Strategic Management and Corporate Finance · Foreign Funding - Instruments, Laws and Procedures

FDI Policy and Routes: Caps, Pricing and Reporting

Updated 11 October 2026 · Fact-checked

FDI is a non-resident investing in the equity of an Indian company. It comes in through the automatic route, with no prior approval, or the government route, with prior approval. The sector fixes the cap and the route. The entity must follow FEMA pricing rules, then report to RBI, for example through FC-GPR.

Understand Foreign Direct Investment (FDI) Policy and Routes

Foreign Direct Investment (FDI) means a non-resident person buying equity instruments of an Indian company. These are equity shares, compulsorily convertible preference shares, compulsorily convertible debentures and warrants. Warrants must also be issued to non-residents in compliance with the NDI Rules. The investor gets ownership and usually some control, so FDI is long-term money, not trading money.

Two layers of rules apply. The FDI policy, issued by the Government, says which sectors are open, up to what limit, and on what conditions. The FEMA Non-Debt Instruments Rules, 2019 turn the policy into law. They cover who may invest, in what instruments, at what price, and how it is reported to RBI.

There are two entry routes. Under the automatic route, the investor needs no prior approval from the Government or RBI. The company only complies with pricing and reporting rules after the investment. Under the government route, the investor needs prior approval through the designated government portal before bringing money in. The sector, the size of the stake and the investor's country can each move a deal from one route to the other.

A sectoral cap is the maximum foreign holding allowed in a sector, shown as a percentage of the company's equity. Some sectors are 100% open on automatic route. Some allow a part on automatic route and the rest on government route. Some allow only a low limit. A few are prohibited for FDI. These include lottery business, gambling and betting, chit funds, Nidhi companies, trading in transferable development rights, real estate business (excluding development of townships, housing and commercial premises) and construction of farmhouses, and manufacture of cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco substitutes. Caps are revised often, so quote them in the exam as per the policy given in the question.

Two cross-cutting points. An investor from a country sharing a land border with India, or whose beneficial owner is in such a country, needs government approval even in an automatic-route sector. Second, after investing, the company must follow pricing (shares cannot be issued below fair value) and reporting (timelines to RBI). A breach is a contravention of FEMA and is usually dealt with by compounding.

Key rules to remember

Automatic route: No prior approval needed; only post-investment compliance; Applies where the sector is open and the investment is within the cap and conditions.
Government route: Prior government approval first; money comes in after approval; Applies to sectors or stakes beyond the automatic limit, and to investors covered by land-border restrictions.
Pricing: issue of shares by unlisted Indian company to non-resident: Issue price ≥ fair value (valuation by a SEBI-registered merchant banker, chartered accountant or cost accountant, on an internationally accepted pricing methodology); For listed companies, the SEBI pricing formulas apply instead.
Pricing: transfer of shares between resident and non-resident: Resident to non-resident: price ≥ fair value. Non-resident to resident: price ≤ fair value; Price for the foreign party works as a floor when buying and a ceiling when selling.
Time to allot shares: Allotment within 60 days of receiving the inflow; otherwise refund within the next 15 days; Beyond that, refund needs RBI permission. Money is not parked with the company.
FC-GPR: Report issue of equity instruments to RBI within 30 days of allotment; Filed by the Indian company through RBI's reporting portal with its authorised dealer bank's support.
FC-TRS: Report transfer of equity instruments between resident and non-resident within 60 days of transfer or receipt/remittance of funds, whichever is earlier; Filed for secondary transfers, not fresh issue.
FLA return: Annual return on Foreign Liabilities and Assets by 15 July each year; Filed by Indian companies that have received FDI or made overseas investment.

How to solve Foreign Direct Investment (FDI) Policy and Routes questions

Use this order for any FDI question. Case facts decide the route and the compliance, so read them closely.

1Identify the investor and the instrument. Is it a non-resident? Is it equity shares, compulsorily convertible preference shares, compulsorily convertible debentures or warrants? Optionally convertible or redeemable instruments are treated as debt (ECB), not FDI.
2Identify the sector. Check whether it is prohibited, open on automatic route, or needs government approval, and note the cap.
3Test the investor. Check for any land-border country link, which brings in government approval whatever the sector.
4Decide the route and state the consequence: automatic means post-facto reporting only; government means apply first and invest after approval.
5Apply pricing. Compare the proposed price with fair value and say whether it is a floor or a ceiling for that transaction.
6List the timelines: allot within 60 days of inflow, report FC-GPR within 30 days of allotment, FC-TRS within 60 days for transfers, FLA by 15 July.
7Conclude with a clear answer and, if there is a breach, say it is a FEMA contravention that can be regularised through compounding.

Quickest way: Sector, route, price, report

When to use it: Use when the question gives a short fact pattern and asks whether the investment is allowed or what the company must do.

Write SECTOR - ROUTE - PRICE - REPORT in the margin.
Fill each line from the facts in one sentence.
For PRICE, write 'floor' if the foreign party is buying and 'ceiling' if it is selling.
For REPORT, write the form name and the number of days.
Finish with a one-line conclusion.

Common mistakes in Foreign Direct Investment (FDI) Policy and Routes

Treating the automatic route as 'no compliance'.
The word 'automatic' suggests nothing needs to be done.
Fix: Say that approval is not needed but pricing, allotment time and reporting (FC-GPR) still apply.
Applying the same price rule to every transaction.
Students remember 'fair value' without the direction.
Fix: Resident to non-resident: not below fair value. Non-resident to resident: not above fair value.
Ignoring the land-border restriction.
Students look only at the sector table.
Fix: Check the investor's country and beneficial owner first. If a land-border link exists, government approval is needed even in an automatic sector.
Mixing up FC-GPR and FC-TRS.
Both are RBI forms with similar names.
Fix: FC-GPR is for fresh issue by the company (30 days from allotment). FC-TRS is for transfer between resident and non-resident (60 days).
Calling optionally convertible preference shares or debentures FDI.
Students see 'preference shares' and assume equity.
Fix: Only compulsorily convertible instruments count as equity for FDI. Others are debt and follow the ECB framework.
Quoting a cap from memory as if fixed.
Caps look like fixed numbers in notes.
Fix: Use the cap given in the question. If you rely on memory, state it as per the FDI policy in force and name the route.

Worked examples

Example 1

Bright Retail India Pvt Ltd wants to sell its own single-brand products through stores. A foreign company, Alder Holdings Ltd (not linked to any land-border country), wishes to buy 100% of its equity. Is prior approval needed? What must be done after the investment?

Show the solution

Sector: single-brand product retail trading. It is open for FDI, and the policy allows 100% on the automatic route, subject to the sector conditions.
Investor test: the investor has no land-border country link, so no extra approval is triggered.
Route: automatic route. Prior government approval is not needed, provided the sector conditions are met.
Pricing: shares must be issued at not less than fair value, certified by a merchant banker, chartered accountant or cost accountant under an internationally accepted methodology.
Reporting: allot shares within 60 days of receiving the inflow, then file FC-GPR within 30 days of allotment, and include the company in the annual FLA return by 15 July.

Answer: No prior approval is required, as the investment is on the automatic route within the sector conditions. The company must follow pricing, allot within 60 days of the inflow, file FC-GPR within 30 days of allotment and file the FLA return by 15 July.

Example 2

Zenith Components Ltd, an unlisted Indian company in an automatic-route sector, receives ₹1,25,00,000 from a non-resident on 10 March for 50,000 equity shares at ₹250 per share. Fair value certified by a merchant banker is ₹240 per share. (a) Is the price valid? (b) By which date must shares be allotted, and by which date must the money be refunded if they are not? (c) If allotment is made on 5 June, by which date is FC-GPR due, and what is the position on the delay?

Show the solution

Check the amount: 50,000 × ₹250 = ₹1,25,00,000. It matches the inflow.
Pricing: the issue price of ₹250 is not less than fair value of ₹240, so the price rule is met. Total fair value is 50,000 × ₹240 = ₹1,20,00,000, which is below the amount received.
Allotment deadline: 60 days from 10 March. March has 21 days left after 10 March (to 31 March), April has 30, so 51 days reach 30 April. Another 9 days gives 9 May.
So shares must be allotted by 9 May. If they are not, the money must be refunded within the next 15 days, that is by 24 May (9 May + 15 days).
Beyond 24 May, a refund also needs RBI permission.
FC-GPR: 30 days from allotment. Allotment on 5 June plus 30 days is 5 July.
Allotment on 5 June is after both 9 May and 24 May. The 60-day limit and the 15-day refund window have both passed. Filing FC-GPR alone does not cure this. The company must approach RBI through its authorised dealer bank, and the contravention is regularised through compounding.

Answer: (a) Yes, ₹250 is not below fair value of ₹240. (b) Allotment was due by 9 May. If not allotted, refund was due by 24 May, and after that a refund needs RBI permission. (c) For an allotment on 5 June, FC-GPR would be due by 5 July. But that allotment is itself late, so the company must seek regularisation through RBI and its authorised dealer bank, and compounding, rather than simply filing FC-GPR.

Exam tips

Always name the route, the pricing floor or ceiling, and the form with its day limit. Examiners look for these three points.
In case questions, check the investor's country before the sector. Land-border links are an easy-to-miss fact built into the question.
Show day counts in a line or two. A correct date with working earns marks even if the form name slips.
Write the answer in the order provision, facts, conclusion, and end with a practical step, such as filing the form or applying for compounding.
When a cap is given in the question, use it. Do not replace it with a figure from memory.

Practice questions from Foreign Funding - Instruments, Laws and Procedures

Foreign Direct Investment (FDI) Policy and Routes in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Foreign Direct Investment (FDI) Policy and Routes: frequently asked questions

What is the difference between the automatic route and the government route for FDI?

Under the automatic route, the foreign investor needs no prior approval; the company only follows pricing and reporting rules. Under the government route, prior approval is required before the money comes in. The sector, the stake and the investor's country decide which route applies.

How do I report FDI to RBI using FC-GPR?

After the Indian company allots shares against the foreign inflow, it files FC-GPR within 30 days of allotment through RBI's reporting portal, supported by its authorised dealer bank. Supporting documents include the valuation certificate and the company secretary's certificate. For share transfers, FC-TRS is used instead.

What are the pricing guidelines for FDI under the FEMA Non-Debt Instruments Rules?

For unlisted companies, shares cannot be issued to a non-resident below fair value. A transfer from resident to non-resident must not be below fair value, and from non-resident to resident not above it. Listed companies follow SEBI pricing norms.

Do I need to memorise all sectoral caps for CS Professional?

Learn the main patterns: prohibited sectors, 100% automatic sectors, and sectors needing government approval or having low caps. Caps are revised often, so use the figure in the question and state the route clearly.