Graded investment limits within sectoral caps; uniform FDI definition for listed, unlisted cos on the anvil

While the overall investment scenario is seen getting a fillip on the back of the easing of restrictions for foreign investment flows for various sectors including the recent 100% FDI hike for insurance, some strategic and control-related concerns from Indian companies when competing with the overseas companies remain, industry experts said. A graded FDI limit approach, they said, will help companies to protect their strategic authority as well as the market share, especially in sensitive sectors such as telecom, defence, pharmaceuticals and banking.

“Different limits within the sectoral caps may help Indian companies to compete effectively. Majority control through the FDI route may have different implications for different companies, especially those in sensitive sectors. For instance, other companies may choose it as a route for dumping into India. So, different limits can help protect the market share of certain Indian companies,” Raja Lahiri, Partner, Grant Thornton Bharat, said.

Aimed at providing more regulatory clarity for foreign investments, the measures are proposed to come after the Budget announcement for a review of foreign investment rules. In her Budget speech on February 1, Finance Minister Nirmala Sitharaman had announced a comprehensive review of the Foreign Exchange Management (Non-debt Instruments) Rules in the upcoming financial year 2026-27 to create a “more contemporary, user-friendly framework for foreign investments, consistent with India’s evolving economic priorities”.

The government is also considering ironing out the differences in FDI definition for both listed and unlisted Indian companies. “At present, there are some differences. The idea is to bring in an alignment in the definition for both types of companies,” the official said.

As of now, any foreign investment in an unlisted Indian company through equity instruments by a person resident outside India is defined as FDI. In listed companies, foreign investments of 10% or more of the post issue paid-up equity capital on a fully diluted basis is considered as FDI.

If an existing investment by a person resident outside India in equity instruments of a listed Indian company falls to a level below 10%, then the investment continues to be treated as FDI. Foreign investments less than 10% in listed companies are classified as foreign portfolio investments (FPIs).

Certain provisions related to downstream investments have also been identified which need clarifications, and work is ongoing to streamline such norms, the official said. The foreign investment framework is also likely to provide clarity on certain issues regarding pricing guidelines for share transfers between residents and non-residents.

Downstream investments are investments made by an Indian entity which has received foreign investment. Experts said there are situations where foreign owned or controlled companies are finding difficulties in downstream investments rather than the direct FDI route and more clarifications would be helpful. A government official said that foreign investors have shown interest on the non-debt side in various companies, including medium-sized companies, and more clarity will be there once the consultations are over.

The government intends to undertake public consultations on these issues as part of the process for rationalisation of the NDI (non-debt instruments) rules. “We intend to undertake public consultations. All the proposals and representations will be examined in a comprehensive manner with a view to rationalise the NDI Rules, enhancing regulatory clarity, promoting ease of doing business, and safeguarding the objectives of India’s foreign investment framework,” the official said, adding that wider consultations with Indian companies will help in fine-tuning the norms without making the consultations too prolonged.