FDI Routes Into India: Automatic and Government
Automatic route means no prior approval, not no rules. The two routes, the banned sectors and the land-border rule.
Foreign direct investment (FDI) into an Indian company enters by one of two routes. Under the automatic route, the investor needs no prior approval from the Central Government. Under the government route, the investment needs that approval first, and must follow whatever conditions the approval sets.
The rules sit in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, read with the government's Consolidated FDI Policy and RBI's Master Direction on Foreign Investment in India. The AD bank receives the money, and the company reports it through the bank to RBI.
You save ₹200 today
- 5 full-length mocks
- 553 questions, chapter by chapter
- Rate & risk calculations
One payment, no subscription · Valid for 2 months
Automatic Route vs Government Route
Prior approval
Automatic route
None from the Central Government
Government route
Required before investing
Who decides
Automatic route
Not applicable; the investor proceeds
Government route
The administrative ministry or department for the sector; applications go through the Foreign Investment Facilitation Portal of DPIIT
Where it applies
Automatic route
Up to 100% in sectors not listed in Schedule I of the NDI Rules (not for financial services), and up to the automatic limit in listed sectors
Government route
Sectors or tranches the policy places under approval, and all investment from land-border countries
Sectoral conditions
Automatic route
Still apply
Government route
Apply, plus any conditions in the approval
| Point | Automatic route | Government route |
|---|---|---|
| Prior approval | None from the Central Government | Required before investing |
| Who decides | Not applicable; the investor proceeds | The administrative ministry or department for the sector; applications go through the Foreign Investment Facilitation Portal of DPIIT |
| Where it applies | Up to 100% in sectors not listed in Schedule I of the NDI Rules (not for financial services), and up to the automatic limit in listed sectors | Sectors or tranches the policy places under approval, and all investment from land-border countries |
| Sectoral conditions | Still apply | Apply, plus any conditions in the approval |
Where FDI Is Prohibited
Paragraph 3.1 of RBI's Master Direction on Foreign Investment in India:
- check_circleLottery business, including government, private and online lotteries.
- check_circleGambling and betting, including casinos.
- check_circleChit funds and Nidhi companies.
- check_circleTrading in transferable development rights.
- check_circleReal estate business or construction of farmhouses (townships, construction of residential or commercial premises, roads, bridges and SEBI-registered REITs are not real estate business).
- check_circleManufacture of cigars, cheroots, cigarillos and cigarettes of tobacco or substitutes.
- check_circleSectors closed to private investment: atomic energy and railway operations.
The Land-Border Rule
An entity or citizen of a country sharing a land border with India, or an investment whose beneficial owner is such a citizen or whose beneficial ownership is vested in such a country, may invest only under the government route. Citizens and entities of Pakistan need government approval and are barred from defence, space and atomic energy as well as the prohibited sectors. RBI's Master Direction now defines beneficial ownership by reference to the thresholds in the anti-money-laundering record-keeping rules.
Routes, caps and prohibitions as exam questions. No signup.
Three Bank-Relevant Caps
From the Consolidated FDI Policy (2020 edition, as amended). Caps change by press note; check the current policy before quoting any sector.
Private sector banks
Cap
74%
Route
Automatic up to 49%; government route beyond 49% up to 74%
Public sector banks
Cap
20%
Route
Government route
Defence industry (licensed)
Cap
100%
Route
Automatic up to 74%; government route beyond
| Sector | Cap | Route |
|---|---|---|
| Private sector banks | 74% | Automatic up to 49%; government route beyond 49% up to 74% |
| Public sector banks | 20% | Government route |
| Defence industry (licensed) | 100% | Automatic up to 74%; government route beyond |
Terms the Questions Use
- FDI vs FPI
- A foreign portfolio investor holds less than 10% of a company's paid-up equity on a fully diluted basis. If an FPI's holding reaches 10% or more, the whole holding is reclassified as FDI.
- Sectoral cap
- The maximum total foreign investment allowed in a company in a sector, counting direct and indirect foreign investment.
- Form FC-GPR
- The return an Indian company files for fresh issue of equity instruments to a foreign investor, within 30 days of issue.
- 60-day rule
- Shares must be issued within 60 days of receiving the foreign investment; otherwise the money is refunded.
How CCFE Tests This
Expect a definition question on the two routes, a list question on prohibited sectors, and scenario questions on caps (a bank, an exchange, an asset reconstruction company). The common trap is treating the automatic route as "no rules": sectoral caps, conditions and reporting still apply, only the prior approval is skipped. Courseware may also name the Foreign Investment Promotion Board (FIPB) as the approving body; RBI's Master Direction now refers to it as the erstwhile FIPB, with approvals from the concerned ministry.
FAQs
What is the difference between the automatic route and the government route for FDI?expand_more
Under the automatic route, a foreign investor needs no prior Central Government approval. Under the government route, prior approval from the concerned ministry or department is required, applied for through DPIIT's Foreign Investment Facilitation Portal.
In which sectors is FDI prohibited in India?expand_more
Lottery, gambling and betting, chit funds, Nidhi companies, trading in transferable development rights, real estate business and farmhouses, tobacco cigar and cigarette manufacturing, atomic energy and railway operations.
Can investors from China invest in India under the automatic route?expand_more
No. Investment from any country sharing a land border with India, or beneficially owned from such a country, must come through the government route.
When does FPI become FDI?expand_more
When a foreign portfolio investor's holding reaches 10% or more of the paid-up equity on a fully diluted basis, the holding is reclassified as FDI.
Next steps
Take a full CCFE mock testTest FDI alongside the rest of FEMA for entities.