Investment strategies in alluring India

India continues to garner focused interest from foreign investors despite global volatility. 2025 was marked by strategic interest in sectors such as financial services, infrastructure and healthcare. The outlook remains positive with momentum for inbound investment, as India continues to be an attractive investment destination for Japanese investors.

With inbound investment subject to a host of considerations under Indian law, this article outlines key strategies for foreign equity investment in unlisted entities in India, including the popular routes.

Pricing constraints for offshore equity investment

Equity investment by offshore investors is typically in the form of equity instruments or instruments compulsorily convertible into equity, with some exceptions as discussed below.

India is a price-controlled regime and a key consideration for inbound investment is applicability of pricing guidelines. Pricing norms require that investments by non-resident entities into Indian companies is undertaken at a price that is not less than the fair valuation of shares (FMV).

This FMV is determined by a merchant banker registered with the Securities and Exchange Board of India (SEBI) or a chartered accountant. There is a fair degree of flexibility in determining the FMV and regulations permit any internationally accepted valuation method, including discounted cash flows.

Such FMV would also be the ceiling price in case of transfers by non-residents to residents, namely, that a non-resident cannot receive consideration in excess of such FMV at the time of divestment.

In case of convertible instruments, the conversion price cannot be lower than the FMV prevailing at the time of the investment. The pricing norm is typically the biggest consideration for structuring investments by offshore investors.

Another essential element for foreign investment, and a corollary to the above-mentioned, is the principle that equity investments by non-residents cannot be guaranteed any assured exit price. This restriction also extends to put options available to an investor against the target company and or its shareholders.

Investors can also explore options involving offshore buyers for greater flexibility in pricing – including any offshore sponsors of the company – since pricing restrictions do not apply to transactions between non-residents.

Alternatively, investors can explore hybrid instruments under routes such as Foreign Venture Capital Investor (FVCI) to manage pricing considerations.

Popular India equity investment routes

Most popular routes for equity investments in India are:

Foreign direct investment (FDI). FDI in Indian companies is the default investment route, allowed for most sectors under either the automatic route (i.e. without prior government approval) or approval route (requiring prior government approval).

While the investment regime has been significantly liberalised such that most sectors now fall under the automatic route, there are a few sectors where specific conditionalities apply such as multi-brand retailing and banking.

While not relevant for investment beneficially originating from Japan, prior government approval is required for inbound investment from any beneficial owners situated in or resident of countries sharing a land border with India (informally known as “Press Note 3” approval).

In terms of instruments, the FDI route permits investment in equity instruments, which include equity shares as well as compulsorily convertible shares and debentures. The commonly used instruments are equity shares and compulsorily convertible preference shares (CCPS), where the conversion price can be fixed/adjusted as per contractual terms subject to pricing guidelines. These carry a preferential dividend and a superior right to equity in a liquidation scenario.

Similarly, compulsorily convertible debentures can be used, with the distinction that the coupon is payable notwithstanding profits of the target, unlike a dividend on CCPS.

Instruments envisaging optional conversion into equity, such as optionally convertible debentures, are not permitted under the FDI route because these are treated as debt investment under Indian regulations and are subject to a separate regime.

For investment in companies that are publicly traded, there are additional considerations at play including pricing and mandatory open offers in case of acquisition of control.

Foreign venture capital investor. One of the routes available for investment is the FVCI route, permitting non-residents to register under the Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000, for investment in specified sectors.

Key benefits of the FVCI route are:

1. 1. Exemption from the pricing requirements; and
   2. Ability to invest in optionally convertible instruments (in addition to equity shares), which provide investors with a fair degree of flexibility to structure safeguarding for their investments, with the ability to enjoy the upside of an equity investor.

Investors registered as FVCIs are permitted to invest in certain identified sectors including: biotechnology and nanotechnology; IT related to hardware and software development; R&D of new chemical entities in the pharmaceutical sector; biofuel production; and the infrastructure sector, including renewable power.

Given considerable interest from Japanese investors in the infrastructure space, FVCI has become an attractive route for structuring investments in this sector where the gestation period for returns is longer and a quasi-equity instrument is preferred against upfront equity risk.

Convertible notes. Indian regulations provide for a special regime for investment in startups through “convertible notes”, defined as instruments issued by a “startup company”, which are repayable at the option of the holder or convertible into equity within 10 years from issue in accordance with agreed contractual terms.

A startup is a private company that needs to be registered and fulfill prescribed criteria, which includes an annual turnover limit. The issue of equity shares against convertible notes must comply with the sectoral limits, pricing guidelines and other applicable conditions for foreign investment.

Unlike convertible instruments, conversion of a convertible note needs to be undertaken at the FMV prevailing at the time of conversion, and not issuance of the note. Investors accordingly cannot take the benefit of the lower entry valuation.

Minority investor rights and protections

Foreign investors acquiring a minority stake (up to 20%) would typically negotiate for a host of rights in the investee company. Some key rights that investors could consider include:

1. 1. Affirmative vote rights can be sought in respect of critical matters that would impact the investment’s value, such as: further issuance of securities; formulation and amendments to the business plan; and any change in the business;
   2. Board and observer seats are fairly common, along with information and access rights to ensure that investors have visibility over company operations. When investors have minority rights and are unable to negotiate for a board seat, they can seek the right to appoint an observer to attend board meetings;
   3. Investors should seek anti-dilution rights, and convertible instruments are favourable for this purpose since it is easier to adjust the conversion price to account for any down-rounds (raising capital at a lower valuation than its previous funding round, selling shares at a reduced price);
   4. Given that exit is a crucial aspect, investment agreements would identify obligation of the founders to provide an exit to investors within a defined time period, including through mechanisms such as a trade sale and a public offer. Investors are recommended to include remedies such as drag-along agreements, which allow majority shareholders to force minority shareholders to join in the sale of a company in case an exit has not been secured within such timeframe. These are increasingly being exercised through investor majority in cases where there are multiple investors;
   5. Investors should seek downside protection for their investment through a contractual liquidation preference mechanism with the investee company and its shareholders to be able to retrieve at least their investment amount. This right typically covers a wide set of events, known as “liquidity events”, including any change of control event and mergers, not just actual liquidation of the investee company. Any exercise of liquidation preference would have to be done in compliance with the pricing guidelines.

Positive 2026 outlook for India

India’s outlook for 2026 remains positive. Against the backdrop of heightened strategic interest, investors are increasingly adopting a hybrid approach, with a mix of debt and equity elements, instead of a vanilla instrument.

This trend is prominent in sectors such as infrastructure, where there is significant traction marked by both investment volume and policy changes.

Considering the various relevant considerations for inbound investment, it is crucial for investors to seek dedicated advice on structuring their investments in Indian companies to select the most appropriate route and instrument aligning with their investment strategy. This would also enable tailored structuring to suit pricing and exit flexibility considerations.

Disclaimer: Please note that this article is a broad outline of the key considerations relevant for Indian equity investments in unlisted companies and should not be considered as a substitute for formal dedicated advice regarding the most efficient structure from a legal and tax perspective.

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