Cross-Border Joint Ventures Under India’s Liberalised FDI Regime: Structuring for Control & Compliance

Introduction

India has emerged as one of the most attractive destinations for foreign investment due to its large market, growing economy, and progressive liberalization of foreign investment laws. Foreign Direct Investment, commonly known as FDI, is governed by the Foreign Exchange Management Act, 1999, the rules framed thereunder, and the Consolidated FDI Policy issued by the Government of India. Over the last decade, India has significantly relaxed foreign ownership restrictions in several strategic sectors such as Defence, Telecom, and Insurance. These reforms have enabled foreign investors to participate more actively in Indian businesses and obtain greater ownership and management control.

Overview of India’s FDI Framework

India permits foreign investment through 2 (two) routes, namely the automatic route and the government approval route. Under the automatic route, foreign investors can invest in Indian companies without prior approval from the Government, subject to compliance with applicable laws and sector specific conditions. Under the government route, foreign investment requires prior approval from the relevant government authority before it can be made.

In addition to the route of investment, India also prescribes sector specific caps which limit the percentage of ownership that foreign investors can hold in Indian companies. These caps vary depending on the strategic importance and sensitivity of the sector.

Impact of FDI Caps on Ownership and Control in Joint Ventures

FDI caps directly influence ownership and control in cross border joint ventures. Where foreign investors are permitted to hold majority ownership, they can exercise significant control over management and decision making. This control is typically exercised through the appointment of directors, voting rights, and contractual protections under shareholders agreements.

Conversely, where foreign ownership is restricted below 50% (fifty percent), foreign investors may not have direct control over the company and must rely on negotiated contractual rights to protect their interests. These rights may include veto powers over key decisions such as appointment of senior management, approval of budgets, issuance of new shares, and sale of assets. Therefore, the applicable FDI cap plays a central role in determining the balance of power between foreign and Indian partners in a joint venture.

• Defence Sector

The Defence sector has witnessed significant liberalization through Press Note 4 (2020 Series) issued on September 17, 2020, and the corresponding amendment to Schedule I of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, notified vide Notification No. GSR 704(E) dated October 15, 2020.  This liberalization has increased the FDI limit under the automatic route from 49% (forty nine percent) to 74% (seventy four percent), while permitting foreign investment beyond 74% (seventy four percent) and up to 100% (one hundred percent) under the government approval route where such investment is likely to result in access to modern technology or other strategic benefits. This is the current permissible limit of FDI under the defence sector.

The Government has also introduced several reforms to make it easier for foreign investors to enter and operate in India’s defence manufacturing sector. Earlier, companies were required to obtain prior Government approval even for minor changes in shareholding within the permitted FDI limit of 49% (forty nine percent). This requirement has now been relaxed, and companies only need to inform the Government within 30 (thirty) days of such changes, reducing regulatory delays.

In addition, the Government has reduced the number of defence products that require an industrial license before manufacturing. This allows companies to begin production more quickly without lengthy approval processes. Further, the validity of industrial licenses granted under the Industries (Development and Regulation) Act, 1951 has been increased from 3 years to 15 years, with a possible extension of 3 more years. This gives companies sufficient time to establish manufacturing facilities and operate without frequent renewals or regulatory interruptions. [1].

As a result of this liberalization, foreign defence manufacturers can now structure joint ventures in which they hold majority ownership and exercise operational control.

• Telecom Sector

The Telecom sector is one of the most liberalized sectors under India’s FDI regime, with 100% (one hundred percent) foreign investment permitted under the automatic route. This allows foreign telecom operators to establish wholly owned subsidiaries in India. Despite the absence of ownership restrictions, joint ventures continue to serve important strategic functions in the telecom sector. Telecom operations in India require access to spectrum, network infrastructure, regulatory licenses, and local compliance frameworks governed by the Department of Telecommunications. Foreign investors often use joint ventures to leverage the Indian partner’s existing telecom licenses, infrastructure assets, and regulatory track record, which significantly reduces entry barriers and operational risks.

From a structuring perspective, full foreign ownership also enables foreign investors to exercise greater flexibility in structuring downstream investments through Indian subsidiaries. An Indian telecom company owned and controlled by foreign investors is treated as a foreign owned and controlled company under FEMA, and any downstream investment made by such entity is treated as indirect foreign investment. This classification affects sectoral caps, approval requirements, and compliance obligations in downstream sectors.

By way of an example: If a US telecom company owns 100% (one hundred percent) of an Indian telecom company, and that Indian telecom company invests in an Indian defence company, that investment will be treated as foreign investment and must comply with the defence sector FDI cap of 74% (seventy four percent) and approval requirements under FEMA.

If instead the Indian telecom company is majority owned and controlled by Indian shareholders with minority held with foreign shareholders, its downstream investment in the defence company will be treated as domestic investment and will not be subject to foreign investment restrictions.

Accordingly, joint venture structuring is often used strategically to manage downstream investment classification and regulatory exposure.

• Insurance Sector

The Insurance sector has undergone significant liberalization over the years. Foreign investment was initially limited to 26% (twenty six percent), which meant that Indian partners were required to retain majority ownership and control. This limit was later increased to 49% (forty nine percent) and subsequently to 74% (seventy four percent).

More recently, pursuant to the Insurance Laws (Amendment) Act, 2025 and the Union Budget 2026, the Government further liberalized the sector by permitting 100% (one hundred percent) foreign investment in insurance companies under the automatic route, as notified through Press Note 1 (2026 Series) dated February 09, 2026, issued by the Department for Promotion of Industry and Internal Trade, and the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025 in January 2026.[2]

However, joint ventures continue to play an important role from a commercial and operational perspective. Insurance business is heavily dependent on distribution networks, including agency channels, bancassurance partnerships, and customer relationships, which are often developed by Indian partners over long periods of time. Entering through a joint venture allows foreign insurers to leverage these established networks and achieve faster market penetration.

From a regulatory structuring perspective, full foreign ownership also simplifies governance arrangements by eliminating the need for complex shareholder protection rights, affirmative voting provisions, and joint control mechanisms that were previously required to balance ownership restrictions. This reduces potential shareholder conflicts and improves operational efficiency.

Governance and Management Rights in Cross Border Joint Ventures

FDI caps have a direct impact on governance arrangements in joint ventures. Majority ownership generally allows foreign investors to appoint a majority of directors and exercise effective control over management decisions. Minority investors, on the other hand, rely on contractual rights to protect their interests. These rights are typically documented in shareholders agreements and may include veto rights over important decisions (also known as reserved matters), information rights, and exit rights.

Such governance mechanisms ensure that both parties are able to participate in decision making while complying with applicable regulatory limits. Proper governance structuring is essential to prevent disputes and ensure smooth operation of the joint venture.

Exit Options and Investment Flexibility

Liberalization of FDI caps has made exit options more flexible. In sectors where 100% (one hundred percent) foreign ownership is now permitted, foreign investors can acquire the entire stake from their Indian partners and convert joint ventures into wholly owned subsidiaries. This provides greater strategic flexibility and allows foreign investors to adapt their investment structures based on business requirements.

Exit flexibility also has important implications for governance and dispute resolution. In earlier regulatory regimes when FDI in the abovementioned sectors was largely capped, joint venture agreements typically included complex exit mechanisms such as to ensure that investors could exit efficiently despite ownership restrictions. With liberalization of FDI limits, foreign investors can now exercise call options to acquire the Indian partner’s shares without regulatory barriers and caps, thereby simplifying exit mechanism.

For example: Consider an insurance joint venture formed in 2018 between a foreign insurer and an Indian partner, where the foreign investor held 49% and the Indian partner held 51%, in compliance with the then applicable FDI cap. The shareholders agreement provided the foreign investor with a call option to acquire the Indian partner’s shares in the future if the FDI limit was increased. At that time, even if the foreign investor exercised the call option, it could not acquire more than 49% due to regulatory restrictions.

However, following the increase in the FDI cap to 74% in 2021 and subsequently to 100% pursuant to Press Note 1 (2026 Series), the foreign investor can now exercise its call option and acquire the Indian partner’s entire 51% stake. This allows the foreign investor to convert the joint venture into a wholly owned subsidiary, eliminate joint control, and obtain full operational and governance control without requiring regulatory approval or restructuring the original joint venture arrangement.

Conclusion

India’s liberalized FDI regime has significantly transformed the structuring of cross border joint ventures. Increased foreign ownership limits in sectors such as Defence, Telecom, and Insurance have enabled foreign investors to obtain greater control over Indian businesses while continuing to benefit from the strategic advantages offered by Indian partners. At the same time, sector specific regulations continue to influence ownership structures, governance arrangements, funding mechanisms, and exit options.

Joint ventures remain an important mode of foreign investment in India, as they allow foreign investors to balance regulatory compliance with commercial objectives. With continued liberalization and regulatory clarity, cross border joint ventures are expected to play an increasingly important role in India’s economic growth and global integration.

[1] https://www.pib.gov.in/PressReleasePage.aspx?PRID=1654091&utm_source=chatgpt.com&reg=3&lang=2

[2] https://www.dpiit.gov.in/static/uploads/2026/02/4eddf849f19d658e3a74dc32d344b5f9.pdf