Foreign Direct Investment in India: 6 Legal Considerations for International Businesses

India is one of the world’s fastest-growing economies and a top destination for foreign direct investment (FDI). With its large consumer base, tech-savvy talent pool, and improving infrastructure, India presents compelling opportunities for international companies.

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However, India has complex regulatory environment. To succeed in the Indian market, international businesses need to plan ahead—structuring their investment properly, ensuring compliance, and understanding how local rules differ from other jurisdictions.

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This guide highlights six key legal considerations that SMEs, especially in software, TMT and manufacturing sectors, should keep in mind before investing in India.

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I. Choosing the Right Investment Structure for Your Business

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Foreign companies looking to establish a presence in India can choose from several entry structures. The right option depends on the business model, industry, and long-term goals. Below are the main structures used in practice, along with explanations of their key features, legal forms, and typical use cases:

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Wholly Owned Subsidiary

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A wholly owned subsidiary is a company incorporated under Indian law that is entirely owned by the foreign parent company. It is typically formed as a Private Limited Company under the Companies Act, 2013. This structure is the most flexible, allowing for full operational and strategic control. It is ideal for businesses that want to directly hire employees in India, own intellectual property developed locally, and carry out full-fledged commercial operations.

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Best suited for: SaaS companies, digital services companies, or any business that needs to establish its own R&D, back-office, or sales presence in India without involving a local partner.

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Joint Venture (JV)

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A joint venture involves partnering with a local Indian entity, with both parties holding equity in a new or existing company. The JV may be formed as a Private Limited Company or a Limited Liability Partnership (LLP). The incorporation process is similar to that of a wholly owned subsidiary, but additional documentation—such as a joint venture agreement or shareholders' agreement—is usually required.

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Best suited for: Foreign manufacturers, consumer brands, or logistics companies looking to benefit from an established Indian partner’s expertise or distribution network.

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Branch Office

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A branch office is an extension of a foreign company, set up to carry out specific business activities in India. It is not a separate legal entity but operates under the foreign parent company’s name. Branch offices can engage in commercial activities such as providing services, executing contracts, or importing/exporting goods.

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Best suited for: Businesses with ongoing service contracts in India or those in consulting, architecture, engineering, or software support services.

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Liaison Office

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A liaison office serves as a representative office for the foreign parent company. It cannot engage in any income-generating activities in India and is limited to liaison work such as market research, communication with partners, and brand promotion.

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Best suited for: Companies exploring the Indian market, building relationships, or coordinating with Indian vendors before committing to commercial operations.

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Note: Liaison offices and branch offices generally must appoint a local representative, and the legal presence is governed by RBI regulations rather than the Companies Act.

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Beyond Traditional FDI: FPIs, AIFs, and GIFT City

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While subsidiaries and JVs are common, foreign investors can also explore:

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• Foreign Portfolio Investment (FPI): It is suitable for passive stakes (<10% equity) in listed Indian companies. This option requires SEBI registration but offers faster entry/exit.
• Alternative Investment Funds (AIFs): Pooled vehicles for startups, infrastructure, or venture capital. Ideal for sector-focused investments.
• GIFT City IFSC: A financial hub with relaxed regulations (e.g., tax benefits, easier forex rules) for asset managers, fintech firms, and offshore funds.
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When to Consider: FPIs suit short-term market plays; AIFs align with long-term sector bets; GIFT City benefits financial services.

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II. How to Set Up a Foreign-Owned Entity or Office in India

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Setting up a business presence in India involves multiple steps, which vary depending on the entry structure. Below is a breakdown by type of entity.

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1. Subsidiary or Joint Venture (Company Incorporation)

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Both wholly owned subsidiaries and joint ventures are incorporated under the Companies Act, 2013, and follow a similar registration process through the Ministry of Corporate Affairs (MCA), which is a central (federal) government body. However, in a joint venture, additional steps are typically required to negotiate and execute agreements between shareholders.

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Key steps:

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1. Digital Signature Certificate (DSC) and Director Identification Number (DIN) application for directors
2. Name reservation and submission of incorporation forms via MCA’s SPICe+ platform
3. Drafting and filing of incorporation documents, including Memorandum and Articles of Association
4. Capital contribution (bank account setup and inward remittance)
5. Issuance of Certificate of Incorporation, PAN, TAN
6. GST registration, if required by turnover or activity
7. FC-GPR submission to RBI for reporting foreign shareholding

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If FDI in the proposed business activity falls under the government approval route, the investor must first obtain prior approval from the relevant ministry through the National Single Window System (NSWS), which has replaced the older Foreign Investment Facilitation Portal (FIFP). Applications must be digitally signed using Digital Signature Certificates (DSCs), and only the foreign investor (not the Indian investee) can submit the application. Supporting affidavits and credentials must be provided under the investor’s login.

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2. Branch Office or Liaison Office Setup

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Setting up a branch or liaison office is governed by the Foreign Exchange Management Act (FEMA) and requires prior approval from the Reserve Bank of India (RBI) via an Authorized Dealer (AD) Bank.

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Steps include:

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1. Submitting an application via the AD Bank (which is typically a major commercial bank authorized by RBI to deal in foreign exchange). This application is processed at the city or regional level, depending on the office location.
2. Providing a business plan, audited financials of the parent company, and details of intended activities
3. Receiving RBI approval and establishing the office
4. Registering the office with the Registrar of Companies (RoC) and obtaining a Corporate Identification Number (CIN)
5. Opening a local bank account, registering with tax and labor authorities

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Note: All entity types—subsidiary, JV, branch, and liaison office—should have a designated local representative and may require local hires to meet labor and operational requirements.

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Practical Consideration: Government Approvals May Take Time

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While the official processing timeline for government approvals is 8–12 weeks, in practice, complex or sensitive investments (such as those in defense or telecom, or from bordering countries) may take 6–9 months due to inter-ministerial reviews. Delays often arise due to security clearances or requests for additional documentation (e.g., ownership charts, security clearances).

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III. Understanding India’s FDI Regime: Sector Caps and Approval Routes

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India’s FDI regime is structured under a dual-route system, administered at the federal level:

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1. Automatic Route

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Under this route, no prior government approval is required. Investors simply need to notify the RBI (Reserve Bank of India) and comply with post-investment reporting requirements. Most sectors, including IT services, software development, manufacturing, and wholesale trading, fall under this category.

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2. Government Approval Route

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In this case, prior approval is required before incorporation or investment. The investor must submit an application through the National Single Window System (NSWS), which replaced the older FIFP system. The Department for Promotion of Industry and Internal Trade (DPIIT) forwards the application to the relevant ministry, the RBI, and in some cases, the Ministry of External Affairs (MEA).

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A. Examples of Key Sectors Requiring Government Approval

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• Defense and Aerospace: foreign ownership up to 74% is permitted under the automatic route; beyond that, government approval is required. Investments are subject to security clearance and conditions related to self-reliance in design and development.
• Telecom Services: foreign ownership up to 100% is allowed under the automatic route, subject to licensing and security conditions.
• Insurance: The foreign ownership cap has been raised from 74% to 100% under the automatic route, provided the entire premium is invested in India. This change was announced in the Union Budget 2025–26.
• Print Media: The foreign ownership is capped at 26% and requires government approval.
• Multi-brand Retail Trading: Foreign ownership up to 51% is permitted under the government approval route, subject to conditions such as mandatory sourcing from small and medium enterprises.
• Real Estate Business (other than construction): Foreign investment is prohibited in real estate business, which includes trading in transferable development rights and construction of farmhouses.
• E-commerce B2C: foreign investment is not permitted in inventory-based e-commerce models. However, 100% foreign ownership is allowed under the automatic route in marketplace models, subject to conditions.

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B. Prohibited Sectors for FDI

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FDI is prohibited in the following sectors:

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• Lottery business, including government/private lottery, online lotteries, etc.
• Gambling and betting, including casinos, etc.
• Chit funds
• Nidhi companies
• Trading in transferable development rights (TDRs)
• Real estate business or construction of farmhouses
• Manufacturing of cigars, cheroots, cigarillos, and cigarettes, of tobacco or tobacco substitutes
• Activities/sectors not open to private sector investment (e.g., atomic energy, railway operations other than certain permitted activities)

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Please note that while the Union Budget 2025–26 announced the increase of the FDI cap in the insurance sector to 100%, the implementation of this change is subject to the issuance of detailed guidelines and amendments to existing regulations.

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Why FDI Is Prohibited in Chit Funds, Nidhi Companies, and TDR Trading

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Certain financial and real estate-related activities are excluded from foreign direct investment (FDI) in India due to their informal nature or regulatory sensitivity:

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• Chit Funds: These are traditional savings and borrowing schemes where a group of individuals pool money regularly, and each member receives the pooled amount in turn. While legally recognized, chit funds are often informal and community-based, making them prone to misuse and difficult to regulate. FDI is prohibited to protect investors and ensure financial system integrity.
• Nidhi Companies: These are non-banking financial companies that operate solely for the benefit of their members by encouraging savings and providing loans within a closed group. Their mutual benefit nature and restrictions on dealing with the general public make them incompatible with foreign investment objectives.
• Trading in Transferable Development Rights (TDRs): TDRs are rights issued by local authorities to landowners in exchange for giving up land for public use. These rights can be sold to developers to allow additional construction elsewhere. Because TDRs are closely tied to urban planning and land use policies, FDI is restricted to prevent indirect foreign influence over real estate development and zoning.

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These prohibitions aim to preserve the integrity of India’s financial system and urban development processes, while ensuring that foreign investment is directed toward transparent and well-regulated sectors.

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3. Special Rules for Investments from Bordering Countries

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Investments from countries sharing a land border with India—including China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan—are subject to heightened scrutiny:

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• Mandatory Prior Approval: All investments, including indirect or follow-on investments, require prior government approval, regardless of sector or ownership percentage.  
• Beneficial Ownership: Changes in indirect ownership through holding structures or foreign acquisitions may also trigger approval requirements.  
• Director Appointments: Nationals from these countries must obtain security clearance before joining the board of an Indian company.

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Plan ahead. These cases often involve longer timelines and heavier documentation.

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Note: Where investment thresholds are mentioned (e.g., 49%, 74%), they usually refer to the maximum foreign ownership permissible before triggering additional regulatory scrutiny or conditions.

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A detailed legal review of sector-specific conditions is necessary before investment planning. For a deeper explanation on how to verify Indian partners and reduce risks, see our companion blog: Due Diligence in India: How to Vet Business Partners, Suppliers, and Distributors.

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IV. Foreign Exchange and Capital Controls: What You Need to Know

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India regulates both inbound and outbound foreign exchange transactions under the Foreign Exchange Management Act (FEMA). These controls do not prohibit capital movement, but they require strict compliance with procedural rules.

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1. Inbound Capital Inflows

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• All FDI must be reported via Form FC-GPR within 30 days of share issuance.

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• The price of shares issued to foreign investors must be in line with RBI valuation norms.

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• Sector-specific limits and restrictions apply to capital structure, foreign shareholding, and business activity.

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2. Outbound Transfers and Repatriation

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• Profits, dividends, and capital gains can be remitted outside India after tax and subject to RBI rules.

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• Form 15CA/15CB certification may be needed for remittances above INR 500,000 (~USD 6,000).

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• Withholding tax applies on royalties, fees for technical services, and dividends.

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• Delays may occur if documentation is incomplete or local tax obligations are unresolved.

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Authorized Dealer (AD) Banks are key intermediaries. Applications for capital movement, RBI filings, and remittances are processed by AD Banks located in the same city or region as your Indian entity.

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V. Language, Documentation, and Local Legal Realities

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India’s national legal and business system operates primarily in English, and most central filings, court submissions, and contracts are accepted in English.

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However:

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• Regional authorities (e.g., land records offices, labor departments) may require filings or accept documents only in regional languages.
• Some official documents, such as licenses or tax notices, may be issued in Hindi or the local language.
• Translation requirements vary; in some cases, a certified English translation must be submitted for legal validity.

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English can be used as the governing language in contracts and official filings. However, when dealing with regional authorities or multi-lingual compliance, Indian legal counsel should verify linguistic requirements and provide translated materials as needed.

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VI. Governance, Tax Planning, and Ongoing Compliance

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After establishing an Indian presence, foreign investors must adhere to ongoing legal, tax, and regulatory obligations.

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1. Corporate Governance

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• Every company must have at least one Indian-resident director (i.e., someone who has stayed in India for 182 days or more in the preceding calendar year).
• Companies must conduct board and shareholder meetings, maintain statutory registers, and file annual returns with the Registrar of Companies (ROC).
• Listed companies and certain regulated businesses may have additional board composition or audit requirements.

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2. Local Hiring and Employment Requirements

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• There is no general legal requirement to hire a minimum number of Indian staff.
• However, in practice, most entities (including branch and liaison offices) need local representatives and personnel to comply with labor registration, tax obligations, and day-to-day operations.

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3. Tax Planning and Transfer Pricing

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• Corporate tax rates vary by revenue and entity type. As of FY 2024–25, the base rate is 22% for domestic companies - companies incorporated in India (plus surcharge and cess – a small percentage levied for specific government funds, e.g. education or health).
• Transfer pricing rules apply to related-party transactions. Documentation and benchmarking studies are mandatory.
• Double Taxation Avoidance Agreements (DTAAs) are available with major countries, offering relief from withholding tax and capital gains tax in certain cases.
• Other taxes include GST, Equalization Levy, and Minimum Alternate Tax (MAT) for certain entities.

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Failure to comply with Indian tax and governance obligations can lead to financial penalties, reputational damage, or legal liability for directors.

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4. Recent Changes in Disclosure and Compliance

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Enhanced Beneficial Ownership Disclosure for FPIs

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The Securities and Exchange Board of India (SEBI) has strengthened its disclosure rules for Foreign Portfolio Investors (FPIs). Any FPI with Indian equity assets under management (AUM) exceeding ₹50,000 crore (approximately USD 6 billion) must now provide detailed information on all underlying entities that have any ownership, economic interest, or control, using a full look-through approach.

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This is a significant increase from the earlier disclosure threshold of ₹25,000 crore (approximately USD 3 billion). The goal of this change is to increase transparency, particularly to ensure compliance with India’s rules on minimum public shareholding and takeover regulations, and to prevent regulatory loopholes being exploited through opaque investment structures.

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Stricter FEMA Compliance and Penalties

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Under the Foreign Exchange Management Act (FEMA), Indian companies receiving foreign investment must adhere to stringent reporting requirements:

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• Form FC-GPR: Must be filed within 30 days of issuing shares to a foreign investor. Delays can attract a Late Submission Fee (LSF) of ₹5,000 (approx. USD 60) or 1% of the total investment amount, capped at ₹5 lakh (approx. USD 6,000) for delays up to six months. For delays beyond six months, the penalty may double.  
• Form DI: Required for reporting downstream investments, to be filed within 30 days of such investment. Non-compliance can lead to penalties under FEMA.  

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Failure to comply with these reporting obligations can result in significant penalties and may affect the company's ability to receive future foreign investments.

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Importance of Timely Compliance

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Given the evolving regulatory landscape, it's imperative for companies to:

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• Maintain accurate and timely records of all foreign investments.
• Consult with local legal and financial advisors to ensure compliance with SEBI and FEMA regulations.
• Regularly monitor updates from regulatory bodies to stay informed about changes in disclosure requirements.

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Proactive compliance not only mitigates the risk of penalties but also fosters trust with investors and regulatory authorities.

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VII. The Role of Lawyers and Why Legal Support Matters

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India’s regulatory framework requires expert interpretation and practical guidance. Lawyers play a critical role in helping foreign businesses:

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• Understand sector-specific FDI conditions
• Navigate the company registration and approval process
• Draft shareholder, JV, or employment agreements in line with Indian law
• Handle tax planning, intellectual property protection, and labor law compliance
• Monitor and manage ongoing filing and regulatory obligations

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Many incorporation or business advisory services in India are unregulated. To ensure reliability, foreign companies should engage legally qualified professionals.

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VIII. How Trustiics Can Help

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Through Trustiics, you can access vetted, experienced local lawyers in India without leaving your office—from anywhere in the world. Your selected lawyer can support you with:

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• Company setup, FDI structuring, and regulatory filings
• Customized legal advice based on your sector and investment model
• Contract drafting, due diligence, and government approval processes

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You can get started by selecting a lawyer, sending a request that describes your needs, and receiving a free quote. Once approved, you make a secure online payment held in escrow until the service is completed.

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Alternatively, contact us at support@trustiics.com and our support team will coordinate the legal services for your India market entry.

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IX. Final Thoughts

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India’s growing economy and consumer market offer substantial opportunities for international businesses. But the success of your investment depends on careful planning, proper legal structuring, and compliance with India’s detailed regulatory framework.

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Every stage of your India market entry—from choosing the right investment vehicle to obtaining sector-specific approvals, managing tax implications, and hiring local staff—requires informed legal decision-making.

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With expert legal support from vetted Indian lawyers on Trustiics, your business can navigate regulatory complexity with confidence, and scale operations in one of the world’s most promising emerging markets.

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Whether you're a SaaS startup outsourcing to India or a manufacturing company building a joint venture, Trustiics gives you the legal clarity and trusted local support to invest smartly.

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