India’s foreign direct investment (FDI) policy framework has undergone significant transformations in recent years, particularly in the context of cross-border mergers and acquisitions (M&As) and Foreign Exchange Management Act (FEMA) reforms. This article examines the evolution of India’s FDI regime, analyzing its investor-friendliness through the lens of recent policy changes, regulatory developments, and Budget 2025 announcements. The analysis reveals a progressive liberalization trajectory, with the government making substantial efforts to attract foreign investment while maintaining strategic control over sensitive sectors. However, challenges remain in terms of regulatory complexity, sectoral caps, and procedural bottlenecks that continue to impact the overall investment climate.
India’s approach to foreign direct investment has evolved from a restrictive, approval-based system to a more liberalized framework that prioritizes ease of doing business and investor facilitation.[1]
The country’s FDI policy framework is governed by the Foreign Exchange Management Act (FEMA) of 1999, which replaced the more restrictive Foreign Exchange Regulation Act (FERA) of 1973. This transition marked a paradigm shift from a control-oriented to a facilitation-oriented approach to foreign investment management.
According to recent data, foreign direct investment inflows remained consistent, and cross-border deal value in manufacturing grew by 97 percent year-on-year in 2023, driven by strategic acquisitions in the auto components and electric mobility space as companies focused on optimizing supply chains.[2]
Evolution of India’s FDI Policy Framework
India’s FDI policy has undergone systematic liberalization since the economic reforms of 1991.[3] The Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry formulates and implements FDI policy in consultation with relevant ministries and departments. The policy framework operates on the principle of providing a transparent, predictable, and comprehensive approach to foreign investment.[4]
The current FDI policy allows foreign investment through two primary routes: the automatic route, where no prior government approval is required, and the government route, which requires prior approval from the concerned ministry or the Foreign Investment Promotion Board (FIPB).[5] Over the years, there has been a consistent effort to expand the scope of the automatic route, thereby reducing bureaucratic delays and enhancing investor confidence.
The Master Direction on Foreign Investment in India, updated in 2024, represents a significant step toward simplifying the regulatory framework.[6] This comprehensive document consolidates various circulars, notifications, and guidelines into a single reference point, reducing regulatory uncertainty and compliance burden for investors.
Regulatory framework and challenges for cross-border mergers and acquisitions that exist in India involve multiple layers of laws and regulatory oversight. The Companies Act, 2013 provides the core structure for corporate restructuring, while FEMA regulations address the foreign investment aspects of these transactions. The Competition Act, 2002 ensures that mergers and acquisitions do not result in anti-competitive practices or distortions in the market.[7]
Over the years, the framework has been progressively liberalized to attract foreign investment.[8] Procedures for share transfers have been simplified, prior approvals in most sectors under the automatic route have been removed, and documentation requirements have been streamlined. Despite these reforms, some sectors still operate under sectoral caps and require government approval, creating a dual regulatory structure that can be complex to navigate.
A major challenge in cross-border M&As is the need to obtain multiple approvals from different regulatory authorities. Although initiatives like single-window clearance mechanisms have been introduced, in practice, coordination across multiple agencies continues to cause delays and raise transaction costs.[9] The introduction of the National Single Window System (NSWS) is a step toward resolving these issues by offering a unified platform for regulatory clearances.
Key FEMA Provisions Governing Cross-Border M&As
Section 6: Current Account Transactions
Section 6 of FEMA deals with current account transactions and provides the foundation for permissible foreign exchange transactions related to cross-border M&As.[10] This section permits any person to sell or draw foreign exchange through an authorized person for current account transactions, subject to reasonable restrictions by the central government in consultation with the RBI. In cross-border M&As, it facilitates payment of advisory, legal, and due diligence costs, along with dividend, royalty, and technical know-how fees, ensuring smooth international operations post-acquisition.
Section 7: Capital Account Transactions
Section 7 forms the cornerstone of FEMA’s regulation of cross-border M&As by governing all capital account transactions involving foreign exchange.[11] This section restricts dealing in foreign exchange for capital account transactions unless permitted by the central government or RBI. In cross-border M&As, acquisition payments, equity investments, loans, and guarantees must either meet prescribed limits and conditions or obtain approval. The RBI regulates permissible classes of transactions, their limits, and conditions, ensuring such deals align with India’s foreign exchange policy and maintain macroeconomic stability.
Section 47: Adjudication and Penalties
Section 47 of FEMA establishes the adjudication mechanism for violations of foreign exchange regulations in cross-border M&As.[12] This section provides for the appointment of adjudicating authorities who have the power to impose monetary penalties for contraventions of FEMA provisions.
FEMA provisions play an important role in shaping the structure and financing of cross-border mergers and acquisitions. One key area is Share Swap Arrangements, where Indian companies may issue shares to non-resident shareholders of a foreign company as acquisition consideration.[13] Such arrangements must comply with the FDI policy and valuation norms, with the exchange ratio determined through fair valuation. Beyond prescribed thresholds, RBI approval is required to ensure compliance and regulatory oversight in cross-border restructuring.
In addition to share acquisitions, FEMA also regulates asset purchase transactions.[14] When foreign entities acquire assets of Indian companies, payments must be routed through authorized dealer banks, with detailed reporting of the transaction and its underlying rationale. These requirements help maintain regulatory compliance and transparency in asset-based cross-border deals.
Financing aspects are equally critical, with FEMA providing detailed provisions on guarantees and borrowings.[15] Indian companies are permitted to offer guarantees to overseas lenders for loans availed by their foreign subsidiaries or joint ventures, subject to specified limits and conditions. They may also raise external commercial borrowings from international lenders, including acquisition financing, to support cross-border transactions.
The Union Budget 2025 introduced transformative reforms that have substantially strengthened India’s foreign direct investment framework.[16] A key highlight was the decision to raise the FDI limit in the insurance sector from 74 percent to 100 percent under the automatic route, subject to the condition that insurers reinvest the entire premium collected within India. [17]
The insurance sector liberalization is particularly significant given the sector’s strategic importance and the previous restrictions on foreign ownership. [18] The move to allow 100 percent FDI in insurance companies aims to attract more capital into this long-term, capital-intensive sector while ensuring that collected premiums remain within the Indian economy.
The budget also introduced measures to simplify regulatory conditions governing foreign investment across various sectors.[19] Finance Minister Nirmala Sitharaman announced that the government will further streamline the regulatory framework to attract capital inflows, while ensuring safeguards for national security and strategic interests.
Investor-Friendliness Assessment: Strengths and Weaknesses
India’s FDI policy framework demonstrates several investor-friendly features that have contributed to its attractiveness as a foreign investment destination.[20] The systematic liberalization of sectoral caps, expansion of the automatic route, and simplification of procedures have created a more conducive environment for foreign investors. The establishment of Invest India as a national investment promotion agency has provided a single point of contact for investors, facilitating investment promotion and aftercare services.[21]
The consolidation of FDI regulations into documents like the Master Direction on Foreign Investment has improved transparency, predictability, and reduced compliance burdens. However, challenges remain due to sectoral caps, the dual automatic/government approval routes, and ambiguities in sectoral boundaries. Despite digitization efforts, approval processes often involve multiple authorities, leading to delays, coordination issues, and higher transaction costs.
When compared to other major emerging markets, India’s FDI policy framework shows both competitive advantages and areas for improvement. The systematic approach to liberalization, comprehensive policy documentation, and establishment of investment promotion agencies aligns with global best practices.[22] The emphasis on sectoral reforms and targeted incentives for strategic industries demonstrates a nuanced understanding of the role of foreign investment in economic development.
The dual-route system and sectoral variations make India’s regulatory framework more complex than jurisdictions like Singapore and Hong Kong, which offer simpler, streamlined processes. These examples highlight that regulatory clarity and predictability are key to attracting and retaining foreign investment.
Conclusion
India’s foreign direct investment policy has steadily evolved into a more investor-friendly framework, with the reforms introduced in Budget 2025 marking an important step in this trajectory. The decision to raise the FDI limit in the insurance sector to 100 percent under the automatic route, combined with procedural simplifications across sectors, reflects the government’s intent to deepen liberalization and strengthen the ease of doing business. These measures, alongside greater transparency, predictability, and improved policy documentation, have contributed to enhancing investor confidence and sustaining a steady flow of FDI inflows. They have also facilitated cross-border mergers and acquisitions by reducing entry barriers for foreign investors.
Despite this progress, structural challenges remain. The persistence of sector-specific caps and approval requirements continues to create a dual regulatory environment, where investors must navigate both the automatic and government approval routes. This dual system, coupled with oversight from multiple regulators, increases transaction costs and can delay deal execution. Procedural bottlenecks, lack of harmonization between different authorities, and occasional inconsistencies in policy implementation further complicate the investment climate.
Overall, India’s FDI framework today is far more open, liberal, and transparent than it was a decade ago. However, sustaining this momentum requires further streamlining of approval mechanisms, greater clarity in sectoral guidelines, and more efficient implementation of existing reforms. Aligning the policy environment with global investor expectations will not only reinforce India’s position as an attractive destination for cross-border investments but also accelerate its integration into global capital flows and supply chains.
[2] India Briefing. (2025). “Cross-Border M&A In India: 2024 Market and Regulatory Updates.” Available at: https://www.india-briefing.com/news/cross-border-ma-in-india-2024-market-and-regulatory-updates-34873.html
[3] Department for Promotion of Industry and Internal Trade. (2024). “Foreign Direct Investment (FDI) Policy.” Available at: https://dpiit.gov.in/foreign-direct-investment/foreign-direct-investment-policy
[4] Press Information Bureau, Government of India. (2025). “India offers a transparent, predictable and comprehensive FDI Policy Framework for investments.” Available at https://www.pib.gov.in/PressReleasePage.aspx?PRID=2101785
[5] Invest India. (2024). “FDI Policy in India.” Available at: https://www.investindia.gov.in/foreign-direct-investment
[6] Reserve Bank of India. (2024). “Master Direction on Foreign Investment in India.” Mumbai: RBI Publications.
[7] Competition Commission of India. (2023). “Annual Report 2022-23.” New Delhi: CCI Publications.
[8] Ibid
[9] White & Case LLP. (2025). “Foreign direct investment reviews 2025: India.” Available at:
https://www.whitecase.com/insight-our-thinking/foreign-direct-investment-reviews-2025-india
[10] Section 6, Foreign Exchange Management Act, 1999
[11] Section 7, Foreign Exchange Management Act, 1999
[12] Section 47, Foreign Exchange Management Act, 1999
[13]Reserve Bank of India. (2023). “A.P. (DIR Series) Circular No. 08 – Share Swap Guidelines.” Mumbai: RBI
[14] Reserve Bank of India. (2024). “Master Direction on External Commercial Borrowings and Trade Credits.” Mumbai: RBI Publications
Riddhi Agarwal
Fourth year law student
Rajiv Gandhi National University of Law, Patiala
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