Foreign Direct Investment (FDI) compliance in strategic sectors: Approvals, beneficial ownership, reporting, filing and due diligence.

Introduction : Foreign direct investment is when a company from one country invests in or puts money into a business in another country. India is one of the most open economies in the world for FDI. FDI is an important source of capital, technology and expertise for India’s business and economy.  While India permits FDI in most sectors, investments in sectors connected with national security, communications and other sensitive sectors are subjected to additional scrutiny and compliance. India allows most sectors 100% FDI through the automatic route, meaning no prior government approval is needed; however, post-investment regulation compliance exists depending on the sector-specific. More than 90% of the FDI coming into India comes through the automatic route. 

For strategically important sectors like the above-mentioned, which involve national security, sensitive data, etc., are treated differently. These specific sectors have ‘caps’ on how much foreign ownership is legally permissible, require governmental approval before any investment can close, and also have ongoing reporting obligations that continue for as long as the investment exists. 

So, for investors, compliance is not limited to checking whether foreign ownership is permitted or not, it also involves examining the type of entry route, beneficial ownership, sector-specific approvals and ongoing post-obligations.

The automatic route or the government route

The first question in any kind of FDI transaction is whether the investment can enter through the automatic route or requires governmental approval. 

Firstly, under the automatic route, prior government approval is generally not required, provided the investment complies with the applicable sectoral cap and conditions under the FDI policy. However, this does not mean that the entire investment is free from regulation. Under the FEMA requirements, reporting obligations and sector-specific conditions will continue to apply. 

Secondly, under the governmental route, prior approval must be obtained before the investment is closed. Applications are processed through the Foreign investment facilitation portal (FIFP). This distinction is important for strategic sectors. Now, for example, under the current FDI policy (2020, as amended from time to time), the defence sector allows foreign investment up to 100%, with investment up to 74% through the automatic route and investment beyond 74% requiring governmental approval and subject to applicable conditions. 

The sectoral cap and the entry route are two separate and important questions. The cap determines how much foreign ownership is allowed, while the route determines whether prior governmental approval is necessary. 

Beneficial ownership (BO) and land border countries' (LBC) restrictions

Foreign investments cannot always be assessed merely by looking at the immediate/face shareholder. The identity of the person who ultimately owns or controls the investing company also becomes very relevant. 

This is particularly important after Press Note 3 (2020), which required governmental approval for investments from entities/persons who are ultimately the investor (beneficial owner) situated in or citizens of countries sharing a land border with India. 

The framework was reviewed through Press Note 2 (2026). This revised framework continues to require the governmental route where the investor is an entity or citizen of a country sharing a border with India or where the BO of the investment is a citizen of such a country. It also provides that a subsequent change in BO that brings an investment within these restrictions mandatorily requires prior governmental approval. 

The effect is that investors must conduct a thorough analysis of their ownership structure. This may require examining upstream shareholders, holding companies and persons who exercise control. The 2026 SOP (standard operating procedure) specifically requires information about ownership, control rights, board appointment rights, the terms and conditions mentioned, veto rights and many other forms of direct or indirect control when assessing BO. 

Hence, a foreign investor should conduct an analysis of the ultimate ownership. And they should not assume that using an entity incorporated in a third country automatically removes the need for a beneficial ownership analysis. 

The sector-specific regulation 

Strategic sectors are  governed by their respective sectoral laws and regulations. 

Now, for example, a foreign investment in a telecom company must ensure compliance with FDI policy and also with other regulatory compliance like licensing and security requirements that are applicable to the telecom operators. The telecom sector operates under a licensing framework under the Indian Telegraph Act, 1885. 

What to check: 

• FDI up to 100% is permitted under the automatic route, subject to certain conditions.

• The transaction is subject to the Department of telecommunications (DoT) scrutiny and compliance of licensing, security and other conditions for operation of business. 

• The licence must declare all direct and indirect foreign investment in the company and submit a compliance report every year. 

• If satellite-based services are involved, comments from the department of space are mandatory. 

Similarly, defence investments may involve industrial licensing and many other security-related requirements. What to check:

• FDI up to 74% is allowed through the automatic route. 

• Beyond 74%, government approval is needed. 

• Industrial licensing is required under the Industries (Development and Regulation) Act, 1951.

• All foreign investments are subject to national security review. 

• Also, compliance with the Arms Act, 1959, is mandatory for weapons manufacturing.

FDI permission does not by itself amount to permission to operate a business. A transaction may therefore require the investor to satisfy several regulatory requirements before closing. The same applies to other sectors like broadcasting, digital payments and other activities. Before entering a translation, parties should identify the sector in which the target operates and map all applicable regulatory approvals rather than treating the approval as the only requirement. 

Reporting obligations

FDI compliance continues after the investment is made. There are two ways. Firstly, where an Indian company issues shares to a person resident outside India and the issues qualify as FDI, the issue must be reported through Form FC-GPR within 30 days from the date of issue.

Secondly, where shares are transferred between residents and non-residents, as under the framework of FEMA, Form FC-TRS may be required.

This distinction is important to understand because the issue of fresh shares and the transfer of existing shares are legally different, which means they are different transactions. Companies receiving FDI are required to comply with the annual foreign liabilities and assets (FLA) return requirements. The RBI framework currently requires FLA to be filed and submitted by 15th July every year.

The Competition Commission of India (CCI) approval and Gun jumping 

A huge & significant FDI transaction may also, depending on the threshold limit, require scrutiny under the Competition Act, 2002’s merger control. 

The Competition act, 2002, contains asset and turnover thresholds for combinations. In addition, the 2023 amendment introduced a deal value threshold under which certain transactions exceeding Rs 2,000 INR may require notification where the target has substantial business operations in India. 

An investor acquiring shares or control in an Indian company should also assess competition law concerns that are separate from the FDI requirements. 

The gun-jumping: where an investment qualifies as a notifiable combination under the Competition Act, 2002, the parties may need to obtain approval from the CCI before implementing the transaction. ‘Gun jumping’ occurs when parties begin implementing the transaction before this approval from CCI, it can be by exercising control over the target, coordinating business decisions, or exchanging competitively sensitive information without adequate safeguards (like a ‘clean team’). Therefore, even where FDI is in itself permitted, parties must ensure that CCI clearance and standstill obligations must be compiled with before closing the deal.

The Checklist for investors: the due diligence

1. Sector: what business does the Indian company actually carry on.

2. Sectoral cap: what is the maximum permitted foreign ownership.

3. Entry route: Is the investment automatic, or does it require government approval.

4. Beneficial ownership: Who ultimately owns or controls the foreign investor.

5. Control: Do shareholder agreements, voting rights or board rights give the investor control beyond its percentage shareholding.

6. Sector-specific approvals: Are approvals or licences required from the relevant regulator. 

7. Competition law: Does the transaction meet the applicable combination thresholds or Deal Value Threshold (DVT).

8. FEMA compliance: What reporting will be required after the investment.

9. Closing: Should regulatory approvals be made conditions precedent to closing.

10. Ongoing compliance: What reporting and regulatory obligations will continue after the transaction. 

Conclusion

FDI compliance in strategic sectors requires not just checking if the foreign ownership is permitted but also examining how much can be invested, whether approval is required, who ultimately owns or controls the investor, and what sector-specific regulations apply. For businesses operating in these sectors, these questions should be addressed pre-transaction. A proper regulatory checklist can help identify approval requirements, avoid delays at closing and reduce the risk of non-compliance. 

Author: Akshatha K Manashivanagi in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References

1. ‘India offers a transparent, predictable and comprehensive FDI Policy Framework for investments’, PIB Delhi, Ministry of Commerce & Industry(herein referred to as MoC&I for brevity), Feb 2025.

2. ‘India attracted $843 billion in FDI between 2014-15 and 2025-26: Official’, PTI, The Economic Times, Jun 2026.

3. ‘India offers a transparent, predictable and comprehensive FDI Policy Framework for investments’, PIB Delhi, MoC&I, 2025. 

4. ‘Cabinet approves changes in guidelines on investments from countries sharing a land border with India’, PIB Delhi, MoC&I, 2026. 

5. ‘Government Implements Key Initiatives to Boost Industrial Growth and Investments’, PIB Delhi, MoC&I, 2025. 

6. Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, Consolidated FDI Policy (Effective from October 15, 2020).

7. Government of India Ministry of Commerce & Industry Department for Promotion of Industry and Internal Trade FDI (Policy, Facilitation & Data) Section FDI Policy Cell Press Note No. 2 (2026 Series). 

8. Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (Amended upto June 13, 2026), Reserve Bank of India, Foreign Exchange Department, Notification No. FEMA. 395/2019-RB.

9. CCI  FAQs on Combination and merger control.

10. FDI Policy: Sectors where Government Approval is required. DPIIT, 2025.

11. Foreign Exchange Management Act, 1999 (FEMA) No. 42 of 1999, § 11; 6(5). 

12. Prevention of money laundering Act, 2002 (PMLA) No. 15 of 2003, §. 2(1)(fa).

13. Companies Act, 2013, No. 18 of 2013, § 2(87). 

14. Industries (Development and Regulation) Act, 1951, No. 65 of 1951, § 11.

15. Competition Act, 2002, No. 12 of 2003, § 5.