the non-resident cannot be paid more than fair value. The same valuation therefore protects against both under-pricing on the way in and over-pricing on the way out. Our pricing guidelines and valuation guide covers the methods and the exit cap in detail.

7 A worked example: Brewly raises from a US fund

The routes and rules are easier to see end to end. Here is how they play out for a typical startup raise.

8 From term sheet to reported FDI

Put the whole thing in order and an automatic-route raise looks like this. The approval-route version simply inserts a ministry-clearance step before the money comes in.

9 Your FDI readiness checklist

1. Identify your sector’s route and sectoral cap in the current consolidated FDI policy.
2. Confirm the sector is not prohibited for FDI.
3. Run the Press Note 3 check: is any investor from, or beneficially owned in, a land-bordering country?
4. Choose a permitted capital instrument (equity shares, CCPS or CCDs); reject SAFEs and optionally convertible instruments.
5. Obtain a valuation report and set the issue price at or above fair value.
6. Register the Entity Master and Business User on the FIRMS portal early.
7. Line up the KYC, FIRC and board/shareholder resolutions with your AD bank.
8. File Form FC-GPR within 30 days of issue, and the ROC PAS-3 separately.

10 FAQs

Disclaimer: This article is general information as of September 2026 and is not legal, tax or professional advice. FEMA, the FDI policy, sectoral caps, routes and the pricing guidelines can change. Confirm your specific obligations with a qualified professional and your AD bank before you raise or file.