A new US Department of State report on the investment climate in India has said that India welcomes foreign direct investment (FDI), but US investors are encountering an environment balancing openness with “economic nationalism” and the risk of corruption in the regulatory system, which is posing a barrier to FDI.
Amid ongoing negotiations for a trade deal with Commerce Minister Piyush Goyal in the US and bilateral trade talks with his US counterpart during the ongoing G20 Trade Ministers’ meeting, the report pitched for a level-playing field for investment in India. Reiterating its long-standing concerns, the State Department report said India maintains laws and practices that treat foreign and domestic investment differently.
“While India permits 100% FDI in most sectors without prior approval, India requires foreign investors — including wholly owned subsidiaries incorporated in India, paying Indian taxes, and maintaining an Indian workforce — to request governmental approval to invest in multi-brand retail trading, private banking, pharmaceuticals, defence, print and digital media and satellites,” the report said.
It said that US businesses report actual corruption and the anticipation of potential corruption — particularly in regulatory systems — as barriers to FDI, adding that US direct investment stock in India reached $58.54 billion in 2024, a 3.37% decline from 2023.
Weak investment has been a major worry for Indian policymakers. Data showed that India saw a jump in net foreign direct investment (FDI) inflows in July. Data released late Friday by the Reserve Bank of India (RBI) showed that net FDI soared to an over five-year high of $7.35 billion. This is the highest monthly inflow since May 2021’s $8.80 billion.
‘Burdensome restriction’
The Foreign Exchange Management Act (FEMA) restricts concurrent FDI and foreign portfolio investment (FPI) investments, creating a redundant and uniquely burdensome restriction that blocks independent funds within the same investment group from participating in initial public offerings (IPOs) if any affiliated fund holds pre-IPO FDI stakes — a safeguard rendered unnecessary by the existing 10% FPI cap and unmatched by any other major jurisdiction, the report said.
Under current rules, an investor who enters a company through the FDI route before its IPO is barred from acquiring additional shares through the FPI route during or after the IPO until all pre-IPO FDI holdings are fully divested — a process further delayed by post-IPO lock-up periods.
Story continues below this ad
“This restriction is particularly burdensome for large investment groups managing multiple independent equity funds, as a pre-IPO commitment by one fund can effectively block other funds within the same group from participating in the IPO. Notably, the existing 10% FPI cap already limits foreign investors from acquiring strategic stakes in listed Indian companies, rendering the concurrent FDI/FPI restriction redundant as a safeguard against foreign concentration,” the report said.
Import restrictions
The State Department report said India’s Import Management System (IMS), implemented in 2023 and extended through 2025 with graduated import caps, continues to pose challenges for foreign firms seeking to import specialised used equipment — particularly high-end servers, semiconductors, and advanced testing hardware critical to technology production — as the system’s burdensome authorisation requirements and lack of transparent guidelines create regulatory uncertainty.
On the export side, India controls exports of sensitive items through the SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies) list, administered by the Directorate General of Foreign Trade, it said.
Bank and foreign exchange
The effective tax rate paid by foreign banks is 4.63 percentage points higher than domestic banks at 38.22%, the report said. “This higher effective tax burden may ultimately affect the relative attractiveness of India as a market for foreign lenders, potentially influencing their decisions on capital allocation, pricing, and the scale of their local operations,” the US State Department said.
Story continues below this ad
The report said India continues to maintain stable correspondent banking access with major global and US banks, adding that India is a tightly regulated market, especially in banking and capital markets, which helps support stability and continued access for foreign financial institutions and their US correspondent relationships.
“At the same time, India still carries typical emerging economy risks, including regulatory changes, macroeconomic fluctuations, and evolving rules for how troubled banks are handled, all of which are relevant considerations for US banks maintaining or assessing correspondent banking ties with Indian counterparts,” the report said.
Foreigners can open bank accounts in India, but there are regulatory conditions and restrictions depending on their residency status and purpose of stay, the US State Department flagged.
Corruption hindering FDI
The report said the Companies Act 2013 establishes corporate governance and oversight requirements that support anti-corruption compliance in the private sector by mandating mechanisms for the protection of whistleblowers, industry codes of conduct, and the appointment of independent directors to company boards.
Story continues below this ad
“Under this framework, the government encourages private companies to establish internal codes of conduct that prohibit the bribery of public officials, requiring publicly listed companies to adopt codes of conduct specifically for directors and senior management personnel. Public information is limited regarding the extent to which the internal controls and compliance mechanisms are implemented across the private sector,” the report said.
