Whalesbook
A recent drop in active foreign companies in India might seem concerning, but experts suggest it reflects a strategic shift rather than an exit. Foreign firms are adapting their approach, favoring subsidiaries over branches and actively managing capital flows, including increased repatriation and outward investment by Indian companies.
Structural Shifts
Experts note a growing preference among foreign investors for setting up direct subsidiaries in India. This move is driven by the desire for better business control and more favorable tax structures. This means that while more foreign companies might be registering, the number of 'active' entities, especially those operating through branches or liaison offices, can fall. At the same time, existing foreign companies are often streamlining their Indian operations. They may close smaller liaison or project offices while expanding their main subsidiary structures or joint ventures. This combination of new companies favoring subsidiary models and existing ones tidying up operations explains why registrations can rise while active company numbers fall. This shift in how companies structure their foreign operations is common as they mature their engagement models.
Changing Capital Flows
Foreign direct investment (FDI) figures for the first ten months of fiscal year 2026 show a complex trend. Net FDI dropped by 24% year-on-year to $1.6 billion, even though gross inflows increased by 15%. This difference is mainly because foreign firms are speeding up capital outflows by selling assets and other methods, and Indian companies are significantly increasing their outbound investment. The latter trend shows Indian capital looking for global opportunities, which directly affects the net FDI balance. This is different from past periods when domestic capital was mostly reinvested in India. Net FDI had already hit a record low for the full fiscal year 2025, highlighting a broader change in capital movement.
Sectoral Shifts in Investment
New foreign company registrations in the first three quarters of FY26 show a clear move away from manufacturing. Out of 52 new companies with available sector data, only five entered manufacturing, which has historically been a major job creator. Instead, the services sector is the main draw for new foreign companies. Community, social, and personal services attracted the largest share with 32 new companies. Insurance followed with seven, and business services with two. Sectors like finance, transport, electricity, and water saw very little new foreign corporate activity, with just one new company each. This shift suggests foreign investment is increasingly targeting areas believed to offer higher growth potential or more favorable rules, which could impact overall job creation differently compared to manufacturing-focused FDI.
Top Investment Destinations
Foreign company registrations continue to concentrate in India's more developed states. Maharashtra led in the first two quarters of FY26, accounting for 21% and 32% of new registrations, respectively. Gujarat was the leader in the third quarter, capturing 25% of new registrations. Other key destinations for foreign investment include Delhi, Karnataka, and Tamil Nadu, reflecting established infrastructure and business environments that attract foreign capital.
Potential Risks and Considerations
While the preference for subsidiaries and capital repatriation signals adaptation, it also introduces potential vulnerabilities. Shifting away from manufacturing, a sector vital for widespread job creation and industrial output, could lead to less varied economic growth. Relying on service-sector FDI might expose the economy to different risks tied to economic cycles and global demand. Furthermore, the surge in outbound investment by Indian companies suggests domestic capital is finding more attractive opportunities abroad, potentially limiting reinvestment in local growth initiatives. This outflow, combined with increased repatriation, reduces the net capital available for domestic expansion. The government's recent easing of FDI rules for neighboring countries, intended to boost investment, also adds complexity regarding competitive dynamics and geopolitical factors, especially if it leads to increased competition from firms with different cost structures. Past allegations of regulatory non-compliance by some foreign entities in India, though not directly tied to this current trend, highlight the ongoing need for strong oversight.
Future Investment Outlook
Looking ahead, Akshat Pande anticipates increased activity in sectors like renewable energy, technology, infrastructure, pharmaceuticals, and biotechnology. Interest is expected to grow in areas benefiting from production-linked incentive (PLI) schemes, including electronics and auto-components. The government's efforts to ease FDI rules, combined with the dynamism in these growth sectors, suggest that while the form of foreign investment is changing, India remains a strategic target for global capital seeking future opportunities.