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Foreign direct investment (FDI) inflows into India have witnessed a steady rise, from USD36 billion during the financial year 2013 to 2014 to USD81 billion (provisional) in 2024 to 2025, because of an investor-friendly policy, under which most sectors are open for 100% FDI through the automatic route (without government approval). According to a recent press release, more than 90% of the overall FDI inflow is received under the automatic route.

Cross-border joint ventures (JVs) have long served as vehicles for foreign investment, while also fostering local innovation. In recognition, the government has increased the FDI limits in sensitive sectors such as defence and telecoms. More recently, the 2025 Union Budget also increased the FDI limits in the insurance sector from 74% to 100%, for companies that invest their entire premium in India.

Forms of JVs

JVs can be created by contract or by incorporation. A JV structure implies the creation of a separate legal entity or participation in the capital of an existing entity by an investor, as per the contractual agreement between the parties concerned. Each party has a contribution that is assimilated and designated under the arrangement. The other form does not involve a separate legal entity. Instead, a co-operation agreement or strategic alliance contract captures the responsibilities of the interested parties.

Legal framework

In terms of the FDI policy, foreign investment is permitted in Indian companies and limited liability partnerships. However, international investors typically prefer to invest in Indian companies.

A JV company with foreign investment would be required, among other things, to comply with the following laws and regulations:

1. 1. Companies Act, 2013. For matters relating to incorporation, registration and compliance;
   2. FDI policy and the Foreign Exchange Management Act 1999 regulations (FEMA). To determine sectors, modalities and restrictions for FDI, and remittance of funds into or out of India;
   3. Income Tax Act, 1961, related rules
      and applicable double taxation avoidance agreement. To determine the tax implications for the JV and the foreign investor on account of dividends, royalties and income from capital gains; and
   4. Competition Act, 2002. To determine whether the acquisition of a stake in an Indian company would trigger the requirement to seek prior approval from the Competition Commission of India on account of applicable thresholds relating to turnover and asset base.

Key considerations

Investment conditions. As previously mentioned, foreign investors are permitted to invest up to 100% in the equity of an Indian company under the automatic route in most sectors. Foreign investment in a few sectors, such as lottery business, casinos, atomic energy and railway operations, is prohibited.

In certain sectors deemed strategically important by the government, foreign investment is permitted subject to sectoral caps (maximum limit of foreign equity) and other specified conditions depending on the sector. For instance, such conditions may inter alia include the requirement of obtaining prior government approval, security clearances, transfer of technology, mandatory reporting of changes in foreign shareholding and sourcing norms. Such conditions may significantly impact a foreign investor’s plans for establishing a JV in India. Since 2020, FDI from countries sharing a land border with India is permitted only with prior approval from the government. If the ultimate beneficial owner (UBO) of the proposed investment in India is situated in or is a citizen of any such country, prior government permission is required. This has led to recent increased scrutiny of JV partners and their UBOs. Any investment made in violation of this requirement is deemed null and void and may require complete repatriation of the foreign capital.

Funding and related issues. An Indian JV is permitted to issue “equity instruments” to its overseas investor. Equity instruments include equity shares and convertible preference shares or debentures. Any non-convertible/partially convertible or optionally convertible preference share or debenture is treated as debt and is subject to relevant FEMA guidelines.

Investment by a foreign investor in an Indian company is subject to the following pricing norms:

1. 1. For shares of a listed entity. The price is determined as per the relevant regulations of the Securities and Exchange Board of India (SEBI); and
   2. For shares of an unlisted entity. Fair value is determined on an arm’s length basis (not less than that offered to Indian shareholders) and duly certified by a chartered accountant or a SEBI-registered merchant banker or a practising cost accountant.

Indian entities may issue equity instruments to foreign JV partners against a swap of equity instruments (including swap of equity instruments of foreign companies), import of capital goods, machinery or equipment, and as adjustment against pre-operative or pre-incorporation expenses, subject to the guidelines for each specified form of consideration set out in the FEMA master directions.

For the transfer of equity instruments between an Indian resident and a foreign investor, up to 25% of the total consideration may be paid by the buyer on a deferred basis within 18 months from the date of the definitive agreement. Where the total consideration has been paid, the seller may furnish an indemnity for an amount not more than 25% of the total consideration for a period not exceeding 18 months from the date of the payment of the full consideration.

Compliance. All investments by a foreign JV partner in an Indian company, whether through subscription to equity instruments issued by the company or by acquisition of shares from the Indian JV partner, have to be duly intimated in prescribed forms to the concerned authorised dealer banks (banks authorised by the Reserve Bank of India) within stipulated periods. Similar intimation is required to be filed at the time the foreign investor sells its stake to a resident entity or individual. Non-compliance may impede or delay future transactions, such as capital infusion, exits or buyouts, involving foreign investors.

Other relevant issues

Due diligence. The Indian regulatory landscape, business practices and socio-political scenario may differ significantly from an investor’s home jurisdiction. It is imperative that the investor carefully considers key aspects of the due diligence report to determine valuation, conditions precedent and subsequent, governance structure, indemnity obligations and exit options.

For example, litigation in India tends to be lengthy, and depending on the sector, the target entity may have a significant number of pending cases. In employee matters, Indian law provides for certain safeguards to workers who are not in the senior management category. Any transition or change in their benefits requires careful consideration.

Real estate. Acquisition of real estate in India can be procedurally complex and time-consuming process, with no central registry of land records. Depending on the location of the property, a purchase or lease may require co-ordination with multiple authorities, increasing transaction time.

Dispute resolution, governing laws. Arbitration, including foreign-seated arbitration, is generally the preferred method of dispute resolution in agreements concerning Indian JVs. Foreign arbitral awards are enforceable in India with limited grounds for a challenge. Parties may choose foreign law as the governing law of the JV agreement.

Repatriation of profits and investment. There is no limitation on the amount of profits that may be repatriated to the foreign JV partner. An Indian shareholder, purchasing shares held by the overseas partner, must comply with the previously mentioned pricing norms.

Enforcement of non-compete and non-solicit clauses. Non-compete and non-solicit clauses are enforceable during the term of the JV agreement. Indian courts have adopted a conservative approach to enforcing non-compete provisions after the termination of the JV agreement between parties. Such clauses may be held enforceable depending on the duration, geographical limitation and other factors. Non-solicit clauses post-termination are usually enforceable.

Kochhar & Co
202, Vios Tower, New Cuffe Parade,
Sewri Chembur Road, Wadala East, Mumbai-400 037,
Maharashtra, India
Tel: +91 22 6112 0700
Email: legal@mumbai.kochhar.com