FDI in India: Automatic vs Government Route, Sectoral Caps, Prohibited Sectors & the 2026 Press Note 3 Relaxation

Over 90% of FDI into India comes through the automatic route — no approval, just reporting. The compliance risk is not in getting permission. It is in knowing when you needed it and didn't ask.

Automatic route = no prior approval, report after. Government route = prior approval from the administrative ministry through the National Single Window System. Some sectors are closed entirely.

Foreign Direct Investment into India is governed by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, read with the Consolidated FDI Policy Circular of 2020 and the stream of DPIIT press notes that amend it. The framework asks three questions in order. Is the sector open at all? Up to what percentage? And does it need prior approval?

Two developments have redrawn the map. Insurance moved to 100% FDI under the automatic route with effect from 5 February 2026, following the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025. And Press Note 2 (2026 Series), issued 15 March 2026, finally softened the blanket Press Note 3 (2020) restriction on investors from land-bordering countries, introducing a 10% beneficial-ownership safe harbour.

The bottom line

Automatic route: most sectors, up to 100%, with no prior approval but mandatory reporting — FC-GPR within 30 days.

Government route: prior approval, covering multi-brand retail, print media, satellites, and any investment above a sectoral cap or from a restricted source.

Prohibited outright: lottery, gambling and betting, chit funds, Nidhi companies, TDR trading, real estate business and farm houses, tobacco manufacturing, and atomic energy and railway operations not opened to the private sector.

The 2026 changes: insurance at 100% automatic, with LIC still at 20%; and Press Note 2 (2026) allowing land-border investments up to 10% beneficial ownership without control under the automatic route, with DPIIT reporting.

The three-question test

Rule 6 and Schedule I of the NDI Rules, 2019, read with the Consolidated FDI Policy, answer all three.

Is the sector prohibited? Schedule I lists where FDI is not permitted at all: lottery business, including government, private and online lotteries; gambling and betting, casinos included; chit funds; Nidhi companies; trading in Transferable Development Rights; real estate business or the construction of farm houses; manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco; and sectors closed to private investment such as atomic energy and certain railway operations.

One carve-out inside that list is worth reading twice. "Real estate business" excludes the development of townships, construction of residential and commercial premises, roads, bridges and REITs. Those are open to 100% FDI under the automatic route.

What is the cap? Sectoral caps are the ceiling on total foreign investment, and they are computed on a fully diluted basis — counting not only the shares issued today, but every share that would come into existence if all options and convertible instruments were exercised.

Which route? Automatic, meaning report afterwards, or Government, meaning approve first.

Where the sectors stand

Schedule I of the NDI Rules, 2019, as amended by successive DPIIT press notes, does the sorting.

100% under the automatic route: greenfield manufacturing, specified agriculture and plantation activities, mining and exploration of metal and non-metal ores, coal and lignite, petroleum refining by private companies, e-commerce marketplace models, single-brand retail trading, construction-development projects, greenfield and brownfield airports, railways infrastructure, asset reconstruction companies, credit information companies, and now insurance and insurance intermediaries.

Automatic up to a cap, Government beyond it:

Caps and conditions move through press notes, so confirm against the live Consolidated FDI Policy before structuring anything on this table.

And a cap is a ceiling, not a licence, because the conditions travel with it. Single-brand retail carries local-sourcing requirements. E-commerce permits the marketplace model and prohibits the inventory-based one for foreign-invested entities. Defence requires infrastructure and security clearances. Insurance now requires that at least one of the chairperson, MD or CEO be a resident Indian citizen, with pricing following RBI guidelines. Staying within the percentage while breaching the conditions is still a contravention.

Press Note 3, and its 2026 relaxation

Press Note 3 of 2020, issued 17 April 2020, required prior Government approval for any investment from an entity or citizen of a country sharing a land border with India — China including Hong Kong and Macau, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan — and for any transfer of ownership resulting in beneficial ownership falling within one of those countries. See Para 3.1.1 of the Consolidated FDI Policy.

Because "beneficial ownership" was left undefined, a fractional LBC interest in a global fund could freeze an entire round. Between April 2020 and April 2024, of 526 proposals filed, roughly 124 were approved, 201 rejected and around 200 left pending, some of them for years.

Press Note 2 (2026 Series), issued 15 March 2026 after Cabinet approval on 10 March 2026, recalibrates it:

1. A 10% safe harbour. LBC investments up to 10% beneficial ownership, without control, may proceed under the automatic route, subject to sectoral caps and conditions, with mandatory reporting to DPIIT.
2. "Beneficial owner" now has a definition, by reference to the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, ending years of guesswork.
3. Control at any shareholding, or beneficial ownership above 10%, still needs prior Government approval.
4. Expedited 60-day processing for LBC proposals in specified sectors: capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer.
5. Pakistan and Bangladesh remain fully restricted. No relaxation.

One timing point matters more than any of the five. Press Note 2 (2026) takes effect only from the date the corresponding amendment to the NDI Rules, 2019 is notified, and DPIIT's revised Standard Operating Procedure for the reporting format was still awaited at the time of writing. Do not close an LBC-adjacent round on the press note alone.

Instruments and pricing

Rules 2, 21 and 23 of the NDI Rules govern how the money comes in. FDI may arrive only through equity instruments: equity shares, fully and compulsorily convertible preference shares and debentures, share warrants, and in specified cases convertible notes issued by startups.

Optionally convertible or redeemable instruments are treated as debt under the ECB framework, not as FDI. That single structuring error converts what looked like a clean equity round into an unreported borrowing.

Pricing under Rule 21 is directional and not negotiable:

• on an issue or transfer to a non-resident, the price must be not less than fair value;
• on a transfer from a non-resident to a resident, the price must be not more than fair value.

Fair value comes from an internationally accepted pricing methodology on an arm's-length basis, certified by a SEBI-registered merchant banker, a practising Chartered Accountant or a cost accountant, with SEBI guidelines applying for listed companies. The principle underneath both legs is the same: a non-resident may not be favoured in either direction.

A worked example

A Singapore-domiciled venture fund wants to lead a ₹120 crore Series B into an Indian SaaS company. One of its limited partners is a Chinese entity holding 4% of the fund's corpus, with no board seat and no veto.

Before March 2026 this was the classic Press Note 3 freeze. An LBC beneficial owner of any size arguably triggered the Government route, and the round would have waited months for an approval that might never arrive.

After Press Note 2 (2026), beneficial ownership is tested against the PMLA Rules definition, the LBC interest is under 10%, and the LP exercises no control. The investment proceeds under the automatic route, with DPIIT reporting per the SOP, the usual Rule 21 valuation and FC-GPR within 30 days of allotment. The deal closes in weeks rather than quarters.

Change one fact and it changes back. Had the Chinese LP held 12%, or held a veto over the fund's India decisions, prior Government approval would still be mandatory.

Common mistakes

1. Structuring with optionally convertible instruments. Only fully and compulsorily convertible instruments qualify as FDI; anything else is ECB, with its own eligibility, end-use and reporting regime.
2. Assuming real estate is prohibited. Township and construction-development projects allow 100% automatic FDI. Only real estate business, farm houses and TDR trading are barred.
3. Counting only the shares issued today, rather than every share options and convertibles could create.
4. Running an inventory-based e-commerce model with foreign investment. Only the marketplace model is permitted.
5. Overlooking indirect foreign investment. Downstream investment by a foreign-owned or controlled Indian company carries the same caps, conditions and pricing rules, plus Form DI reporting.
6. Treating Press Note 2 (2026) as already operative without confirming the NDI Rules amendment and the DPIIT SOP.
7. Getting the valuation direction backwards. The floor applies on issue to non-residents, the ceiling on transfer to residents.

Frequently asked questions

Is 100% FDI now allowed in insurance? Yes, under the automatic route with effect from 5 February 2026, subject to IRDAI clearance and governance conditions. Foreign investment in LIC remains capped at 20%.

Does Press Note 3 still apply to Chinese investors? Yes, but narrowed. Since Press Note 2 (2026), up to 10% beneficial ownership without control is permitted under the automatic route with DPIIT reporting. Control, or more than 10%, still needs prior approval. Pakistan and Bangladesh get no relaxation.

What happens if I invest under the automatic route in a sector needing approval? It contravenes Rule 6 of the NDI Rules and Section 6 of FEMA, exposing you to Section 13 penalties, though it may be curable through post-facto approval and compounding.

Can FDI come as a loan? No. FDI has to be through equity instruments. Debt funding follows the ECB framework, with separate eligibility and reporting.

Is a valuation certificate always required? For unlisted companies, yes. Pricing must comply with Rule 21 on both issue and transfer, certified by an authorised valuer.

Does downstream investment need separate compliance? Yes. Indirect foreign investment by a foreign-owned or controlled Indian entity attracts the same caps and conditions, plus Form DI reporting within 30 days.

Primary sources

• Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 — Rules 2, 6, 21 and 23, and Schedule I
• Consolidated FDI Policy Circular of 2020 dated 15 October 2020, as amended
• Press Note 3 (2020 Series) dated 17 April 2020; Press Note 2 (2026 Series) dated 15 March 2026; PIB Press Release dated 10 March 2026
• Press Note 1 (2026 Series) — insurance sector; Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025
• Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 — beneficial owner definition