/ Cross-border investment · FDI vs FPI

FDI vs FPI, how foreigners invest in Indian startups.

Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are the two primary routes for foreign capital into Indian companies. For Indian startup founders raising from US / UK / UAE / Singapore investors, understanding which route each investor uses determines sector eligibility, approval requirements, pricing, and exit mechanics.

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Written by CA Durgesh Chavda

Chartered Accountant (ICAI) · Founder, Bharat Quantum Prospera · US incorporation, India-US DTAA, FEMA ODI, NRI taxation, cross-border structuring · LinkedIn

/ FDI framework

The default route for strategic investors.

Foreign Direct Investment (FDI) is governed by the FDI Policy and FEMA (Non-debt Instruments) Rules 2019. Foreign investors acquiring equity or compulsorily-convertible instruments in Indian companies for long-term participation use FDI.

Routes:

Automatic Route: no prior approval needed; investor remits capital, Indian company issues shares, reports to RBI via Form FC-GPR within 30 days.
Approval Route: prior approval from the relevant administrative Ministry via FIFP portal; applies to specific sectors with caps (defence, retail, print media, etc.).

Sector caps: most Indian sectors permit 100% FDI automatic route. Specific caps apply: insurance 74%, defence 74%, banking (private) 74%, pharma brownfield 74%, print media 26%, broadcasting content 49%, multi-brand retail 51% (approval). Agriculture, lottery, gambling, chit funds — FDI prohibited.

Press Note 3 of 2020: investment from entities / individuals in countries sharing land borders with India (China, Pakistan, Nepal, Bhutan, Bangladesh, Myanmar, Afghanistan) requires prior approval regardless of sector. Includes beneficial owner tests. Delayed many China-origin VC rounds post-2020.

/ FPI framework

The listed-equity portfolio route.

Foreign Portfolio Investment (FPI) is regulated by SEBI under FPI Regulations 2019. FPIs are foreign investors acquiring listed Indian equities, debt securities, or specified instruments for portfolio (not strategic) participation.

FPI registration categories:

Category I: government / sovereign-related entities, pension funds, banks, insurance companies — broadest access, lowest KYC burden.
Category II: regulated funds, individual investors, family offices — standard access, higher KYC.

What FPIs can invest in:

Listed equities (primary + secondary market).
Debt securities (government, corporate).
Mutual fund units, ReITs, InvITs.
Specified unlisted instruments (debt, hybrid) within limits.

Aggregate limits: FPI holding in a single listed Indian company capped at 10% of paid-up capital per FPI; aggregate FPI cap 24% of paid-up (increasable by board / shareholder resolution up to sector cap).

/ FDI vs FPI for startup founders

Which investors use which route.

FDI investors (for Indian startup rounds):

US / UK / EU venture capital funds directly investing in Indian company.
Strategic corporate investors.
HNI individual investors from treaty-benefit jurisdictions.
Mauritius / Singapore / UAE holding companies of foreign funds.

FPI investors:

Portfolio investors in listed Indian equities (post-IPO).
Debt-fund investors in listed Indian bonds.
Mutual fund buyers (where FPI route applies).

For an Indian startup raising a venture round from US / UK / Singapore VC: the investor uses FDI route. Form FC-GPR filed. If the investor is from a Press Note 3 country or has significant Chinese beneficial ownership, approval route applies.

For an Indian listed company issuing an FPO or offering OFS: FPI route for foreign portfolio participants.

/ Pricing and exit mechanics

Both routes have pricing guidelines.

FDI pricing (unlisted companies):

Issue price must be at or above fair value determined by SEBI-registered Merchant Banker (DCF, NAV, or comparable company method).
Fair value floor on primary issuance; discount only in specified circumstances with disclosure.
Transfer of FDI holdings (secondary) similarly must be at or above fair value.

Exit from FDI investment:

Secondary sale to another foreign investor: FEMA-compliant pricing + Form FC-TRS within 60 days.
Secondary sale to Indian resident: FEMA-compliant pricing + Form FC-TRS.
Buyback by Indian company: subject to tax at company level post-Oct 2024.
IPO: foreign holding converts to listed FPI-eligible equity.

FPI exit: standard stock-market sale subject to STT; capital gains tax applies at 12.5% LTCG / 20% STCG (post-July 2024).

/ Ready when you are

Raising from US / UK / Singapore VC into your Indian company?

FDI compliance drives whether the money arrives smoothly. We handle pre-round pricing certificate, Form FC-GPR within 30 days, FC-TRS for secondary, and the specific-sector approval if your investor's structure triggers Press Note 3. Standard FDI compliance per round is priced per scope.

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FAQ

Common questions, answered.

What is the difference between FDI and FPI?

FDI (Foreign Direct Investment) is strategic / long-term equity investment, typically in unlisted companies, with investor playing an active role. FPI (Foreign Portfolio Investment) is passive / portfolio investment in listed securities for financial return. Different regulatory frameworks (FEMA + sector FDI policy for FDI; SEBI FPI regulations for FPI), different limits, different exit mechanics.

Does Press Note 3 of 2020 affect Indian startup rounds?

Yes. Any investor from a land-border-sharing country (China, Pakistan, Nepal, Bhutan, Bangladesh, Myanmar, Afghanistan) or an investor with beneficial ownership traced to such a country needs prior government approval. In practice, mainland China HNI / fund investment into Indian startups has slowed dramatically since 2020. Startups with 2016-19-vintage Chinese investors may face scrutiny on subsequent rounds.

Can a US VC invest in an Indian Pvt Ltd through FDI automatic route?

Yes, for most sectors. The US VC remits capital to the Indian company's bank account; the company issues shares; Form FC-GPR filed with RBI within 30 days. Pricing-guideline-compliant valuation certificate required. For restricted sectors (defence, insurance, media), approval route applies regardless of investor nationality.

What is Form FC-GPR?

Foreign Currency - Government of Pakistan Rupee — no, it is Foreign Currency-General Permission Return. Form filed by the Indian company with RBI reporting fresh issuance of shares to a foreign investor. Filed via the RBI's FIRMS portal within 30 days of share issue. Mandatory for every FDI inbound transaction.

Can the same foreign investor invest via both FDI and FPI?

Yes, in different capacities for different purposes. A US pension fund might hold FDI equity in a pre-IPO Indian company and FPI exposure to listed Indian equities. Each investment follows its respective framework; the investor must comply with both.

Does BQP handle FDI / FPI compliance for Indian startups?

Yes. Pre-round scoping, pricing-guideline-compliant valuation certificate (via SEBI-registered Merchant Banker partner), Form FC-GPR filing within 30 days of share issue, Form FC-TRS for secondary transactions, FDI compliance for the Indian company's cap table. FPI setup for foreign funds investing in Indian listed securities also handled. Request via get-a-quote.html.