India remains one of the world’s most attractive destinations for foreign investment, offering opportunities for international businesses, private equity investors, multinational corporations and strategic investors. However, investing in India requires careful attention to sectoral caps, entry routes, pricing norms, reporting requirements and the Foreign Exchange Management Act, 1999 (FEMA).
In 2026, India’s FDI framework remains liberal across many sectors, while regulated activities continue to carry specific conditions or approval requirements. Recent policy changes, including the liberalisation of the insurance sector, make it important for investors to review the applicable sector-specific rules before structuring a transaction.
At Legum Solis, our corporate and transaction advisory practice assists international businesses with FDI structuring, joint ventures, private equity transactions, M&A and regulatory compliance.
What Is FDI in India?
Foreign Direct Investment refers broadly to investment by a person resident outside India into an Indian company or eligible Indian instrument, subject to the applicable FDI Policy, the FEMA framework and sector-specific regulations.
India follows two principal routes for FDI:
- Automatic Route: Investment can generally be made without prior Government approval, provided the applicable sectoral cap, conditions and regulatory requirements are satisfied.
- Government Route: Prior approval of the Government is required for sectors or transactions where the applicable policy prescribes the approval route.
The Department for Promotion of Industry and Internal Trade (DPIIT) policy framework permits FDI of up to 100% under the automatic route in many sectors, subject to applicable laws, sectoral conditions and security requirements.
Key Sectoral Updates Investors Should Watch in 2026
The first question for any foreign investor should be: what sector does the Indian target operate in? The answer can determine the applicable foreign ownership limit, the entry route, whether Government approval is required and which sector-specific conditions apply.
Insurance
A significant 2026 update is the increase of the FDI limit in the insurance sector to 100% under the automatic route. This was introduced through DPIIT’s Press Note 1 (2026 Series) and given effect under the foreign exchange framework through amendments to the FEMA Non-Debt Instruments Rules. The higher limit applies to insurance companies and specified insurance intermediaries, and it remains subject to approval or verification by the Insurance Regulatory and Development Authority of India (IRDAI). The Life Insurance Corporation of India continues to be subject to a separate 20% cap.
Investors should therefore review the updated sector-specific framework rather than rely on older FDI limits.
E-Commerce
The FDI framework continues to distinguish between permitted marketplace activities and inventory-based e-commerce. FDI is not permitted in the inventory-based model, while marketplace activities remain subject to specific conditions.
Other Regulated Sectors
Sectors such as banking, defence, telecom, pension, retail and other regulated activities have their own sectoral caps, entry routes and conditions. Investors should verify the applicable sectoral table before finalising the transaction structure.
The key takeaway is simple: a headline FDI percentage is not enough to determine whether an investment is permissible. The sector, investment instrument, ownership structure, entry route and applicable conditions must all be assessed together.
FDI Structuring: The First Legal Decision
Before funds enter India, investors should determine the most appropriate investment structure. Common structures include:
- Acquisition of shares in an existing Indian company
- Subscription to newly issued shares
- Joint ventures with Indian promoters
- Wholly owned subsidiaries
- Strategic investments
- M&A transactions
- Private equity and venture capital investments
The structure should be assessed against sectoral caps, pricing rules, tax implications, corporate law requirements, FEMA regulations, beneficial ownership considerations and exit mechanisms. A poorly structured transaction can create regulatory complications long after the investment has been completed.
Key FEMA Compliance Obligations
FDI compliance does not end when the money reaches the Indian company. Depending on the nature of the transaction, the company must comply with RBI reporting requirements through the prescribed FIRMS framework.
- Issue of shares (Form FC-GPR): An Indian company issuing equity instruments to a non-resident, where the issue is reckoned as FDI, must report it in Form FC-GPR within 30 days of the date of issue. The instruments themselves must generally be issued within 60 days of receiving the consideration, failing which the amount may have to be refunded.
- Transfer of shares (Form FC-TRS): Transfers of equity instruments between a resident and a non-resident are reported in Form FC-TRS within 60 days of the transfer or of the receipt or remittance of funds, whichever is earlier, subject to applicable exemptions.
Late reporting attracts a Late Submission Fee, and failure to report at all can lead to compounding proceedings under FEMA and complications during diligence for future funding rounds.
Pricing and Valuation Requirements
Another critical area is the pricing of shares. Transactions involving the issue or transfer of securities to or from non-residents must comply with the applicable pricing guidelines and valuation requirements.
Investors should therefore obtain appropriate valuation advice and ensure that transaction documents, consideration and regulatory filings remain consistent. This is particularly important in FDI transactions, share transfers, rights issues, preferential allotments and M&A structures.
Beneficial Ownership and Government Approval Requirements
Foreign investors must also consider India’s beneficial ownership and security-related requirements. Under Press Note 3 (2020), an investment where the investor, or the beneficial owner of the investment, is situated in or is a citizen of a country sharing a land border with India requires Government approval. Certain relaxations have been introduced from time to time, so the current position should be verified for each transaction.
Legal due diligence should therefore examine not only the immediate investor but also the ultimate beneficial ownership structure.
Corporate and Post-Investment Compliance
Once the investment is completed, the Indian entity must continue to comply with applicable corporate and foreign exchange regulations. This may include:
- Maintaining statutory registers and corporate records
- Board and shareholder approvals
- ROC filings
- RBI/FEMA reporting
- FLA return requirements
- Maintaining investment documentation
- Compliance with sector-specific licences
- Share transfer documentation
- Monitoring foreign ownership limits
- Compliance with downstream investment rules
RBI guidance also requires eligible Indian entities with outstanding foreign liabilities or assets to submit the Foreign Liabilities and Assets (FLA) return on the RBI’s FIRMS portal, generally by 15 July each year.
Why FDI Legal Due Diligence Matters
For a foreign investor, entering India is not simply a question of identifying a promising business opportunity. The legal architecture of the investment determines whether the transaction can be completed efficiently and whether the investment can subsequently be operated, expanded or exited without regulatory obstacles.
At Legum Solis, we advise international investors and Indian businesses on FDI structuring, joint ventures, private equity, M&A, shareholder agreements and regulatory compliance. Our cross-border capability is further supported by our association with the GRATA International network, providing access to counsel across multiple jurisdictions.
Frequently Asked Questions
- What is FDI in India?
Foreign Direct Investment (FDI) is investment by a person resident outside India into an Indian company or eligible Indian instrument, subject to the applicable FDI policy, FEMA regulations and sector-specific requirements. - What is the difference between the Automatic Route and the Government Route for FDI?
Under the Automatic Route, eligible foreign investment can generally be made without prior Government approval, subject to applicable conditions. Under the Government Route, prior approval is required before investing. - What are the key FDI compliance requirements in India?
Key requirements include complying with sectoral caps and entry routes, pricing and valuation rules, FEMA regulations, beneficial ownership requirements and the prescribed RBI reporting obligations. - What are the major FDI sectoral updates in 2026?
A significant development is the increase of the FDI limit in insurance to 100% under the automatic route, subject to IRDAI approval or verification and other applicable conditions. Other regulated sectors continue to have their own caps, entry routes and requirements. - What FEMA filings are required for FDI in India?
Depending on the transaction, filings may include Form FC-GPR for the issue of eligible equity instruments to non-residents (within 30 days of issue) and Form FC-TRS for applicable transfers between residents and non-residents (within 60 days). Other reporting requirements, such as the annual FLA return, may also apply. - Why is legal due diligence important for foreign investors in India?
Legal due diligence helps identify sectoral restrictions, approval requirements, FEMA obligations, ownership issues, pricing requirements and potential regulatory risks before an investment is completed. This helps investors structure transactions effectively and avoid compliance problems.
Conclusion
FDI in India in 2026 continues to offer opportunities across manufacturing, technology, services, infrastructure and other sectors. However, sector-specific caps, entry routes, Government approvals, FEMA requirements, pricing norms, beneficial ownership rules and reporting obligations can significantly affect how an investment should be structured.
For foreign investors, reviewing these requirements before committing funds helps reduce regulatory risk and avoid costly compliance issues later. Legum Solis advises domestic and international clients on FDI structuring, cross-border transactions, M&A and India’s evolving corporate and regulatory framework.
Planning an investment into India?
Whether you are structuring an acquisition, setting up a joint venture or reviewing FEMA compliance for an existing investment, the Corporate & Transaction Advisory team at Legum Solis can help you evaluate your position and plan your next steps. Get in touch with us to discuss your matter.
A shareholders agreement (SHA) is the constitutional document of a privately held company — more important, in many respects, than the articles of association, because it governs the relationship between shareholders in ways that the articles cannot. A poorly drafted SHA is a deferred dispute: the omissions and ambiguities that seemed unimportant at closing become battlegrounds when investor expectations and promoter decisions diverge.
This article identifies ten provisions that appear in every well-drafted SHA and the specific risks that each provision addresses.
1. Reserved Matters and Affirmative Voting Rights
Reserved matters are decisions that require the consent of a specified shareholder (typically the investor) regardless of board or majority shareholder approval. Common reserved matters include: approval of annual budgets above a threshold, incurrence of debt above a specified limit, changes to the company’s business, related-party transactions, and changes to capital structure.
Without reserved matters, a majority shareholder can bind the company to decisions that materially affect the investor’s position without any recourse. The scope of reserved matters should be calibrated to the investor’s concern — too narrow, and the protection is illusory; too broad, and it creates operational paralysis.
2. Tag-Along Rights
A tag-along right requires that if a promoter proposes to sell shares to a third party, the investor must be offered the right to sell a proportionate number of their shares on the same terms and conditions. This prevents a scenario where promoters realise liquidity through a sale while minority shareholders are left behind in a company whose dynamics have fundamentally changed.
3. Drag-Along Rights
The mirror image of tag-along: a drag-along right allows a majority shareholder (or a shareholder above a specified threshold) to compel minority shareholders to sell their shares in a third-party acquisition on the same terms. This is essential for investors and promoters seeking a clean exit — a strategic acquirer will invariably require 100% of the share capital, and a minority shareholder who refuses to sell can hold the entire deal hostage.
4. Anti-Dilution Rights
Anti-dilution provisions protect an investor from the economic impact of a subsequent equity issuance at a lower valuation (a “down round”). Broad-based weighted average anti-dilution is the market standard: it adjusts the investor’s conversion price based on a formula that takes into account both the price and the volume of the new issuance, moderating the adjustment relative to full-ratchet anti-dilution (which resets the conversion price to the new round price regardless of volume).
5. Liquidation Preference
A liquidation preference entitles an investor, in the event of a liquidation, dissolution, or deemed liquidation (including a sale or merger of the company), to receive a specified return on their investment before any proceeds are distributed to ordinary shareholders. A 1x non-participating preference — the investor gets back their invested amount and no more — is protective without being punitive. A participating preference — the investor gets their preference back and then participates pro rata in any remaining proceeds — can be economically severe for founders in lower-valuation exits.
6. Right of First Refusal (ROFR)
A ROFR requires that before any shareholder sells shares to a third party, they must first offer those shares to the other shareholders (or the company) at the same price and on the same terms. This keeps ownership within the existing shareholder group and prevents the introduction of unwanted third parties without consent.
7. Deadlock Resolution
Deadlock — where shareholders with equal voting power cannot agree on a material decision — is one of the most disruptive events in a privately held company. Well-drafted SHAs provide a structured resolution mechanism: a multi-step escalation to senior management, followed by mediation, followed — if all else fails — by a buy-sell (Russian Roulette) provision under which one party names a price at which they will buy the other out, and the other party must either accept the sale or buy at that price.
Russian Roulette is a blunt instrument and should be a mechanism of last resort — but its presence in the SHA creates a powerful incentive to resolve disputes through earlier steps before it is invoked.
8. Non-Compete and Non-Solicitation
Promoters and key founders should be bound by non-compete and non-solicitation covenants during their association with the company and for a defined period post-exit. Under Indian law, Section 27 of the Contract Act makes post-employment non-compete clauses potentially unenforceable as restraints of trade, depending on scope and duration. Careful drafting — limiting the geographic scope, activity scope, and duration — is essential to maximise enforceability.
9. Information Rights and Reporting Obligations
Investors require timely, accurate information about the company’s financial position to manage their portfolio and discharge their fiduciary duties. A well-drafted SHA specifies: monthly management accounts (within a specified number of days of month-end), quarterly audited or reviewed financials, annual audited accounts, and prompt notification of material developments. Information rights should survive a shareholder’s exit for the period during which they retain any residual rights under the SHA.
10. Governing Law and Dispute Resolution
The governing law and dispute resolution clause is frequently the last to be negotiated and the first to matter when a dispute arises. For SHAs involving international investors, the choice of Singapore law and SIAC arbitration is common — it provides a neutral forum, sophisticated arbitrators with expertise in corporate disputes, and an award enforceable under the New York Convention in over 170 jurisdictions.
For domestic SHAs, the seat of arbitration, the number of arbitrators, and the institution should be specified with particularity. A well-drafted SHA arbitration clause can mean the difference between a dispute resolved in eighteen months and one that lingers in court for a decade.
Our corporate practice has advised founders, venture capital funds, and strategic investors on shareholders agreement negotiation and drafting across sectors. If you are in the process of raising capital or structuring a joint venture, we welcome the opportunity to advise on the SHA — before the term sheet is signed, not after it is.