Foreign investment in Indian startups: FDI routes, pricing and filings

Automatic route and government route

Under the automatic route, a foreign investor can invest without prior approval and the company only reports the investment. Most sectors allow up to 100% foreign ownership this way. Some have caps or need government approval, a few, such as lotteries and atomic energy, are closed to FDI, and approval applications go through the Foreign Investment Facilitation Portal.

Where the investor, or its beneficial owner, is from a country that shares a land border with India, investment has needed government approval since Press Note 3 of 2020. In March 2026 the government clarified that non-controlling beneficial ownership of up to 10% from such countries can come through the automatic route, subject to conditions, so check the current wording before taking money with any such link.

Instruments a startup can issue

Foreign investors can buy these capital instruments. Anything non-convertible, optionally convertible or only partly convertible is treated as debt and falls under the rules on external commercial borrowing instead.

• Equity shares.
• Preference shares and debentures that are fully, compulsorily and mandatorily convertible, such as CCPS and CCDs.
• Share warrants.
• Convertible notes, from DPIIT-recognised startups only: at least ₹25 lakh from an investor in a single tranche, converted into equity shares or repaid at the holder's option within ten years. Citizens and entities of Pakistan and Bangladesh cannot invest this way, and startups in sectors needing approval need it for notes too.

Pricing rules

For an unlisted company, shares issued to a non-resident cannot be priced below 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. For convertible instruments, the price or conversion formula must be fixed at issue, and the conversion price cannot be below the fair value at that time.

Transfers follow the same idea: a resident selling to a non-resident cannot go below fair value, and a non-resident selling to a resident cannot go above it. Share swaps need a valuation from a SEBI-registered merchant banker.

Illustrative example: a valuer certifies fair value at ₹400 a share. A foreign investor may pay ₹400 or more, but not ₹350. At ₹400, a ₹2 crore investment buys 50,000 shares (₹2 crore ÷ ₹400).

Filings and deadlines

Late filings attract a late submission fee, and some lapses have to be regularised through compounding with the RBI. The RBI updates its Master Directions often, so check the current versions on rbi.org.in, or ask an adviser, before each round.

Downstream investment

An Indian company that is owned or controlled by non-residents counts as a foreign investor when it invests in another Indian company. That downstream investment must follow the same entry route, sectoral caps and pricing rules as direct FDI, needs board approval, cannot be funded with money borrowed in India, and is reported on Form DI. It matters when a foreign-funded startup sets up a subsidiary or buys another Indian company.

A pre-round checklist

• Confirm your sector's entry route and any cap.
• Check each foreign investor's beneficial ownership against the land-border rules.
• Get a fair value certificate dated close to the issue.
• Pass board and shareholder approvals and follow the private placement process.
• Allot within 60 days of receiving money, and file FC-GPR within 30 days of allotment.