India needs to provide a more level playing field for foreign investors, a new US Department of State report stated. The report has pointed to regulatory hurdles, tax differences and corruption concerns faced by American companies.

It comes as India and the US continue talks on a trade agreement. Commerce Minister Piyush Goyal is in the US for discussions and trade talks are also taking place with his US counterpart during the G20 Trade Ministers’ meeting.

As reported by The Indian Express, the US has again raised concerns about the different rules that can apply to foreign and Indian investors.

India allows 100% foreign direct investment (FDI) in most sectors without prior government approval. There are, however, several sectors where foreign investors need approval.

“While India permits 100% FDI in most sectors without prior approval, India requires foreign investors, including wholly owned subsidiaries incorporated in India, paying Indian taxes, and maintaining an Indian workforce, to request governmental approval to invest in multi-brand retail trading, private banking, pharmaceuticals, defence, print and digital media and satellites,” the report said, according to The Indian Express.

The report also said US companies see corruption as a problem. This includes both cases of actual corruption and concerns about possible corruption when dealing with regulators.

US investment in India has also fallen. The US direct investment stock stood at $58.54 billion in 2024, down 3.37% from 2023. The Indian Express report attributed the fall in investment over concerns in India over weak FDI. RBI data released on Friday showed that net FDI increased sharply to $7.35 billion in July. This was the highest monthly figure in more than five years. Net FDI had last reached $8.80 billion in May 2021.

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‘Burdensome restriction’

The US report has also questioned India’s rules covering FDI and foreign portfolio investment (FPI). Under the current rules, an investor that buys shares in a company through the FDI route before its IPO cannot buy more shares through the FPI route until its earlier FDI holdings are fully sold. Lock-up rules after an IPO can add more time to the process.

The State Department said this can create problems for large investment groups that manage several separate funds. One fund’s investment before an IPO can prevent another fund in the same group from buying shares in the IPO.

“This restriction is particularly burdensome for large investment groups managing multiple independent equity funds, as a pre-IPO commitment by one fund can effectively block other funds within the same group from participating in the IPO. Notably, the existing 10% FPI cap already limits foreign investors from acquiring strategic stakes in listed Indian companies, rendering the concurrent FDI/FPI restriction redundant as a safeguard against foreign concentration,” the report said.

According to The Indian Express report, the US said the 10% FPI limit already restricts how much foreign investors can own in listed Indian companies. It questioned whether the additional FDI-FPI restriction is needed.

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Import restrictions

Foreign companies also face difficulties when importing certain used equipment into India, according to the report. The Import Management System was introduced in 2023 and continued through 2025 with limits on imports. The US said the system has made it harder for companies to bring in specialised equipment such as high-end servers, semiconductors and advanced testing equipment. The report said the approval process and unclear guidelines have added uncertainty for companies.

India also controls exports of sensitive products and technologies through the SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies) list. The Directorate General of Foreign Trade manages these controls.

Bank and foreign exchange

The report also raised concerns about the tax burden on foreign banks. Foreign banks have an effective tax rate of 38.22%, which is 4.63 percentage points higher than that of domestic banks.

“This higher effective tax burden may ultimately affect the relative attractiveness of India as a market for foreign lenders, potentially influencing their decisions on capital allocation, pricing, and the scale of their local operations,” the US State Department said in the report.

As reported by The Indian Express, the report said India continues to have stable correspondent banking links with major US and international banks.

It also described India as a tightly regulated market, especially in banking and capital markets. The report said this supports stability and helps foreign banks maintain their relationships with Indian banks.

“At the same time, India still carries typical emerging economy risks, including regulatory changes, macroeconomic fluctuations, and evolving rules for how troubled banks are handled, all of which are relevant considerations for US banks maintaining or assessing correspondent banking ties with Indian counterparts,” the report said. Foreign nationals can open bank accounts in India, but the rules vary depending on their residency status and reason for staying in the country.

Corruption hindering FDI

The report also looked at India’s rules for preventing corruption in private companies. The Companies Act, 2013 requires companies to follow corporate governance and oversight measures. These include whistleblower protection, codes of conduct and independent directors on company boards.

The government also encourages companies to have internal rules against bribery. Listed companies are required to have codes of conduct for directors and senior management.

“Under this framework, the government encourages private companies to establish internal codes of conduct that prohibit the bribery of public officials, requiring publicly listed companies to adopt codes of conduct specifically for directors and senior management personnel. Public information is limited regarding the extent to which the internal controls and compliance mechanisms are implemented across the private sector,” the report said.

As reported by The Indian Express, the State Department said there is limited public information on how these anti-corruption controls are actually being implemented by private companies.