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Start with the exact activity, ownership chain and transaction structure. In India, foreign-investment eligibility depends on what the business actually does, who ultimately owns or controls the investor, how money and securities will move, and where the operation will be located. Before signing or funding a deal, confirm the applicable foreign direct investment (FDI) route, sector cap, conditions, approvals, FEMA/RBI mechanics, tax exposures and operating permits. Then use the findings to set the price, closing conditions, warranties, indemnities and post-closing workplan.

This is a general diligence framework, not a sector-specific legal opinion. The answer can change with the investor’s nationality and beneficial owners, the Indian activity, the deal type and the states in which the business operates.

1. Define exactly what you are proposing to do

Do not begin with a generic question such as whether India allows foreign investment. Describe the proposed business precisely enough for a regulator, bank and tax adviser to classify it. Prepare a written perimeter covering:

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  • Products or services, customer types and revenue streams.
  • Assets, technology, intellectual property and data the Indian operation will use.
  • States and cities where offices, factories, warehouses, employees or land will be located.
  • Import, export, payment-processing and cross-border service flows.
  • Whether the plan is a new Indian subsidiary, acquisition, joint venture, branch, liaison office, project office, portfolio holding or investment through an existing Indian company.
  • Whether the transaction is a new issue of shares or other equity instruments, a transfer from an existing holder, a convertible instrument, a downstream investment or a combination.

The activity—not a broad industry label—drives the FDI analysis. A software company, for example, may face a different answer from a company manufacturing regulated equipment, even if both describe themselves as technology businesses.

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Document the transaction parties

List the foreign investor, every intermediate holding company, the Indian target or proposed subsidiary, sellers, lenders and co-investors. Record each party’s jurisdiction, tax residence, ownership percentage, voting rights, board rights and ability to appoint or remove management. Include proposed options, warrants, convertibles, vetoes and shareholder-agreement rights because control can arise without majority share ownership.

2. Confirm the FDI route, cap and conditions

Use the current Department for Promotion of Industry and Internal Trade (DPIIT) consolidated FDI policy and the applicable Foreign Exchange Management Act (FEMA) rules as the starting point. The policy generally permits up to 100% foreign investment through the automatic route in unlisted sectors, subject to applicable laws and conditions, but that general statement does not resolve a particular activity. Sector-specific caps, entry routes, performance conditions, security restrictions, minimum capitalization, lock-ins and special approval requirements can change the result.

Questions to answer for the exact activity

  • What is the correct sector classification and business description?
  • What is the maximum aggregate foreign ownership, counting direct and indirect investment?
  • Is the route automatic or does the transaction require prior government approval?
  • Which authority receives an approval application, and what documents and timing apply?
  • Are there conditions on control, management, technology transfer, sourcing, pricing, security or location?
  • Do later changes in ownership, control, activity or instruments trigger a fresh approval or filing?

Check policy notifications and FEMA amendments issued after the 2020 consolidated policy. An old sector table can be misleading if a later notification changed a cap, route or condition.

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Assess direct, indirect and downstream investment

Trace the proposed investment through every Indian entity. Foreign investment in an Indian holding company can create downstream investment in an operating subsidiary, with its own approval, funding and reporting analysis. Calculate the aggregate foreign investment and test whether the investor or any intermediate entity is foreign-owned or foreign-controlled under the applicable rules. Do not treat a locally incorporated holding company as automatically outside the FDI framework.

3. Apply nationality and beneficial-ownership restrictions

Obtain a complete ownership chart to the ultimate natural persons, sovereign entities, trusts, funds and publicly traded vehicles. Reconcile legal ownership with voting agreements, board appointment rights, vetoes, pledges, side letters and other control arrangements. Ask each investor to certify its ownership and control, and preserve evidence supporting the certification.

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Land-border-country analysis

Additional restrictions may apply when an investor has ownership or control connected to a country sharing a land border with India. A Cabinet announcement issued by the Press Information Bureau on 10 March 2026 describes changes under which the beneficial-ownership test is applied at the investor-entity level. It also describes a conditional automatic-route allowance for certain non-controlling beneficial ownership of up to 10% and a 60-day decision timeline for proposals in specified manufacturing activities, including capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer.

The announcement is a policy statement, not a substitute for checking the effective implementing notification, its scope and all conditions. Before relying on the 10% threshold or the 60-day timeline, have Indian counsel confirm that the rule is operative and applies to the investor, activity and transaction. The key wording in the government release is: The Beneficial Ownership test shall be applied at the level of the investor entity.

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4. Map FEMA and RBI investment mechanics before sending funds

Eligibility is only one part of the work. A transaction can be permitted in principle and still fail because funds arrived through the wrong channel, securities were issued late or a required report was missed. Ask India-qualified counsel, the company secretary and the authorised dealer bank to agree a written closing flow.

Funding and instruments

  • Confirm that consideration will move through permitted banking channels and that the bank can document the remittance.
  • Identify the instrument: equity shares, preference shares, debentures, convertible notes or another permitted non-debt instrument.
  • Check valuation and pricing rules for an issue and for a transfer, including the required valuation professional and valuation date.
  • Review currency, exchange-rate evidence, escrow arrangements and any withholding or bank documentation.
  • Confirm whether shareholder or government approvals are needed before funds are accepted.

Issue, transfer and reporting timetable

RBI’s Non-Debt Instruments directions generally require equity instruments to be issued within 60 days after receipt of consideration. If they are not issued, the applicable rule provides for a refund within the following 15 days. Confirm the exact rule for the chosen instrument and maintain the remittance advice, valuation report, board and shareholder resolutions, share certificates or demat records and bank correspondence.

For a transfer, identify who files the prescribed return, by when and with which valuation and tax documents. Build a responsibility matrix so the foreign investor, Indian company, seller, company secretary, bank and advisers each have a named owner and deadline. Reporting and exit rules vary with the parties and transaction; do not assume that a completed closing eliminates later obligations.

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5. Investigate the Indian target’s corporate and legal records

For an acquisition or joint venture, obtain records directly from the target and verify them against statutory sources where possible. At minimum, review:

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  • Certificate of incorporation, constitutional documents, statutory registers and filings.
  • Current cap table, share certificates or demat statements, options, convertibles, pledges, liens and encumbrances.
  • Beneficial-ownership declarations, board and shareholder minutes, reserved matters and related-party approvals.
  • Authority of sellers, directors and signatories to enter the transaction.
  • Pre-emption, tag-along, drag-along, anti-dilution and change-of-control rights.
  • Material litigation, arbitration, notices, investigations, settlements and regulatory correspondence.
  • Intellectual-property registrations, licenses, assignments, open-source use and employee invention agreements.
  • Real-property title, leases, land-use permissions, construction approvals and security interests.
  • Insurance coverage, claims history, environmental matters and contingent liabilities.

Reconcile management’s description of ownership and contracts with filings, bank records and the documents that create the rights. A clean presentation deck is not evidence of clean title.

6. Test financial statements, cash needs and commercial assumptions

Historical financial diligence

Review audited statements, management accounts, general ledgers, bank statements, debt schedules, working-capital trends, capital expenditure and related-party transactions. Investigate unusual revenue recognition, customer deposits, capitalization of expenses, overdue receivables, inventory aging, cash restrictions and off-balance-sheet commitments. Tie material balances to contracts, invoices and tax filings.

Forecast and market diligence

Test the assumptions behind customer growth, pricing, churn, capacity, hiring, foreign-exchange exposure, import duties, logistics and working capital. Check customer and supplier concentration and whether key contracts can be terminated on a change of control. Separate verified orders from management estimates and identify which assumptions would break the investment case.

Use the results to negotiate a defensible valuation and funding plan. A risk may justify a price adjustment, escrow, earn-out, condition to closing, representation, warranty, indemnity or specific post-close covenant. Record the financial impact and the evidence supporting it instead of relying on a broad promise that the target has no material issues.

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7. Build a tax workstream for the transaction and operations

Indian tax advisers should analyze both the entry transaction and the continuing business for the relevant tax year. Scope the review to:

  • Tax residence, permanent-establishment and treaty questions.
  • Capital-gains and withholding consequences for an acquisition or transfer.
  • Corporate income tax, minimum-tax rules where relevant and accumulated losses.
  • Transfer pricing for related-party services, financing, royalties and cost allocations.
  • Goods and Services Tax, customs, import duties and export incentives.
  • Payroll withholding, employee benefits and contractor classification.
  • Tax notices, assessments, appeals, refunds and outstanding payments.

Use the Income Tax Department’s e-Filing Portal for current notices, forms and filing information, because requirements and forms can change by tax year. Obtain copies of returns, reconciliations, assessments and correspondence rather than relying solely on a management tax certificate.

8. Map every operating licence and compliance obligation

FDI approval is not a licence to operate. Create a permit matrix by activity and location, with the issuing authority, legal entity, premises, renewal date, responsible owner and evidence of compliance. Depending on the business, examine:

  • Sector regulator registrations and technical or safety approvals.
  • Corporate, labor, payroll, immigration and employment-law filings.
  • Competition, consumer-protection and advertising requirements.
  • Data protection, cybersecurity, incident response and cross-border data transfers.
  • Environmental consents, waste handling, emissions, factory and occupational-safety permissions.
  • Import-export, customs, product standards, labeling and trade-control rules.
  • Land, building, fire, zoning, municipal and state permissions.

The exact list depends on the products, services and states involved. Obtain local advice where national diligence cannot answer a municipal or state requirement.

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9. Review people, technology, data and continuity risks

Inspect employment agreements, senior-management incentives, confidentiality and invention assignments, contractor arrangements, statutory benefits, pending disputes and retention risks. Confirm that key employees can legally work in India and that the proposed ownership structure does not breach sector-specific management restrictions.

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Inventory software, source code, patents, trademarks, domain names, technical documentation and third-party licenses. Check whether the target actually owns what it sells and whether open-source obligations, security vulnerabilities or unsupported systems could create remediation costs. Map personal and sensitive data, processing purposes, vendors, retention, access controls, breach history and international transfers. Include disaster recovery, backups, critical suppliers and business-continuity testing in operational diligence.

10. Compare entry structures using the right decision criteria

There is no universally best route. Compare the structure that fits the activity and risk profile against the following criteria:

Decision criterion Questions to answer
FDI route and approval Is the activity automatic-route eligible, or is prior government approval required?
Ownership and control What foreign-ownership cap, voting rights, board rights and downstream consequences apply?
Funding instrument Which instrument is permitted, how is it priced and what issue or transfer timetable applies?
Reporting and exit Which returns, bank records, repatriation rules and later filings must be completed?
Tax and compliance cost What tax leakage, transfer-pricing work, licenses and recurring filings will the structure create?
Operating footprint Which state, local, environmental, labor and premises approvals are needed?
Execution risk Can the parties obtain consents, clear title, satisfy conditions and fund on schedule?

Document why the chosen structure meets the investor’s control, liability, tax, financing and exit objectives. Revisit the analysis if the business activity or ownership changes.

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11. Turn findings into closing protections

Classify every issue as a deal blocker, condition precedent, price adjustment, specific indemnity, warranty qualification, post-close remediation or accepted risk. The transaction documents should reflect that classification.

Typical execution controls

  • Make government approvals, bank confirmation, third-party consents, key permits and clean title conditions to closing where appropriate.
  • Use tailored representations and warranties for ownership, authority, compliance, taxes, employment, data, intellectual property, contracts and litigation.
  • Set caps, baskets, survival periods, escrow or holdback arrangements and procedures for indemnity claims.
  • Require a pre-close compliance certificate and a schedule of all filings due after closing.
  • Assign a named owner and deadline for each remediation, license renewal, tax filing and RBI report.

Do not allow a general “compliance with law” warranty to replace specific protection for a known issue. Record accepted risks in the investment committee approval and operating plan.

12. A practical go/no-go checklist

  1. Write the activity, transaction, ownership and operating-location description.
  2. Classify the sector and verify the current cap, route and conditions under DPIIT policy and FEMA.
  3. Trace direct, indirect and beneficial ownership, including land-border-country connections.
  4. Obtain government, sector, state and local approvals identified by the activity map.
  5. Agree the funding, instrument, valuation, issue or transfer and reporting flow with the authorised dealer bank.
  6. Complete legal, corporate, financial, tax, commercial, people, technology, data and operational diligence.
  7. Quantify each material finding and allocate it through price, conditions, warranties, indemnities or post-close actions.
  8. Approve a compliance calendar and cash-flow plan before releasing investment funds.

Authoritative sources and current-status cautions

The DPIIT Consolidated FDI Policy Circular of 2020 provides the framework for routes, caps, conditions and indirect or downstream investment, but later notifications must be checked. RBI’s FEMA Non-Debt Instruments rules and directions govern consideration, pricing, issuance, transfers and reporting; transaction-specific procedures should be confirmed with the authorised dealer bank. The Press Information Bureau’s 10 March 2026 Cabinet announcement is the source for the beneficial-ownership wording and the described 60-day timeline for specified manufacturing proposals; verify the implementing notification before treating either as operative. The Income Tax Department e-Filing Portal provides current tax notices and forms. Invest India is a free official investor-facilitation resource for navigation and contacts.

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