Foreign investment in Indian startups: the rules explained

A foreign cheque into an Indian startup comes with a rulebook the domestic one doesn't. Before the money lands, someone has to answer three questions: does it need approval, at what minimum price, and what must be filed afterwards.

This explainer walks through each, with links to the official texts. It is educational, not legal advice; a FEMA lawyer or chartered accountant should review any live deal.

Which rules govern foreign investment in Indian startups?

Foreign investment in Indian companies is governed by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, known as the NDI Rules, which the RBI administers. Payment and reporting follow separate RBI regulations. The RBI's Master Direction on foreign investment gathers both into one working text.

The Master Direction, updated up to 15 June 2026, defines foreign direct investment as investment through equity instruments by a person resident outside India in an unlisted Indian company. For a startup, that means almost any foreign equity cheque counts as FDI, whatever its size.

The framework may change. On 21 July 2026 the RBI released draft Foreign Investment Rules, 2026 to replace the NDI Rules, with comments due by 31 August 2026. Until final rules are notified, the NDI Rules apply. We found no official DPIIT figure for FDI into startups alone, so this explainer quotes none.

When does foreign investment need government approval?

Most startups take foreign money on the automatic route, with no prior approval. Foreign investment is allowed up to 100% automatically in sectors that are not listed in Schedule I of the NDI Rules and not prohibited. Listed sectors carry caps or need approval, and financial services not specifically listed need approval.

The Master Direction defines the two routes. On the automatic route, no prior central government approval is needed. On the government route, approval comes first, sought through DPIIT's Foreign Investment Facilitation Portal, and the investment must follow its conditions.

Sectoral caps and closed sectors

A sectoral cap is the most foreign investment an Indian entity may take, counting direct and indirect foreign investment together. Defence manufacturing, for example, is open to 74% on the automatic route, as the Invest India defence page notes.

Some sectors are closed to foreign investment altogether. The Master Direction lists them:

• Lottery, gambling and betting, including casinos.
• Chit funds and Nidhi companies.
• Trading in transferable development rights, and real estate business or construction of farm houses.
• Manufacturing cigars, cheroots, cigarillos and cigarettes of tobacco or its substitutes.
• Atomic energy and railway operations, which are not open to private investment.

What does Press Note 3 (2020) mean for startups?

Press Note 3 (2020) put investors from countries sharing a land border with India on the government route, including where the beneficial owner sits in such a country. Changes approved in 2026 now let non-controlling beneficial ownership of up to 10% from those countries use the automatic route, subject to caps and reporting.

DPIIT issued Press Note 3 on 17 April 2020. As IndiaCorpLaw summarised, the countries are China, Afghanistan, Pakistan, Bangladesh, Myanmar, Bhutan and Nepal.

The Union Cabinet approved the easing in March 2026, The Tribune reported on 11 March 2026. The Master Direction now ties "beneficial owner" to the Prevention of Money-laundering Rules, and a later shift of beneficial ownership into such a country needs approval too.

For a founder, the practical step is diligence on the cap table of every foreign fund in the round. A small stake held through a fund with land-border limited partners can still decide the route. Citizens and entities of Pakistan face a separate rule: approval in all open sectors, and no investment in defence, space or atomic energy.

How must the price be set for a foreign investor?

For an unlisted company, the issue price to a foreign investor can't be lower than a fair value worked out by an internationally accepted pricing method on an arm's length basis, and certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant. The certificate must be no more than 90 days old.

For convertible instruments such as CCPS and CCDs, the price or conversion formula must be fixed upfront at issue, and the price at conversion can't fall below the fair value worked out at that time. Our comparison of CCPS and CCDs for investors explains why both count as equity only when fully and compulsorily convertible.

Two more rules shape term sheets. Instruments may carry an optionality clause only with a lock-in of at least one year and no exit at an assured price. A startup company can also issue convertible notes to a foreign investor for Rs 25 lakh or more in a single tranche.

Approval is a sector question. Price and paperwork are questions for every foreign cheque, however small.

What are the reporting timelines after foreign money comes in?

The startup must issue shares within 60 days of receiving the money and file Form FC-GPR within 30 days of issuing them. Convertible notes go on Form CN within 30 days, and companies that have received foreign direct investment file the annual FLA return by 15 July. Delays attract a late submission fee.

Event	Deadline	Form
Money received, shares not yet issued	Issue within 60 days, or refund within 15 days after that	None
Equity instruments issued	30 days from the date of issue	FC-GPR
Convertible notes issued to a foreign investor	30 days from issue	CN
Stock options granted to non-resident staff	30 days from issue	ESOP
Shares transferred between resident and non-resident	60 days from transfer or payment, whichever is earlier	FC-TRS
Foreign direct investment held during the year	15 July every year	FLA

The filing rules sit in regulation 4 of the FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, amended up to 13 June 2026, and the 60-day issue window is in the Master Direction. Under regulation 5, late filings attract a late submission fee set by the RBI.

Missed filings surface in diligence. Unreported foreign money is one of the cap table red flags investors check, so keep every FIRC, valuation certificate and acknowledgement in the data room.

Questions

Can a foreign investor own 100% of an Indian startup?

Yes, in most sectors. The RBI's Master Direction allows up to 100% foreign investment on the automatic route in sectors that are not listed in Schedule I of the Non-Debt Instruments Rules and not prohibited. Listed sectors carry their own caps or need government approval, and some, such as lottery and gambling, are closed.

What is Press Note 3 of 2020?

Press Note 3 (2020 Series), issued by DPIIT on 17 April 2020, requires government approval for investment by an entity or citizen of a country sharing a land border with India, or where the beneficial owner is in such a country. After the 2026 changes, non-controlling beneficial ownership of up to 10% can use the automatic route.

What is the FC-GPR filing deadline?

An Indian company that issues equity instruments to a person resident outside India, where the issue counts as foreign direct investment, must report it in Form FC-GPR within 30 days of the issue date. The rule is in regulation 4 of the FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

How is the price set when a foreign investor buys startup shares?

For an unlisted company, the price can't be below a fair value worked out by an internationally accepted method, on an arm's length basis, and certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant. The certificate must be no more than 90 days old on the investment date.

Sources: Reserve Bank of India, Master Direction: Foreign Investment in India, updated up to 15 Jun 2026 · Reserve Bank of India, FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, amended up to 13 Jun 2026 · Reserve Bank of India, Rationalisation of FEMA (Non-Debt Instruments) Rules, 2019: Draft Rules for Comments, press release, 21 Jul 2026 · IndiaCorpLaw, Revised FDI Policy for Neighbouring Countries, 21 Apr 2020 · The Tribune, Govt eases FDI norms for China, other nations sharing land borders with India, 11 Mar 2026 · Invest India, Defence Manufacturing sector page, updated 25 Jun 2026

For more on how startup funding works in India, read the MyStartupValley blog or visit mystartupvalley.com.