India

We have so far, in the Corporate Governance series, delved into the governance protections for shareholders and fiduciary duties of directors. In this article, we specifically focus on the protection available to minority shareholders in companies, including a highlight on the number ‘10’ as far as corporate governance is concerned. Majority rule is the cornerstone on which corporate governance is based, since a company is a separate legal entity and it is impractical to require unanimous consent for every decision. This enables efficient decision making by relying on the collective wisdom of majority shareholders to act in the best interests of the company. While the principle of majority rule facilitates effective corporate functioning, it also creates opportunities for abuse. Hence, majority rule is tempered by a system of checks and balances, wherein statutory safeguards and minority rights operate to restrain potential abuse of power and ensure that decisions are taken in the broader interests of the company rather than serving the narrow interests of the controlling shareholders.   This principle is effective practically, only if the majority shareholder group is diverse and represents different interests. On the contrary, if majority shareholding is held by one person or group of people with similar interests, the decisions taken by them, may not necessarily be reflective of the interests of all stakeholders of the company and there may be an inclination to support individual or group interests. This is where minority protection provisions of corporate law come into play, which enable smaller shareholders to raise their voice, have their interests protected and, claim oppression or mismanagement against the majority. Where does majority rule become fair game and where does it cross the line and become oppressive to minority?   When one speaks of majority rule, the numbers that immediately come to mind are (a) 50% (simple majority), that is, where shareholders holding more than 50% voting rights can effectively control the passage of ordinary resolutions, (b) 75% (special majority), that is, where the consent of shareholders holding more than 75% voting rights is required to approve certain critical matters; and (c) 25% (negative control), that is, where shareholders holding more than 25% of voting rights have the ability to block special resolutions, though they don’t have the right to enable the passage of any resolution.   The one number that often gets overlooked in the scheme of things is 10%. This number holds a special place in Indian corporate law, giving 10% shareholders certain critical rights representation rights and rights to take action against the majority.   Representation rights   Minority representation and right to audience are essential for good governance. Shareholders holding not less than 10% of the paid-up share capital of a company are entitled to call for a general meeting of the shareholders. If the board fails to call for a meeting despite such request, such shareholders can, not only call a general meeting themselves but also get reimbursed for the expenses.   Members of a company having not less than 10% of the total voting power (or holding shares on which an aggregate sum of not less than INR 5 lakhs or such higher amount as may be prescribed has been paid-up), have the right to demand that the chairman of a general meeting order for a poll to be taken rather than a resolution being passed by show of hands.   Rights such as the right to call for a general meeting, demand for a poll, enable minority shareholders to ensure that the majority does not block their representation, and in turn, their right to be heard,  when it comes to decision making, irrespective of their ability to enable passage of resolutions.   Management rights   In addition to rights available to shareholders to ensure protection of their legally granted rights, company law, under certain circumstances, allows them the right to correct or highlight wrong doing in the company. Critical for this is the right available to 1000 small shareholders or 10% of the total number of shareholders (whichever is lower), of a listed company to have a director appointed by them. Further, minority shareholders may also seek investigation into the affairs of the company, particularly, where fraud, mismanagement or misconduct is suspected.   Dissenting shareholder rights   While  company law requires the consent of holders of 3/4th of a class of shares to effect any change to the terms of such shares, if a minimum of 10% of the holders of the class of shares whose rights are being varied do not consent to such variation, they have the right to apply to the National Company Law Tribunal to have the variation of rights attached to their shares cancelled.   In a public offering, if the proposal for change in objects or variation in terms of a contract, referred to in the prospectus is dissented by at least 10% of the shareholders who voted in the general meeting, then such dissenting shareholders are entitled to be provided an exit. This provides protection to shareholders in situations where there is a change in the terms on the basis of which a public offer was made and the shareholders who had approved the previous terms would like to exit the company.   Rights in relation to oppression and mismanagement   One of the most powerful rights available to smaller shareholders is the right to raise their voice against oppression and mismanagement. If, not less than 100 members or not less of the 10% of the total number of its members, whichever is less, or any member/ members holding not less than 10% of the issued share capital (which requirement may also be waived by the NCLT), are of the opinion that (i) the affairs of the company are being conducted prejudicially or oppressively towards public interest or the company’s interest or (ii) any material change such cause such prejudicial conduct, then they can approach the NCLT for relief.   It is interesting to note that company law provides for relief not only in case of proven oppression but also for anticipated ones, though this has not really been tested.   The NCLT has the power to provide a wide range of reliefs including, transfer of shares between members, reduction of share capital, termination, setting aside or modification of any agreement, setting aside of any transfer of goods, reconstitution of the board, etc.   Squeeze out right and obligation   Once an acquirer or group of people hold 90% or more of the issued equity share capital of a company, the acquirer has the right to make an offer to buy out the remaining minority shares. The minority shareholders also have a reciprocal right to offer their shares to the majority. The acquisition must take place at a fair price, which is determined by a registered valuer, ensuring that the minority shareholders cannot be squeezed out at a discount. The squeeze-out mechanism reflects the broader philosophy of Indian corporate law: while it enables efficient consolidation of ownership by the majority, it simultaneously protects minority shareholders through fair pricing and procedural safeguards.   Judicial approach   Indian courts have consistently recognized the importance of balancing majority rule with minority protection. Indian courts have even held that the question is not about legality vs illegality, and that even legal actions may amount to oppression to minority shareholders. However, the courts also do not interfere with the governance of a company, unless a legitimate case is made out.   In Needle Industries (India) Ltd. vs. Needle Industries Newey (India) Holding Ltd. (1981 (3) SCC 333), the Hon’ble Supreme Court of India held that that oppression involves conduct that is burdensome, harsh or wrongful. The Court went further to say that even an isolated illegal act may not amount to oppression; however, a series of illegal acts may lead to a conclusion that there is an intent to commit oppression.   In Miheer H. Mafatlal v. Mafatlal Industries Ltd. (1997 (1) SCC 579), the Supreme Court noted that while approving a scheme, the company court has to satisfy itself that members were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to the interest of the minority.   The Supreme Court has also reaffirmed the importance of majority rule, by stating that not every act that prejudices the minority can be classified as oppression. Famously, in the matter of Tata Consultancy Services Ltd. vs. Cyrus Investments Pvt. Ltd. (AIRONLINE 2021 SC 179), the Supreme Court of India while ruling in favour of Tata, held that removal of a director does not automatically constitute oppression unless it is shown that the conduct was prejudicial, oppressive or lacking in probity.   Implication during investment negotiations   When negotiating shareholder agreements and other transaction documents, founders should remain mindful of the statutory rights that arise once an investor or group of shareholders crosses the 10% shareholding threshold under law. Consequently, founders should carefully consider how equity is structured and whether certain governance or information rights are being granted alongside the shareholding. Some of the questions that founders should ask themselves – who is likely to cross 10% individually or whether there are a group of similarly acting shareholders who will cross 10%? What rights are being given to such shareholders? Is there any mechanism by which there is a mediation before statutory remedies are exercised?   Similarly, investors should be mindful of when this threshold is breached for them or the other shareholders, specially if there are any opposing interest groups that may breach the 10% mark.   Clear acceleration channels (before statutory action is taken), well-defined governance frameworks, and dispute resolution mechanisms within the shareholder agreement can help ensure that statutory rights are exercised responsibly and that disagreements are addressed constructively.   Conclusion   The “power of 10” reflects the legislature’s attempt to balance the efficiency of majority rule with safeguards against its potential abuse. As corporate structures grow increasingly complex and concentrated ownership continues to shape Indian companies, the strategic importance of this threshold becomes even more apparent. Recognising and utilising the rights attached to this benchmark is therefore essential to ensuring that corporate democracy in India remains both effective and equitable. In the next chapter in this series, we will explore another powerful right available to minority shareholders in the form of ‘class action suits’.   Authors   Saumya Ramakrishnan and Karan Kalra   Contact: [email protected]; [email protected]   Disclaimer: The article is intended solely for general informational purposes only and does not constitute legal advice. It should not be acted upon without seeking specific professional counsel. No attorney-client relationship is created by reading this article.          

Executive Summary Reinvestment is a tool used by AIFs to reuse the same capital more than once for investment without requiring investors/LPs to actually infuse any capital beyond their commitment amount into the AIF.   Background A recent settlement order passed by the Securities and Exchange Board of India (“SEBI”) with respect to a Category II alternative investment fund (“AIF”) discusses alleged breach of concentration norms by the said AIF on account of reinvested amounts being made a part of “investable funds”[1] to calculate the concentration limit of 25% of investable funds for investment in a single portfolio company prescribed under the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) for a Category II AIF (which is not a large value fund for accredited investors).[2] SEBI, calling this approach as erroneous, stated that for the purpose of determining “investable funds,” the “corpus” must be confined to the total commitments received from investors and preclude any gains or losses generated by the AIF.[3] The concentration limits work differently when it comes to Category III AIFs if they choose to compute their limit on the basis of net asset value of the scheme with respect to investments in listed equity.[4] In that case, gains or losses will be relevant and directly impact the investment limits. In other words, if an AIF, having a corpus of INR 110 Crore and investable funds of INR 100 Crore, invested the entire INR 100 Crore across different companies and was able to generate a return of INR 120 Crore, while it can invest an amount higher than INR 100 Crore in total by reinvesting all proceeds received by it, it still cannot invest more than INR 25 Crore in a single investee entity. This article discusses nuances of reinvestment from a commercial, legal and governance perspective. Purpose of Reinvestment The practice of reinvestment or recycling of capital involves the fund investing the same amount of money more than once after it has come back to the fund from investments into investee entities. The purpose of recycling is to enhance returns from a fixed capital base and maximise value from the entire capital pool. Management fees and fund expenses reduce the corpus available for investment. By recycling capital, managers feel they can offset these expenses, ensuring that the fund is effectively able to deploy the full capital and generate returns on it. Although reinvestments do not guarantee increased returns, they improve the odds of generating higher returns by enabling deployment of capital in excess of the original corpus. Method of Reinvestment The terms governing reinvestments (including caps, timing and nature of income) differ across funds focusing on different asset classes. Investors typically do not curtail the ability of funds whose strategy involves the fund receiving recurring income (such as debt funds and real assets focused funds) to reinvest freely because it forms a core part of their strategy. The fund documents typically govern the manner and extent of such reinvestments, which may be done either by (i) reusing the proceeds for reinvestments received from exits at the fund level, without actually remitting the amounts to the investors and recalling or drawing them down again; or (ii) actually remitting such amounts to them and then recalling or drawing them down again. If (i) is chosen as the modus operandi, a deeming fiction is created which gives it the character of (ii) for all accounting purposes. In either case, a pro-forma drawdown notice should be shared with investors by the manager in case of reinvestments including to allow them to exercise their excuse rights. Key Terms impacted by Reinvestment Some of the key principal terms of the fund that generally get impacted on account of reinvestments and should be carefully considered include drawdowns, return of capital, computation of preferred rate of return, management fees, post-commitment period considerations, tax distributions and distribution waterfall. Risks associated with reinvestments While recycling capital offers great benefits, an aggressive use of this tool in poorly executed investment strategies could adversely impact the investors. A significant risk with reinvestments is that an aggressive recycling of capital may cause liquidity concerns for the investors, more specifically for private assets focused funds where underlying investments are typically illiquid. Investors are also concerned that broad flexibility with reinvestments may lead the manager to repeatedly allocate capital to shorter tenure investments, potentially affecting the availability of capital for investments aligned with the fund’s primary strategy of patient investing (if relevant). In addition, recycling can present operational challenges in tracking and accounting for recycled amounts. Managers should implement robust fund accounting systems, internal policies, and compliance checks to ensure accurate monitoring and reporting. Risk Mitigation Strategies Over time investors have negotiated limits in the fund documents to mitigate the risks associated with reinvestments. These may differ across asset classes and investment strategies. Common industry practices include fund lifecycle related time-limits, limits pertaining to timing of proceeds, type of proceeds, overall cap. Conclusion Recycling of capital is an increasingly indispensable tool in the hands of fund managers. It empowers them to seize attractive investment opportunities as they arise, even after the initial capital has been deployed. This is important in a dynamic market where the best opportunities may not always align with the drawdown schedule or investment strategy determined by a manager in advance.   Authors Sanyukta Srivastav and Nandini Pathak Contact: [email protected] Disclaimer: The article is intended solely for general informational purposes only and does not constitute legal advice. It should not be acted upon without seeking specific professional counsel. No attorney-client relationship is created by reading this article.   [1] The term “investable funds” is defined in the AIF Regulations to mean the corpus of the scheme of the Alternative Investment Fund net of expenditure for administration and management of the fund estimated for the tenure of the fund. Regulation 2(1)(p) of the AIF Regulations. [2] SEBI Settlement Order in respect of Examination of Violation of Concentration Norms by AIF and Investment Manager, accessible here. [3] Ibid. [4] Regulation 15(1)(d) of the AIF Regulations.

Introduction Alternative Investment Funds (“AIFs”) in India are granted a perpetual registration to operate in that capacity by the Securities and Exchange Board of India (“SEBI”).[1] While the term ‘AIF’ is defined to mean the pooling vehicle or the fund itself under the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”)[2], there is a separate enabling provision under the regulations to allow the AIF to launch ‘schemes’[3] subject to filing placement memorandum with SEBI, indicating that multiple funds (or pooling vehicles) may exist within a single AIF registration in the form of schemes.[4] Other provisions under the AIF Regulations indicate that a single fund may also operate under the AIF registration.[5] This article aims to provide a structural understanding of AIFs in India (as pooling vehicles themselves, versus as launching multiple pooling vehicles within its perpetual registration) from the perspective of laws of incorporation or organisation, commercial preferences, costs, efficiency, operational and regulatory ease. At the end, there is a related discussion around recent developments proposing a new corporate structure for AIFs in India. References to a ‘multi-scheme’ structure in this article pertain to an AIF which has chosen to launch multiple funds within a single registration, whereas references to ‘single-scheme’ structure should be understood to mean AIFs which have chosen to launch itself as the single fund under its registration. Legislative Background The concept paper released by SEBI on August 01, 2011, for the introduction of the proposed legal framework for AIFs did not originally envision a single AIF being able to launch multiple schemes. Instead, each AIF was intended to be registered as a single-scheme or fund having one set of investors and a single distinct portfolio.[6] However, this position did not translate into law and the AIF Regulations which came into force in 2012 allowed a single AIF to launch multiple schemes, similar to how mutual funds and venture capital funds (under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations”)) are structured.[7] There is, however, an intelligible differentia between (i) mutual funds and AIFs in law, as the former can only be structured as trusts whereas the latter can also be set up as companies or limited liability partnerships (“LLPs”); and (ii) venture capital funds under the erstwhile VCF Regulations and AIFs in law, as the former had a clear distinction between “scheme if the VCF is a trust” and VCF itself if it is set up as a company, whereas no such distinction exists under the AIF Regulations.[8] A decade later, in 2022, taking note of the growing multi-scheme structures in the industry, SEBI introduced an express provision in the AIF Regulations to require fund managers and trustees to ensure that the assets and liabilities of each scheme of an AIF, and bank account and securities account of each scheme are segregated and ring-fenced from those of all other schemes of the AIF.[9] As of June 2022, there were more than a hundred multi-scheme AIFs having launched at least two schemes, with 6% of them having more than ten schemes.[10] Since 2022, this number is expected to have only increased. Why Trust Structures Have Been the Natural Home for Multi-Scheme AIFs More than 95% of the registered AIFs in the market today are set up as trusts under the Indian Trusts Act, 1882 (“Indian Trusts Act”). A trust is created when the author of the trust (settlor) clearly shows an intention to create a trust, specifies its purpose, identifies one or more beneficiaries and transfers the trust property to the trustee with instructions that such trust property is to be held by the trustee for the benefit of the beneficiaries.[11] Typically, in the context of an AIF set up as a trust (“Trust AIF”) launching a single scheme, a settlor through an indenture of trust appoints a trustee for the trust, settles an initial settlement amount, and instructs the trustee to hold the initial settlement amount, along with any accruals, including investments in portfolio entities (trust property) for the benefit of identified investors (beneficiaries). In the case of a Trust AIF structured to enable the launch of multiple schemes, the settlor enables the trustee to launch multiple schemes under the same indenture and instructs the trustee to hold the portfolio of one scheme only for the benefit of the relevant investors of that scheme. Accordingly, a position can be taken that by structuring the indenture to enable the launch of multiple schemes, each such scheme is its own trust under the Indian Trusts Act. This ability to house multiple schemes under the same indenture is a feature unique to trust structures and is possible due to the light touch framework set out under the Indian Trusts Act. A similar multi-scheme structure housed within a single LLP or company may not be automatically possible through a single instrument of creation or incorporation under the Limited Liability Partnership Act, 2008 (“LLP Act”) or the Companies Act, 2013, respectively. Multi-Scheme v. Single-Scheme AIFs Cost, Time and Regulatory Efficiency There are various factors that influence a fund manager's decision to have a multi-scheme or single-scheme AIF structure. Cost is one important consideration especially for first-time fund managers. For example, a private equity fund proposing to register as a Category II AIF will have to pay a registration fee of INR 10,00,000 just once at the time of registration of the AIF with SEBI and can subsequently launch each new scheme at a lower fee of INR 1,00,000. In a single-scheme structure, each scheme would need to be registered as its own AIF and pay a registration fee of INR 10,00,000 each time. Accordingly, a multi-scheme AIF structure allows the managers to raise successive pools of capital aligned with distinct investment strategies without incurring a full registration fee for each fundraise. Further, launching a new scheme under an existing AIF is typically processed more quickly by SEBI than registering a fresh AIF, enabling faster time-to-market. The compliance burden, including associated costs, is also lower in a multi-scheme structure, as the manager only needs to comply with the requirements applicable to a single AIF, rather than multiple AIFs. In contrast, in a single-scheme structure, each scheme would require a separate AIF registration, along with its own set of AIF-level compliance requirements. The introduction of the co-investment scheme framework by SEBI further strengthens the case for adopting a multi-scheme AIF structure. These schemes are required to be launched for co-investment in a single portfolio company, and participation is restricted to investors of an existing scheme of the AIF. As a result, a multi-scheme structure provides the necessary flexibility to launch such co-investment schemes alongside the main fund strategy under the same AIF, without requiring a separate AIF, thereby making it operationally and commercially more efficient for fund managers. Ring-fencing of Assets and Liabilities At the same time, it is relevant to note that pursuant to the 2022 amendments to the AIF Regulations, ring-fencing and segregation of the assets and liabilities of each scheme of an AIF are now a regulatory requirement. In practice, each scheme typically obtains a separate Permanent Account Number (PAN), resulting in each scheme of the same AIF being treated as a separate assessee for taxation purposes. Accordingly, where the indenture of trust is appropriately structured to ensure that each scheme is constituted and recognised as a separate trust, the assets and liabilities of each scheme should be sufficiently ring-fenced from those of other schemes. This protection may be further strengthened through contractual ring-fencing provisions in the fund documents. Where an AIF is set up as a LLP or a company, the ability to achieve absolute segregation of assets and liabilities at a scheme level is inherently limited under the laws governing incorporation, given that the LLP or company constitutes a single juridical entity. While contractual ring-fencing may still be implemented in such structures, it may not offer the same level of protection as a trust-based structure. This limited ability to fully segregate liabilities is also a key consideration for certain institutional investors, who may prefer (or require) a single-scheme AIF structure to avoid any potential exposure to liabilities arising from other schemes. Accordingly, the choice of legal form of the AIF assumes added significance when evaluating a multi-scheme structure, alongside the commercial and regulatory considerations discussed above. Commercial and Investor Considerations If a manager proposes to offer two inherently distinct investment strategies such as a private equity investment scheme and an infrastructure focused scheme, it may be preferred to launch separate AIFs. Moreover, the AIF Regulations require all schemes of an AIF to have the same sponsor and manager entity. So, where schemes are commercially required to have different sponsors and / or manager entities (assume one additional GP for a slightly different strategy, for example), each fund would need to be launched as a separate single-scheme AIF for operational ease. Certain governance matters, while arising at the scheme level, may have implications at the AIF level across all schemes. For instance, provisions relating to the removal of the manager under the scheme documents may require the consent of investors holding 75% by value of their investment. In a single-scheme AIF, this threshold is readily calculated with reference to all investors in the scheme. However, in a multi-scheme structure, the appropriate basis for computing such a threshold is not clearly defined. In particular, it is unclear whether it would be sufficient for investors in a single scheme to meet the 75% consent threshold to effect the removal of the manager for the entire AIF, or whether such approval must be obtained separately in respect of each scheme, or alternatively, computed with reference to investors across all schemes on an aggregated basis. This potential for dilution of voting rights is a key reason, in addition to lack of precedence upholding the ring-fencing of assets and liabilities across schemes, as to why certain investors (institutions who are regulated entities themselves, in particular) prefer, and make it non-negotiable, to have a single-scheme AIF structure. Alignment with Global Practices Foreign investors, especially global allocators, are familiar with the multi-scheme structure as it aligns with global practices of investment funds being structured as umbrella funds. The Cayman Islands have the Segregated Portfolio Company structure, while Mauritius and Singapore have investment vehicles structured as Variable Capital Companies. Each of these structures allows sub-funds/segregated portfolios to be managed under an umbrella fund with the requirement under the respective statutes to ensure ring fencing between the sub-funds. However, the legal understanding of such structures is quite different in India because there is no corporate legal framework designed to permit a segregated portfolio structure within a single incorporation, except as explained for a trust structure. In the Indian context, conversation around multi-scheme structures for investment funds which would most align it with global best practices, often leads back to the honourable Finance Minister’s budget announcement in 2024 on the proposal to seek legislative approval for an efficient mode of pooling funds of private equity through a variable capital company structure.[12] There have been no formal developments on this yet. Conclusion On March 23, 2026, the Corporate Laws (Amendment) Bill, 2026 was introduced in the Lok Sabha (“Bill”).[13] The Bill proposes amendments to the LLP Act which include changes pursuant to the government’s post‑budget announcements earlier this year aimed at aligning the LLP framework with the functional and operational requirements of AIFs.[14] While the industry has long advocated for these amendments to facilitate the theoretically permitted use of LLPs as AIF vehicles, certain gaps in the Bill have given rise to interpretational uncertainty. In particular, the proposed framework enables the conversion of single-scheme AIFs set up as trusts into LLPs, but does not clearly extend this pathway to multi-scheme AIF trust structures. Further, the Bill does not address whether multiple schemes can, as a matter of law and structure, be housed within a single LLP. The Bill is a significant step toward practically broadening the legal forms available for AIFs in India. However, the position remains unclear for multi-scheme AIFs, which currently derive much of their flexibility from the trust structure and its ability to support scheme-level segregation under a single AIF registration. In its present form, the proposed framework for AIFs to be set up as LLPs does not clearly facilitate a multi-scheme structure meaning that a fund manager opting to set up an AIF as an LLP may need to commit to a single-scheme AIF structure at the outset, a decision that can be deferred in the case of AIFs set up as trusts. Accordingly, while the choice between a single-scheme and multi-scheme model will continue to depend on commercial, governance, liability and investor considerations, the viability of LLPs as a true alternative for multi-scheme AIFs will depend on further legislative changes or clarificatory guidance.   Authors: Sanyukta Srivastav, Radhika Parikh and Nandini Pathak Contact: [email protected]; [email protected] Disclaimer: The article is intended solely for general informational purposes only and does not constitute legal advice. It should not be acted upon without seeking specific professional counsel. No attorney-client relationship is created by reading this article.   [1] Regulation 3(7), SEBI (Alternative Investment Funds) Regulations, 2012 can be accessed here. [2] Regulation 2(1)(b), SEBI (Alternative Investment Funds) Regulations, 2012 can be accessed here. [3] Regulation 12, SEBI (Alternative Investment Funds) Regulations, 2012 can be accessed here. [4] Proviso to Regulation 12(2) of the AIF Regulations even indicates that no filing fee is applicable for launch of the first scheme of the AIF. [5] Regulation 13 of the AIF Regulations refers to tenure of the ‘fund’ or the ‘scheme’. [6] Concept Paper on proposed Alternative Investment Funds Regulation for Public Comments, PR No. 121/2011, can be accessed here. [7] Regulation 12(1), SEBI (Alternative Investment Funds) Regulations, 2012 can be accessed here. [8] Regulation 11(2), SEBI (Venture Capital Funds) Regulations, 1996 can be accessed here. [9] Securities and Exchange Board of India (Alternative Investment Funds) (Fourth Amendment) Regulations, 2022, can be accessed here. [10] Minutes of SEBI Board Meeting dated September 30, 2022, can be accessed here. [11] Section 6, Indian Trusts Act, 1882, can be accessed here. [12] Budget Speech of Nirmala Sitharaman for Budget 2024-25, can be accessed here. [13] The Corporate Laws (Amendment) Bill, 2026, can be accessed here. [14] FinMin carefully watching rupee movement, says Economic Affairs Secretary - The Economic Times

Historical Relationship and Economic Collaboration India and Japan share one of Asia's most enduring and philosophically grounded bilateral partnerships. Rooted in Buddhist cultural ties and a shared commitment to democracy, the rule of law, and an open international order, the relationship has evolved from a development-assistance dynamic into a full-spectrum "Special Strategic and Global Partnership"- a designation formalised in 2014 during Prime Minister Modi's landmark visit to Tokyo.[1] The "Japan and India Vision 2025", which was a roadmap for deep, broad-based collaboration across sectors[2] has been supplemented by the ambitious "Japan-India Joint Vision for the Next Decade", which encompasses increasing cooperation and collaboration in security, defence, clean energy, technology, space, and a landmark human resource exchange programme.[3] In 2025, the two sides set a new target of Japanese Yen (“JPY” or “Yen”) 10 trillion of private investment from Japan into India over the next decade, surpassing the earlier JPY 5 trillion target of 2022.[4] This expansion signals an extraordinary vote of confidence and creates an immediate commercial pipeline for legal, financial, and advisory work. Latest policy developments further underscore the commitment of both countries to deepen investment linkages. Japan has proposed the establishment of a dedicated investment facilitation cell in India, aimed at supporting Japanese companies in navigating regulatory processes, addressing operational challenges and accelerating market entry.[5] Further, the India-Japan Comprehensive Economic Partnership Agreement, in force since August 2011, governs goods, services, investment, intellectual property, and movement of persons, as well as provides for tariff elimination.[6] Collectively, these changes are indicative of an emerging investment corridor, one that is not just backed by capital investment, but institutionalized, legal frameworks that are meant to turn will into a long-term, scalable commercial activity. Infrastructure Financing and ODA Japan remains India's largest bilateral donor, having extended loans and grants since 1958. As of the latest available data, accumulated commitments exceed JPY 6.978 billion, with 84 ongoing projects across power, transportation, environment, and basic human-needs infrastructure.[7] In March 2025, the two governments signed six loan agreements worth JPY 191.736 billion, continuing a tradition of developmental financing that dates back over six decades.[8] The flagship infrastructure initiative remains the Mumbai-Ahmedabad High-Speed Rail Corridor - India's first bullet train project, largely funded through a Japan International Cooperation Agency (“JICA”) loan. Beyond the bullet train, Japan has financed over 750 kilometres of road infrastructure in India's northeast[9], extended Official Development Assistance (“ODA”) loans for Delhi Metro Phase IV, and is pursuing smart islands and port digitalisation projects in the Andaman & Nicobar and Lakshadweep islands.[10] Infrastructure projects financed through JICA and Japan Bank for International Cooperation (“JBIC”) carry specific procurement and contractual standards, including requirements around competitive bidding, environmental and social safeguard frameworks, and dispute resolution mechanisms often aligned with Japanese government procurement norms. Cross-border financing structures require careful navigation of India's exchange control laws and External Commercial Borrowing (“ECB”) regulations, and sector-specific regulatory approvals. As projects progress to construction and operations phases, legal practitioners in project finance, engineering, procurement, and construction contracting, land acquisition, and arbitration will find growing opportunities. Long-Term Joint Ventures Japanese corporate presence in India has become substantial and structurally diversified. As of October 2024, 1,434 Japanese companies operate in India through 5,205 business establishments.[11] Long-term JVs have been the dominant structural model. The Government of India has facilitated these arrangements through the "Japan Plus Desk" mechanism under the Department for Promotion of Industry and Internal Trade of India (“DPIIT”), a dedicated team with representatives from the Indian government and Japan's Ministry of Economy, Trade and Industry (“METI”) tasked with investment facilitation, regulatory liaison, and promotion of Japanese Foreign Direct Investment (“FDI”).[12] The India–Japan Industrial Competitiveness Partnership (“IJICP”), anchored in a 2021 Memorandum of Cooperation (“MoC”) between DPIIT and METI, provides the institutional framework for identifying and removing structural barriers to joint manufacturing competitiveness.[13]  In terms of the legal landscape, long-term JV structures generate work across the lifecycle: shareholder agreements, technology licence and transfer agreements, operational frameworks, IP ownership and confidentiality, and eventual exit or restructuring. Japanese FDI in India Japan is India's fifth-largest FDI source nation, with cumulative equity inflows of approximately United States Dollar (“USD”) 43.28 billion between April 2000 and December 2024 (representing approximately 6% of total cumulative FDI into India).[14] The JBIC's 2024 survey ranked India as the top promising country over the medium term (next 3 years).[15] Japanese annual direct investment in India's transportation sector alone increased more than sevenfold between 2021 and 2024, reaching nearly USD 1.91 billion, while simultaneously declining in China's transport sector.[16] Indian Investments in Japan As of 2022, the number of Indian companies working in Japan is increasing, with the number of such companies crossing 100, and India’s net foreign direct investment in Japan standing at 1.798 million.[17] The corporate footprint of Indian firms in Japan includes some major firms like Tata Consultancy Services, Canara Bank, ShimBi Labs, Tech Mahindra and Cyient.[18] Human Resource Exchange People-to-people movement has long underpinned the bilateral commercial relationship. Japan's JICA has sent 11,835 Japanese experts to India and trained 8,400 Indian professionals in Japan.[19] As of December 2024, approximately 53,974 Indian nationals reside in Japan, a community whose commercial importance in IT, engineering, and caregiving is growing rapidly.[20] The transformative moment came in August 2025 with the Action Plan for India-Japan Human Resource Exchange and Cooperation, announced at the 2025 Annual Summit.[21] The plan sets an aspirational target of facilitating the two-way movement of more than 500,000 personnel within five years. Japan and India also have a social security agreement, which eliminates double social security contributions for Indian workers in Japan, provided that the Indian worker is covered under the social security system of India and continues to pay his/her contribution during the period of overseas contract.[22] It will also enable them to repatriate or transfer their accrued social security benefits upon relocation to India or another jurisdiction.   Latest Economic Trends Japan’s changing monetary policy For decades, Japan’s monetary policy served as a primary engine for global "carry trades," where investors borrowed Yen at negligible interest rates to invest in higher-yielding assets abroad. However, as of early 2026, the Bank of Japan has decisively moved toward raising interest rates to combat domestic inflation. For Indian entities, this shift signals a potential rise in the cost of capital. As the Yen strengthens, Indian investments into Japan become more expensive and Indian companies with Yen-denominated ECBs may face increased repayment burdens. However, the rising Yen and falling rupee can accelerate long-term FDI in India, which will support Japan’s goals to invest 10 trillion Yen into India over the next decade.[23] Supply Chain Diversification: The "China +1" Strategy The "China +1" strategy has evolved from a defensive trend into a strategic mandate for Japan and India. Japan is actively de-risking its manufacturing base by establishing supply channels with friendly countries and decreasing reliance on China. India is emerging as an important "Plus One" destination, specifically in semiconductors, pharmaceuticals, and critical minerals sectors. This transition is codified through G2G frameworks like the India-Japan Digital Partnership 2.0, which facilitates "friend-shoring" of moving critical production to politically aligned partners to avoid the logistical vulnerabilities of over-reliance on a single country. Implications of the West Asia Conflict As the West Asia conflict intensifies, countries all over the world face supply chain crunches and economic uncertainties, India and Japan are focused on enhancing collaboration in key sectors such as critical minerals, semiconductors and AI, with a central theme of de-risking their economies from supply chain reliance and geopolitical shock.[24] Sectoral Analysis It is in this context of growing economic convergence and changing world priorities that the India-Japan relationship is now being characterised by industry-specific cooperation. The relationship is no longer pegged on any single pillar like infrastructure or automobiles, but rather is playing out in a series of strategic areas that integrate capital, technology, policy support and long-term demand. At this stage, it is important to take a closer look at the major sectoral focus areas so as to know where the next stage of India-Japan interaction is going to culminate. Automobiles and manufacturing The most established and commercially entrenched pillar of the India-Japan economic relationship is the automobile and manufacturing industry. The total FDI equity inflow of Japan into India was USD 43.36 billion between January 2000 and December 2024, and the automobile industry was the largest recipient of Japanese FDI in India, 16.87% of the total.[25] What distinguishes Japanese investment in this sector is not just scale, but structure. Japanese participation in India has historically been long-horizon, manufacturing-led and vendor-network driven. That model persists to date; however, it is changing. The Embassy of Japan in India and Japan External Trade Organization indicated that as of October 2024, there are 1,434 Japanese companies and 5,205 business establishments in India, and over half of all Japanese companies and more than one-third of their operational bases are in the manufacturing sector.[26] This implies that the automotive relationship is part of a broader Japanese industrial presence, which encompasses components, machinery, and electrical equipment. The industry can thus not be viewed as a sole Original Equipment Manufacturer (“OEM”) narrative but as a whole manufacturing ecosystem with a huge bearing on supply contracts, localisation, industrial land, technology transfer and vendor compliance. The institutional structure of this ecosystem has been getting more organised in recent years on a bilateral basis. The formal mechanism is the IJICP, based on the MoC between the DPIIT and the METI.[27] The partnership is aimed at improving the industrial competitiveness of India and increasing the industrial and R&D collaboration between India and Japan. The current regulatory environment remains highly favourable to Japanese automotive and manufacturing investors. India’s FDI policy permits 100% foreign investment under the automatic route in manufacturing, and manufacturers are permitted to sell products manufactured in India through wholesale and/or retail, including e-commerce, without prior government approval.[28] This has been one of the central legal enablers for Japanese investment because it allows integrated manufacturing structures spanning production, distribution and exports. India’s policy is now explicitly geared toward moving the India-Japan automotive partnership beyond conventional assembly into electric mobility, batteries and advanced components. The centrepiece is the Production Linked Incentive (“PLI”) Scheme for Automobile and Auto Components, with an outlay of INR 25,938 crore.[29] The scheme is designed to promote domestic manufacturing of advanced automotive technology products, including electric and hydrogen-based mobility technologies and high-value auto components. For Japanese investors, this is highly material: Japanese OEMs and suppliers are well-placed in exactly the technologies- precision components, EV systems, power electronics, fuel-efficiency technologies and high-quality manufacturing processes that the scheme is designed to incentivise. The policy picture is reinforced by adjacent schemes relevant to the EV manufacturing chain, like the PLI Scheme for Advanced Chemistry Cell Battery Storage[30] and PM E-DRIVE Scheme.[31] Recent developments suggest that Japanese manufacturers continue to see India not only as a demand market, but increasingly as a production and export base. Suzuki’s latest announcement in March 2026 is a useful example: Maruti Suzuki approved an investment of INR 101.9 billion for the first phase of a new Gujarat plant with an annual capacity of 2,50,000 units.[32] Bilateral policy is also moving into mobility-tech cooperation: the 2025 India–Japan Economic Security Cooperation fact sheet records joint Vehicle-to-Everything demonstration experiments, annual technical workshops, and collaboration on intelligent transportation systems.[33] This indicates that the manufacturing relationship is beginning to merge with software, connectivity and smart-mobility regulation. From a legal and business-development perspective, that is the real takeaway. The India–Japan automotive and manufacturing corridor is no longer confined to legacy OEM investment. It now sits at the intersection of industrial policy, localisation, EV and battery incentives, cross-border technology transfers, smart-mobility systems and supply-chain restructuring. Critical Minerals The critical minerals sector is emerging as one of the most strategically important, though still relatively early-stage, pillars of the India–Japan economic relationship. Unlike automobiles and manufacturing, where Japanese investment is already deep and measurable, the critical minerals partnership is presently being shaped more by strategic policy alignment and supply-chain security concerns. As per data, the metallurgical industries account for 6.49% of cumulative Japanese FDI into India from January 2000 to December 2024.[34] That figure is relevant, but it does not fully capture the scale or trajectory of the critical minerals partnership now under formation. The strategic logic of cooperation is clear. Both India and Japan are seeking to reduce excessive dependence on concentrated overseas supply chains, particularly Chinese processing capacity for minerals that are essential to batteries, electric vehicles, semiconductors, clean energy equipment and defence manufacturing.[35] In this context, India and Japan are not merely pursuing a mining relationship; they are attempting to build a broader framework for ensuring resilient supply chains which are immune from Chinese dependencies. In August 2025, India’s Ministry of Mines and Japan’s METI signed a MoC on Mineral Resources.[36] This is the most important recent bilateral instrument in the sector. The memorandum covers cooperation in exploration, mining, extraction, processing, recycling, stockpiling and supply-chain resilience, and expressly contemplates joint investments in India as well as other resource-rich countries. It also provides for the establishment of a joint working group, indicating an intention to move towards a more institutionalised partnership. The most prominent example of India-Japan economic partnership in the critical minerals sector is the collaboration between Indian Rare Earths Limited and Toyota Tsusho, which led to the establishment of Toyotsu Rare Earths India in Andhra Pradesh, which has become a crucial supply chain node for critical minerals.[37] With the introduction of various schemes and measures, the emphasis of India-Japan partnership is slowly shifting from the export of raw or semi-processed mineral material toward the creation of a domestic “mines-to-magnets” ecosystem. The regulatory environment has evolved significantly to support this transition. India’s FDI policy permits 100% foreign investment under the automatic route for mining and exploration of metal and non-metal ores, subject to sectoral laws.[38] At the same time, certain strategically sensitive minerals remain subject to tighter conditions, including cases where government approval, domestic value addition or technology transfer requirements may apply. A particularly important enabling reform came through the Mines and Minerals (Development and Regulation) Amendment Act, 2023, which removed several minerals from the list of “atomic minerals”, thereby opening them to private participation and auction-based allocation.[39] That reform substantially widened the pathway for foreign strategic investors, including Japanese participants, to enter upstream resource projects in India. Government policy in this sector is being driven by the National Critical Mineral Mission (“NCMM”), approved in 2025 with an outlay of approximately INR 34,300 crore.[40] The mission is designed to support the full critical minerals value chain, including exploration, mining, beneficiation, processing, recycling, stockpiling and overseas asset acquisition. The NCMM is intended to streamline approvals, support value addition, and reduce strategic vulnerability in key minerals. The critical minerals sector, therefore, represents a different stage of India–Japan economic cooperation from automobiles. It is less mature in terms of visible FDI, but more strategic in policy significance. Nuclear energy India has recently opened its nuclear energy sector to the private sector. The target is to increase India’s nuclear energy capacity tenfold to 100 gigawatts by 2047[41], which requires an estimated investment of USD 226 billion.[42] The government has passed a bill to overhaul the regulatory landscape for nuclear energy in India, allowing private companies to: (i) build, own, and operate nuclear plant or reactor; and (ii) fabricate, transport, trade, and store nuclear fuel. India’s foreign investment policy continues to prohibit FDI in atomic energy. However, the government has clarified that there is no restriction on FDI in the nuclear industry for the manufacturing of equipment and providing other supplies for nuclear power plants and related facilities.[43] Japan, a global leader in nuclear technology, is well placed to bolster India's atomic energy sector. The potential for increasing collaboration and investment in the nuclear energy sector was highlighted by Prime Minister Narendra Modi in the India-Japan Economic Forum 2025.[44] Further, the India-Japan Agreement for Cooperation in the Peaceful Uses of Nuclear Energy, which came into force in 2017, provides a legal framework for Japan to export nuclear technology, equipment, and materials to India, therefore facilitating deeper strategic and commercial engagement in this sector. India’s growing emphasis on the development of nuclear energy, together with cooperation agreements between India and Japan, positions the sector as a viable avenue for India-Japan collaboration. Pharmaceuticals The Pharmaceutical sector is a key growth sector for India and Japan. While India is one of the leading countries in mass manufacturing of drugs (3rd largest producer of pharmaceuticals by volume and 13th largest producer of pharmaceuticals by value[45]), Japan is a global hub for research and innovation in pharmaceuticals. This sector draws 4% of India’s total FDI.[46] FDI in the pharmaceutical industry (including for the manufacturing of medical devices) is permitted up to 100% through the automatic route. For investment in brownfield projects, up to 74% is allowed through automatic route, after which government approval is required. Investment link conditions for this sector include: (i) prohibition of non-compete clause against promoters and existing shareholders; (ii) for brownfield investments, maintenance of the same production level of essential medicines and research and development expenses. The Indian government has introduced PLI schemes in the pharmaceutical sector, which are aimed at promoting domestic manufacturing of critical bulk drugs such as Active Pharmaceutical Ingredients (“APIs”), Key Starting Materials (“KSMs”), and drug intermediates, particularly those where India has high import dependence (notably on China). The scheme also supports the production of high-value products, including complex generics, biopharmaceuticals, and patented drugs, through financial incentives tied to incremental sales. By targeting these segments, the Indian government is trying to reduce supply chain vulnerabilities and enhance technological capabilities in essential medicines. These schemes align seamlessly with Japan and India’s China +1 strategy, with its focus on decreasing reliance on China for critical inputs like APIs and KSMs. India’s robust generic drug production, cost advantages, and government-backed incentives position it as an ideal “Plus One” destination for Japanese firms. Semiconductors India is aggressively positioning itself as a global semiconductor hub. The domestic semiconductor market, valued at approximately USD 52 billion in 2025, is projected to cross USD 100-110 billion by 2030.[47] To catalyse this, the Government of India launched the India Semiconductor Mission (“ISM”), which was expanded in the 2026 Budget as ISM 2.0 with an outlay of INR 10 billion.[48] This new phase pivots toward a comprehensive ecosystem approach, focusing on indigenous intellectual property (“IP”), semiconductor equipment, and speciality chemicals. India’s FDI policy for this sector allows 100% investment through the automatic route. Under the ISM, the central government provides fiscal support of up to 50% of the project cost on a pari-passu basis for setting up semiconductor and display fabs.[49] Complementing central schemes, several Indian states such as Gujarat, Uttar Pradesh and Odisha have introduced dedicated semiconductor policies to provide top-up capital incentives. These schemes inter alia offer additional state subsidies, capital assistance and power supply guarantee. Japan is a vital partner in this journey. In July 2023, India and Japan signed an MoC on the Semiconductor Supply Chain Partnership, focusing on design and manufacturing. This synergy was further emphasized in the India-Japan Digital Partnership 2.0 (2025), facilitating joint ventures like the Renesas-CG Power OSAT facility.[50] With access to India’s massive electronics market and state-backed fiscal subsidies, Japanese companies are well-positioned to lead the next wave of global semiconductor manufacturing from India. Global Capability Centres As of December 2025, the government reported that India has over 1700 Global Capability Centres (“GCCs”) and the sector is projected to grow to 2,400 GCCs and attract USD 105 billion investment by 2030.[51] These offshore units help multination companies in harnessing India’s skilled workforce and deploying it in key interest areas such as information technology, research and development, customer support, and other business operations. For GCCs involved in sectors such as IT/ITeS, research and development and outsourcing activities, 100% foreign investment is allowed through the automatic route. Key central and state-level policies promote GCCs include: (i) the Software Technology Parks of India scheme which offers single-window clearances and various tax incentives; (ii) Karnataka’s GCC Policy 2024-2029 which provides land subsidies, power rebates, and innovation grants up to INR 5 million; and (iii) Gujarat’s GCC Policy 2025 which targets IFSC units with zero stamp duty and 100% electricity duty exemption for 10 years, various tax exemptions and seamless forex operations. In the 2026 Budget, Finance Minister Nirmala Sitharaman proposed a national GCC framework to promote hubs in tier-2 cities[52] which may entail enhanced tax incentives. The government has implemented new labour codes designed to streamline regulatory compliance by removing duplicative requirements relating to registrations, returns, and maintenance of registers, which is expected to enhance the ease of doing business for GCCs. Japanese entities can significantly cut costs through access to 28% of the global STEM workforce and 23% of global software engineering talent[53] at competitive salaries while maintaining proximity (1.5-hour time gap). Artificial Intelligence The AI segment of the India–Japan relationship is comparatively recent, and unlike manufacturing or infrastructure, it is not yet reflected in clearly disaggregated FDI data. Instead, AI-linked investments are captured within broader sectors such as computer software and hardware, services, telecom and digital infrastructure- areas in which Japan already has a visible presence in India’s FDI inflows.[54] The absence of clean data is not indicative of weak engagement; rather, it reflects the fact that AI is still emerging as a cross-sectoral layer over existing industries. The India-Japan AI relationship is being driven by complementarity between India’s digital talent and Japan’s industrial and enterprise technology base, combined with a shared interest in developing trusted and secure digital ecosystems. The institutional foundation for this cooperation is the India-Japan Digital Partnership 2.0, formalised through a MoC in August 2025.[55] India and Japan have committed to developing safe, secure, and trustworthy AI systems that are human-centric and aligned with sustainable development goals. They will further intensify cooperation on the international level, including the Hiroshima AI Process, the UN, and AI Safety Summits, and enhance bilateral cooperation. The MoC is also concerned with the development of collaborative mechanisms of AI safety and security, such as constant monitoring, resilient protocols, and interoperable standards throughout the AI lifecycle. The India-Japan AI Cooperation Initiative offers a more dedicated platform to collaborate in the field of large language models, joint research and academic-industry collaboration.[56] The significance of such developments is that AI is no longer an implicit part of IT cooperation but a bilateral priority with a formal engagement mechanism. The Indian regulatory framework on AI is in the process of development, yet some of the foundational aspects have already been put in place. One of these projects is the India AI Mission, March 2024, with a budgetary allocation of INR 10,371.92 crore.[57] The mission seeks to establish a full AI ecosystem with public compute infrastructure, indigenous foundational models support, startup funding, datasets, and skilling and governance frameworks for safe and trusted AI. Simultaneously, AI operations in India are becoming more influenced by the larger digital regulatory system. Penetration into the AI industry in India is not so much about gaining production-related incentives as it is about positioning within the digital infrastructure, enterprise adoption, research partnership and platform development. A unique aspect of the India-Japan AI relationship is the contribution of Indian IT and digital services companies based in Japan. Indian companies, including TCS, Infosys and HCL, have established a long-standing presence in Japan, which has helped them to transform themselves with the advent of digital engineering and IT modernisation.[58] Concurrently, bilateral policy actions, like the 2025 human resource exchange scheme, are anticipated to increase the influx of Indian digital talent into Japan, which strengthens AI collaboration by people, rather than capital. Recent developments suggest that the AI partnership is moving from policy articulation to operationalisation. Formalisation of Digital Partnership 2.0, introduction of the AI Cooperation Initiative and the growth of data-centre and digital infrastructure investments all point to the idea that AI is becoming a fundamental component of India-Japan economic activity, not an adjunct layer of technology.[59] It is pertinent to note that India is still developing regulatory frameworks, and companies venturing into this area will have to negotiate a blend of data protection law, sector-specific regulations, and cross-border safety parameters. Defence The India-Japan defence relationship has developed to a more operational strategic alliance, which is a huge shift from usual diplomatic arrangements. What previously existed as dialogues and joint exercises is now extending into technology transfer, co-development and defence industrial cooperation, indicating a deeper convergence of security interests in the Indo-Pacific. Security engagement was established by the Joint Declaration on Security Cooperation (2008)[60], and since then, two key agreements were brought into effect in 2015: the Agreement Concerning the Transfer of Defence Equipment and Technology[61] and the Agreement on Security Measures for the Protection of Classified Military Information. These tools developed the legal foundation of technology transfer, co-development and safe information exchange. In 2021, this structure was reinforced by the Acquisition and Cross- Servicing Agreement, which allows both the Indian Armed Forces and the Japan Self-Defence Forces to provide logistical support to each other.[62] Recent ministerial engagements have reinforced this trajectory. The India-Japan 2+2 Foreign and Defence Ministerial Dialogue (August 2024) acknowledged progress in joint research programmes, including collaboration on unmanned ground vehicles, and signalled a willingness to expand defence-industrial cooperation.[63] The most significant recent development is the move from dialogue to actual co-development and co-production of defence technology. This is exemplified by the Memorandum of Implementation signed in November 2024 for the co-development and co-production of the UNICORN (Unified Complex Radio Antenna) mast system for Indian naval platforms.[64] The agreement marks Japan’s first transfer of advanced defence equipment to India under the 2015 framework and represents a substantive shift from a buyer–seller relationship to a collaborative production model. The structure of the UNICORN arrangement is instructive from a legal and commercial standpoint. Japan provides design, engineering and core technology inputs, while India, through entities such as Bharat Electronics Limited, is responsible for integration and domestic manufacturing.[65] This reflects the alignment between Japanese technology capability and India’s “Make in India” defence manufacturing policy, which prioritises domestic value addition and local production. Beyond specific projects, the regulatory and policy environment in India has evolved to support this model. The domestic industry has a chance to boost production in the sector with FDI in defence manufacturing being allowed up to 100% (up to 74% under the Automatic route and above 74% under the Government route).[66] The Defence Acquisition Procedure 2020 lays down categories of procurement that favour domestic manufacturing and an incrementally higher percentage of indigenous content. Complementing this, initiatives such as iDEX (Innovations for Defence Excellence) are designed to integrate startups and technology providers into the defence ecosystem, creating potential entry points for collaboration with foreign technology partners.[67] In both commercial and legal aspects, the defence sector stands out from other fields of India-Japan economic activity. Transactions and activities are mostly government-driven, highly regulated, technology sensitive, and they need to be carefully negotiated in terms of industrial licensing, export controls, classified information procedures, technology-transfer controls, procurement eligibility and localisation demands. The move towards co-development and co-production also brings about additional complications in terms of ownership of intellectual property, allocation of liability, governance of a joint venture and long-term supply arrangements.   Foreign Investment Framework in India: Key Legal Considerations for Japanese Investors As India-Japan economic engagement deepens across manufacturing, technology and strategic sectors, a clear understanding of India’s foreign investment regime becomes critical for structuring inbound investments. India’s FDI framework is largely liberalised, but remains rule-based and compliance-driven, requiring careful navigation of sectoral conditions, pricing norms and downstream investment restrictions. India permits foreign investment under two primary routes: Automatic Route - where no prior government approval is required; Government Route - where approval must be obtained from the relevant ministry or department. A significant majority of sectors, including manufacturing, services, infrastructure and technology, are open under the automatic route, making India one of the more accessible jurisdictions for foreign capital. This route now accounts for over 90% of total FDI inflows and covers the vast majority of sectors.[68] Several key sectors of interest to Japanese investors, including automobiles, auto-components, manufacturing and renewable energy, permit up to 100% foreign direct investment under the automatic route, subject to other applicable sectoral conditions.[69] However, certain sectors remain restricted or partially regulated, including defence, insurance, telecom, multi-brand retail and media, where caps and/or approval requirements apply. For Japanese investors, this distinction is important not only at the entry stage, but also for subsequent investments, restructuring and downstream investments, where sectoral caps and approval triggers must be continuously monitored. Legal Framework for Foreign Investors For Japanese companies and investors, India presents a well-structured, though layered foreign direct investment regime. The framework has been progressively liberalised over the past decade, and understanding its architecture is a prerequisite for any commercial engagement. Japan’s recent proposal to establish a dedicated investment facilitation cell in India is further expected to assist Japanese companies in navigating India’s regulatory landscape with greater ease and efficiency. This is part of a larger shift in the bilateral relationship which is now moving from investment promotion to active facilitation and institutional support, especially as Japanese investments become more sector diversified. The legal edifice rests on two interconnected instruments. The primary statute is the Foreign Exchange Management Act, 1999 ("FEMA"), which governs all cross-border capital transactions. Beneath it, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules"), notified by the Ministry of Finance, set out the permitted instruments, sectoral caps, pricing guidelines, and reporting obligations applicable to foreign investment. Alongside these, the RBI’s foreign investment directions and India’s FDI Policy lay out sector-by-sector eligibility, caps, and conditions.[70] Investment Options- Choosing the Right Structure The foreign investment policy in India allows non-resident entities to invest in India, subject to certain sector-specific restrictions and conditions. Investments can be made in Indian companies formed under the Companies Act, 2013, and Limited Liability Partnerships (LLPs) formed under the Limited Liability Partnership Act, 2008.[71] Although LLPs can also be used as an investment vehicle, their application is limited because FDI in LLPs is permitted only in sectors where 100% FDI is allowed under the automatic route, and there are no FDI-linked performance conditions.[72] The same condition also governs downstream investment by LLPs with foreign investment and company–LLP conversions.[73] Where a foreign investor establishes an Indian holding company or a joint venture that then invests in a second-level Indian operating entity, that second-level investment is classified as "downstream investment" under Rule 23 of the NDI Rules.[74] The guiding principle, recently reaffirmed by RBI's updated Master Direction, is unambiguous: what cannot be done directly shall not be done indirectly. Downstream investments by foreign-owned or controlled companies must comply with the same entry routes, sectoral caps, pricing guidelines, and reporting obligations as direct FDI.[75] In cases where the intended presence is more limited in scope, foreign entities may also establish branch offices, liaison offices or project offices under the foreign exchange framework. However, there are restrictions on their operations (liaison offices can only perform representational functions; branch offices can undertake approved commercial activities; and project offices can only undertake a specific project and generally cease to exist on completion of the project). Pricing Guidelines Indian exchange control laws require pricing guidelines to be followed while making inbound and outbound investments: for inbound investments, the price of equity instruments must not be less than the fair market value (FMV) as determined by a chartered accountant, cost accountant, or a registered merchant banker using any internationally accepted pricing methodology. Conversely, for outbound investments, the transaction must be conducted at an arm’s length price, per any internationally accepted pricing methodology. Round Tripping Round-tripping is generally prohibited in India as it may be sued for money laundering or tax evasion. Indian exchange control laws prohibit an Indian resident entity from investing in an overseas entity that directly or indirectly invests in India or has invested in India at the time of making such investment, which will result in a structure having more than two layers. Future Pathways The India-Japan relationship is shifting towards becoming a structurally compatible economic corridor, which is being shaped by the convergence of policies as much as commercial opportunity. What is different today is not the size of capital or sectoral dispersion, but the level of integration within manufacturing, technology, supply chains and talent. To India, Japanese involvement translates into long-term capital, technology and execution discipline; to Japan, India provides market size, a strong and low-cost labour pool and a plausible diversification platform in a global economy that is becoming fragmented. Meanwhile, the growing human resource exchange system, facilitated by the social security agreement, provides a parallel dimension of integration to connect capital flows with the permanent mobility of talent and skills between the two economies. The India-Japan alliance will not be characterised by the speed of deals in real time, but rather the stability and complexity of the ecosystem that it is focused on developing in the upcoming decades. Authors : Sucharita Basu (Founding and Managing Partner), Parag Bhide (Partner), Shreya Tiwari (Associate) and Mitali Kshatriya (Associate). 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