In this Legal Update, Rod Brown and Stanley YP Tan of Mayer Brown, and Vijay Sambamurthi and Prashant Kataria of Lexygen, summarise a number of changes to India’s foreign direct investment (FDI) policies, which were announced by the Government of India through the Press Note 1 of 2018 dated 23 January 2018.


Currently, foreign investors may invest into an Indian company through two routes:

  • the government approval route: for sectors which require the prior approval of either the Reserve Bank of India (RBI) or the relevant sectoral department/ministry of the Government of India; or
  • the automatic route: for sectors which do not require the prior approval of the RBI or the Indian government above.

Liberalisation of FDI Policies in a Number of Sectors

FDI policies in relation to a number of sectors have been liberalised, including retail, civil aviation, real estate brokering, power and pharmaceuticals.

Single Brand Retail Trading (SBRT)

Previously, FDI in SBRT above 49% was only allowed under the government approval route and not the automatic route. Now, up to 100% FDI under the automatic route is possible. While most of the conditions attached to FDI in SBRT remain, some changes to the conditions have been announced.

The mandatory sourcing requirement for SBRT entities with FDI above 51% remains (whereby a SBRT entity is required to meet the mandatory requirement of 30% of purchases from India). However, for the initial five years of operation, SBRT entities are now allowed to offset their ‘incremental sourcing’ of goods from India (i.e., the increase in terms of value of the global sourcing from India for a brand in a financial year compared to the previous financial year) against the mandatory sourcing requirement.

In addition, a non-resident entity may conduct SBRT either directly or through a local entity.

Civil Aviation

Foreign airlines are now allowed to invest up to 49% in Air India under the government approval route. This is subject to the following two conditions:

  • the total investments in Air India by foreign investors from any sector, whether direct or indirect, must not exceed 49%; and
  • substantial ownership and effective control of Air India must be vested in Indian nationals.

Real Estate Brokering Services

While FDI in the real estate sector has been permitted up to 100%, it is subject to compliance with numerous conditions. It has now been clarified that real estate brokering services do not come within the scope of restrictions applicable to FDI in the real estate sector, and up to 100% FDI in such services through the automatic route is allowed.

Power Exchanges

Previously, foreign institutional investors and foreign portfolio investors could only invest in power exchanges through secondary markets. This has been relaxed such that investments through the primary markets are also allowed.


The definition of “medical device” in the FDI Policy was subject to periodic amendments as it was pegged to the definition in the Drugs and Cosmetics Act, 1940 (“DC Act”). This language in the FDI Policy linking the definition of “medical device” to the DC Act has now been removed, thereby providing foreign investors more clarity in this regard.

Issue of Shares against Non-cash Consideration

Under the previous FDI policy, issue of equity shares against non-cash consideration involving pre-incorporation expenses and import of machinery was only permitted under the government approval route. Now, for sectors allowing FDI under the automatic route, such issue of shares against non-cash consideration would be permitted under the automatic route, subject to certain conditions.

Investment into Regulated Investment Companies

Previously, up to 100% FDI into an Indian company which is engaged only in the activity of investing in the capital of other Indian companies and in Core Investment Companies (companies holding not less than 90% of their net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies and categorised as Non-Banking Financial Companies by the RBI) was allowed, but only through the government approval route.

Now, if the above activities are regulated by any financial sector regulator, then up to 100% FDI would be allowed under the automatic route.

However, if the above activities are not regulated by any financial sector regulator, or partly regulated or there is doubt regarding their regulation, FDI would still need to be via the government approval route, subject to conditions as may be decided by the Indian government (including minimum capitalisation).

Auditor Requirements

A new requirement in relation to auditors has been included in the revised FDI policy. If the auditor for the Indian investee company specified by a foreign investor has an international network, then the audit of the investee company must be conducted jointly with another auditor that is not part of the same international network.


The changes to the FDI policy have been incremental, but significant and they have been welcomed both by Indian promoters and foreign investors. These changes should further bolster faith in India as an investment destination.

This Legal Update is written by partner, Rod Brown, and senior associate, Stanley YP Tan, of Mayer Brown, in conjunction with managing partner, Vijay Sambamurthi and partner, Prashant Kataria of Lexygen.