Prohibited Sectors for Foreign Direct Investment (FDI) in India

India’s dynamic economy presents a fertile ground for Foreign Direct Investment (FDI), with its open-market policies driving growth and job creation. While the country largely embraces foreign capital, it also judiciously safeguards its strategic and public interests. This balancing act is evident in the FDI policy, which, while welcoming in many sectors, imposes absolute prohibitions in a few.

The latest Consolidated FDI Policy Circular, dated 15-10-2020, outlines these restrictions, demarcating sectors where FDI remains a non-starter. Understanding these nuances is essential for foreign investors considering setting up an Indian Subsidiary or entering into a Joint Venture with any other company. This piece aims to unravel these prohibited sectors, offering clarity on the intricate tapestry of India’s FDI landscape

List of Prohibited Sectors for FDI in India

FDI policy categorises industrial sectors into Prohibited and Permitted Sectors. In Prohibited Sectors, foreign investment is strictly prohibited. Even in Permitted Sectors, there may be restrictions. FDI is currently restricted in specific sectors by placing a cap on the percentage of FDI allowed or by imposing restrictions through PN-3. This note restricts FDI from countries such as China and Bangladesh that share a land border with India.

Note on Press Note 3 (PN-3) :

Press Note 3 of 2020 restricts FDI from countries that share a land border with India, such as China, Pakistan, Bangladesh, Afghanistan, etc. Investments from these countries require government approval, regardless of the FDI cap in the sector concerned. This directive aims to prevent opportunistic takeovers or acquisitions of Indian companies during times of economic vulnerability. For investors from these neighbouring countries, understanding the implications of Press Note 3 is essential for navigating the FDI process in India.

Automatic Vs Government Route of FDI

It is important to note that two methods exist for processing FDI in the permitted sector. Applications that fall within the allowed limit of FDI and are not affected by Press Note 3 are processed automatically without prior permission. On the other hand, all other cases for FDI in permitted sectors, such as those that exceed the allowed FDI percentage or are affected by PN-3, are processed through the Government Route, also known as the approval route. In such cases, prior permission from the central government is required. You can also read the comparison between automotive and government routes of FDI.