Foreign Direct Investment (FDI) outflows from India may be rising, but this trend isn’t alarming, Capitalmind CEO Deepak Shenoy said on Thursday. Explaining the mechanics behind the shift, Shenoy noted that “India’s net FDI is down substantially but it’s not sinister.” He added, “FDI is still strong incoming but outflows have increased. What does that mean? Let me explain.”

In a detailed post, Shenoy unpacked the nature of FDI, clarifying that “it’s a foreign entity buying equity into an Indian company.” He differentiated FDI from foreign portfolio investments (FPI), saying, “Now you have FPI, which is portfolio investments by people like hedge funds and index funds and all that, into Indian listed companies. That is not FDI. When Suzuki bought shares in Maruti, it was FDI.”

He added: “When a VC invests from a foreign entity into an Indian co, it’s FDI. When Amazon US funds losses of its Indian entity, it probably brings in equity (since taking debt from abroad is a larger painnnnnn) as FDI.”

Referring to backend operations of global companies, Shenoy said: “Most GCCs though will just do transfer pricing for their India ops i.e. JP Morgan USA will pay JP Morgan India a fee for the backend ops, so that is revenue for the Indian firm, not equity, and that is not FDI.”

He pointed to recent market exits by venture capital firms and promoter share sales by multinationals as the main reasons behind current FDI outflows. “What comes in as FDI can only go out as FDI,” he explained, noting, “Many MNC stocks have had FDI from their owner promoters for decades, at 75% (max possible) ownership. This is unhealthy as the remaining float is cornered by a few funds and investors, so these stocks trade at ludicrous valuations.”

Shenoy added: “Some of these companies are like wait, we could sell at these ludicrous valuations and still have control of the company? Wokay let us. And they sold effectively and FDI outflow even if the companies are listed. This is good because there’s more of these stocks to trade. But yes, FDI outflow.”

He also highlighted an encouraging trend in India’s capital markets. “The second important point is the emergence of domestic capital to find growth. Both at VC or PE levels, and in markets, domestic participation has increased. It is now possible to build a scale company funded by Indian sources. And it’s less painful than dealing with FC-GPR etc.”

Summing up the trend, Shenoy said: “So foreign FDI outflows are through VCs exiting cos they have to (and even if they sell to a foreign fund, it’s considered FDI outflow, FPI inflow), or by foreign promoters creating more room for their stocks that trade at obscene valuations by selling shares. And then new Indian cos are getting Indian capital to find growth. We don’t rely on foreign capital as much today. FDI will likely slow down due to these reasons. We shouldn’t be worried.”

He concluded: “Finally two smaller things will come too. One, Indian firms will invest abroad, buy large companies worldwide. Second, that companies will list and raise further funds from foreigners as QIP (which is FPI, not FDI). Lastly, we have restricted FDI from China for security reasons. But a limited portion, say up to 49%, may be eased up and then we will see FDI again from there. It’s not a big deal if FDI slows but I think it’s temporary. If Indian markets are providing exits then more money will come, not less.”

Meanwhile, according to the Ministry of Commerce & Industry, India received $81.04 billion in FDI in FY 2024–25, up 14% from the previous year. The services sector was the largest recipient (19%), followed by computer software and hardware (16%) and trading (8%). Maharashtra, Karnataka, and Delhi accounted for the bulk of FDI, while Singapore remained the top source, contributing 30% of total inflows.

India’s long-term FDI trend remains strong. Between FY 2014–25, the country attracted $748.78 billion in FDI — almost 70% of the total inflows received in the last 25 years. Government policy, sectoral liberalisation, and increased participation from 112 countries have reinforced India’s appeal as a global investment hub, the ministry said.