Schedule I explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Paragraph 2 of Schedule I to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 is the negative list: nine items, (a) to (i), in which foreign direct investment is not allowed at all, whatever the route. It also carries the Explanation that says what "real estate business" does and does not include. The Rules are made under clauses (aa) and (ab) of sub-section (2) of section 46 of the Foreign Exchange Management Act, 1999.
This article states the position as per the Rules notified on 17 October 2019 (S.O. 3732(E)) as amended by the notifications named in this article; the latest amendment consulted is S.O. 4870(E) dated 2 September 2026. Later amendments, press notes and sector regulators' conditions should be checked before acting. If a proposed business sits near one of these items, our FEMA advisory team can test it against the words of the paragraph.
FDI is prohibited in lottery business, gambling and betting, chit funds, Nidhi companies, trading in Transferable Development Rights, real estate business or construction of farm houses, manufacture of cigars, cheroots, cigarillos and cigarettes, and activities not open to private investment such as atomic energy and railway operations. Foreign technology collaboration is also barred for lottery, gambling and betting. "Real estate business" does not include township development, construction of residential or commercial premises, real estate broking, registered REITs or rent on lease. A company in a prohibited sector may still issue bonus shares to existing non-resident holders, and foreign portfolio investors are held to an aggregate limit of 24 per cent.
The nine items
| Item | Prohibited sector or activity, as printed | Status of the text |
|---|---|---|
| (a) | Lottery business including Government or private lottery, online lotteries, etc. | As notified on 17 October 2019 |
| (b) | Gambling and betting including casinos, etc. | As notified |
| (c) | Chit funds | As notified |
| (d) | Nidhi company | As notified |
| (e) | Trading in Transferable Development Rights | As notified |
| (f) | Real estate business or construction of farm houses | Item as notified; Explanation substituted by S.O. 1802(E) dated 12 April 2022 |
| (g) | Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes | As notified |
| (h) | Activities or sectors not open to private sector investment, e.g. (I) atomic energy and (II) railway operations (other than permitted activities mentioned in paragraph (3) of Schedule I) | As notified |
| (i) | Foreign technology collaborations in any form, including licensing for franchise, trademark, brand name, management contract, for lottery business and gambling and betting activities | As notified |
Paragraph 2 is headed "Sectors prohibited for FDI". Apart from the Explanation to item (f), none of the 19 amending notifications up to 2 September 2026 changes it.
Reading the items
Items (a) and (b) use "including" and "etc.", so the named examples (Government or private lottery, online lotteries, casinos) do not exhaust the item.
Items (c) and (d) name chit funds and Nidhi companies without more.
Item (e) bars trading in Transferable Development Rights. Note (1) under serial number 10.2 of the Table repeats that foreign investment is not permitted in an entity engaged in real estate business, construction of farm houses and trading in transferable development rights.
Item (g) covers manufacture of the four named tobacco products "of tobacco or of tobacco substitutes".
Item (h) gives atomic energy and railway operations as examples ("e.g."). The bracket saves the permitted railway activities: serial number 17 of the Table allows foreign investment in the listed railway infrastructure activities, such as suburban corridor projects through PPP, dedicated freight lines and rolling stock manufacturing.
Item (i) is not a sector. It extends the bar for lottery, gambling and betting to foreign technology collaboration in any form, including licensing for franchise, trademark, brand name and management contract.
The Explanation to item (f): "real estate business"
The Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022, S.O. 1802(E) dated 12 April 2022, substituted the Explanation. As it now stands, "real estate business" means dealing in land and immovable property with a view to earning profit from there, and does not include:
- development of townships;
- construction of residential or commercial premises, roads or bridges;
- educational institutions, recreational facilities, city and regional level infrastructure, townships;
- real estate broking services;
- Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014;
- earning of rent or income on lease of the property, not amounting to transfer.
Two printing points. The Explanation opens "For the purpose of this rule" although it stands in a Schedule, and the Gazette prints its closing as "transfer.;" without a closing quotation mark.
As notified in 2019 the Explanation was shorter: it said only that real estate business shall not include development of townships, construction of residential or commercial premises, roads or bridges and registered REITs. The Reserve Bank's Master Direction - Foreign Investment in India, updated up to June 15, 2026, still prints that shorter wording in paragraph 3.1 and prints item (h) without the bracketed words. The Gazette text of 2022 is the one given above; readers should confirm against the official text. The permitted side of the line is in our article on construction development and industrial parks.
What a company in a prohibited sector may still receive
The prohibition is on FDI. The Rules print two things that such a company may still see:
Bonus shares to existing non-resident holders. Rule 7(2), inserted by the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2025, S.O. 2549(E) dated 11 June 2025, lets an Indian company engaged in a sector or activity prohibited for foreign direct investment issue bonus shares to its pre-existing shareholders who are persons resident outside India, provided the shareholding pattern of such shareholders is not changed by the bonus issue. Bonus shares issued to them before that sub-rule commenced are deemed to have been issued in accordance with the Rules or the earlier regulations of 2000 or 2017, as the case may be. See rules 7 and 7A on rights and bonus issues.
Foreign portfolio investment up to 24 per cent. The last proviso to paragraph 1(a)(ii) of Schedule II says the aggregate limit with respect to an Indian company in a sector where FDI is prohibited shall be 24 per cent. The Master Direction repeats this in paragraph 5.1.4. Details are in our article on FPI individual and aggregate limits.
The second proviso to rule 6(a), as substituted in 2026, also refers to "sectors or activities prohibited for foreign investment" when it limits where a citizen of Pakistan or an entity incorporated there may invest.
A worked example
Kestrel Holdings Pte Ltd wants to invest in Vanya Estates Private Limited. If Vanya buys land parcels and resells them for profit, it is dealing in land and immovable property with a view to earning profit: item (f) applies and FDI is prohibited. If Vanya instead constructs residential premises, or runs a real estate broking service, or earns rent on leased property without any transfer, the Explanation takes that activity out of "real estate business", and the entry for construction development in the Table governs.
Separately, Meridian Leisure Limited runs a lottery business and has an old non-resident shareholder. It cannot take fresh FDI and cannot license a foreign brand for that business (item (i)). It may issue bonus shares to that shareholder if the shareholding pattern does not change (rule 7(2)).
Need help deciding whether a business is in a prohibited sector?
The answer often turns on a few words: "dealing in land", "not amounting to transfer", "other than permitted activities". Our FEMA advisory service reviews the activity, the object clause and the revenue model against paragraph 2 before money moves.
Key takeaways
- Paragraph 2 lists nine items; eight are sectors or activities and the ninth bars technology collaboration for lottery, gambling and betting.
- "Real estate business" means dealing in land and immovable property with a view to earning profit from there.
- Township development, construction of premises, real estate broking, registered REITs and rent on lease are outside that term after S.O. 1802(E) dated 12 April 2022.
- Railway operations are prohibited, but the railway infrastructure activities permitted in the Table are saved.
- A company in a prohibited sector may issue bonus shares to existing non-resident holders under rule 7(2).
- The aggregate foreign portfolio investment limit for such a company is 24 per cent.
Read next
- Schedule I paragraph 3: automatic route and Government route
- Serial numbers 10 and 11 of the Table: construction development and industrial parks
- Rule 6: who may invest and the land-border provisos
- Inbound investment under FEMA: an overview of sectors and routes
Disclaimer: Based on the Gazette text of the instrument this article names, as notified and as amended by the notifications named in the article (for the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 the latest amendment consulted is S.O. 4870(E) dated 2 September 2026), as consulted on 2 October 2026. There is no official consolidated text; the provisions were read with each amendment applied. Sectoral caps, entry routes, conditions, forms and time limits change by notification, press note and circular; later changes should be checked on the Gazette, DPIIT and Reserve Bank sites. This article is general information, not legal advice; check the official text before acting.