Introduction
On 21 July 2026, the Reserve Bank of India (“RBI”) released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 (the “Draft Rules“) for public consultation. If adopted, the Draft Rules would replace the existing Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the “NDI Rules“), which currently form the principal framework governing equity investments by non-residents into India.
The Draft Rules represent a significant overhaul of India’s foreign investment framework since the NDI Rules were introduced. They also reflect a broader policy objective of separating foreign investment policy from foreign exchange regulation, with the Department for Promotion of Industry and Internal Trade (“DPIIT“) responsible for policy and the RBI responsible for implementation under the Foreign Exchange Management Act, 1999 (“FEMA“). The reforms were announced in the Union Budget 2026-27 as part of the Government’s broader initiative to modernize and simplify India’s foreign investment framework. The Draft Rules are intended to consolidate and streamline the regulatory regime while making it easier for foreign investors to navigate. The Draft Rules are open for public comments until 31 August 2026.
It may be noted that the Draft Rules (as currently published) set out the principal terms for foreign investments and are supplemented by three Annexures. Annexure I contains the proposed framework for direct listing of Indian companies on international stock exchanges, while Annexures II and III incorporate the FDI Policy and applicable RBI regulations/directions, respectively. Accordingly, certain substantive policy and operational requirements will continue to depend on those external instruments and subsequent RBI directions.
Key Changes at a Glance
The table below provides a high-level comparison of the current framework under the NDI Rules and the proposed position under the Draft Rules:
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Topic
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Current Position (NDI Rules 2019)
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Proposed Position (Draft FI Rules 2026)
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Regulatory framework
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Investor-centric: different rules for different investor types (FDI, FPI, FVCI, NRI, etc.)
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Investee-centric: unified rules focusing on the Indian investee entity regardless of investor type
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FDI vs FPI threshold
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Listed: more than 10% = FDI; less than 10% = FPI. Unlisted: any investment = FDI
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Uniform 10% threshold proposed for companies and LLPs. 10% or more would be treated as FDI; below 10% to be treated as FPI, subject to the final rules and applicable SEBI requirements
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Foreign control concept
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Foreign Owned and Controlled Company (FOCC) with ownership + control test
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Foreign Controlled Entity (FCE); ownership and control to be determined under applicable sectoral-regulator requirements or, in their absence, applicable Indian law
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Definition of equity
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Instrument-based: specified list of eligible instruments (equity shares, CCDs, CCPs, etc.)
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Accounting-standards based: equity is what the investee classifies as equity under applicable accounting standards
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Definition of Foreign Investment in Equity
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Included indirect investment by way of downstream investment, but no separate definition
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New definition of “foreign investment in equity” introduced to mean investment in the equity of an eligible investee by a person resident outside India, whether made: (i) directly, or (ii) indirectly. Scope of indirect investment further clarified.
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Direct listing overseas
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Separate notification (Jan 2024); limited provisions
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Consolidated single framework with relaxed pricing (no floor for initial listing) and explicit transfer ring-fencing
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Land-border restrictions (PN3 read with PN2)
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Included: prior government approval required for direct and indirect investments exceeding 10% from land-bordering countries (subject to conditions)
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Not expressly included in Draft Rules; likely to be governed through FDI Policy/DPIIT notifications
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Regulatory architecture
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Overlap between RBI rules and DPIIT policy
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Clearer demarcation: RBI handles FEMA procedures/reporting; DPIIT retains policy/sectoral caps/entry routes
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Detailed Discussion
Shift from Investor-Centric to Investee-Centric Framework
The NDI Rules regulate investment by reference to the type of investment — Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), Foreign Venture Capital Investment (FVCI), Non-Resident Indian Investment (NRI) and so on, each carrying its own conditions and reporting requirements. The Draft Rules instead focus on the Indian investee entity. The concept of an “eligible investee entity” is broadly defined to include companies, LLPs, investment vehicles (REITs, InvITs and AIFs), partnership firms and proprietary concerns. This is a significant shift from the NDI Rules which (except in very limited circumstances) do not permit foreign investment in partnership firms and proprietary concerns and foreign investment in LLPs is limited to sectors which do not have any attendant conditions. To what extent and subject to what conditions investment into each of these investee entities will be permitted is yet to be determined.
Unified 10% FDI/FPI Threshold
Under the current NDI Rules, any foreign investment in an unlisted company is generally treated as FDI, while the 10% threshold applies only to listed companies. The Draft Rules propose to apply a uniform 10% threshold across companies and LLPs. Investments of 10% or more would generally be treated as FDI, while investments below 10% may qualify to be made through the FPI route, subject to the final rules and the interplay with the SEBI FPI framework. This could be particularly relevant for early-stage venture capital and minority private equity investments in unlisted companies. Investors acquiring or holding minority positions may need to consider whether the proposed framework could affect their investment route or compliance obligations.
Foreign Controlled Entity
The Draft Rules replace the concept of a “foreign owned and controlled company” (FOCC) with the broader concept of a “Foreign Controlled Entity” (FCE). The FCE test would be determined by the ownership and control requirements prescribed by the relevant sectoral regulator in consultation with the Central Government and, in their absence, under the applicable Indian law governing the relevant entity. Where an Indian entity qualifies as an FCE, its downstream investments would be required to comply with applicable conditions only for sectors specifically prescribed under the foreign investment policy. While more clarity is required on this, it may potentially reduce compliance burden for holding company structures outside of the identified sectors.
New Definition of Equity — Accounting-Standards Based Approach
The NDI Rules specify the instruments that qualify as equity for foreign investment purposes, including equity shares, compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCDs). The Draft Rules instead define equity by reference to the investee’s classification under applicable accounting standards. This could create uncertainty for hybrid instruments commonly used in PE and VC transactions because instruments such as CCPS and CCDs, although historically treated as equity under FEMA, may in certain circumstances be classified as financial liabilities under Indian accounting standards. This change would also necessitate greater involvement of financial advisors in understanding terms of instruments and determining whether the same qualify as “equity”.
New Definition of Foreign Investment in Equity
The Draft Rules introduce the term “foreign investment in equity” to mean investment in the equity of an eligible investee entity by a person resident outside India, whether made: (i) directly, or (ii) indirectly. Indirect foreign investment in equity may be made through: (i) an FCE, or (ii) another non-resident that is owned or controlled by, or under common “ownership” or “control” with, the investing person. For this purpose, “ownership” means beneficial holding of more than 50% of the relevant non-resident entity, while “control” means the right to appoint a majority of the directors or to control management or policy decisions, whether exercised directly or indirectly, individually or in concert. Such control may arise through shareholding, management rights, shareholders’ agreements, voting agreements that entitle them to 10% or more of the voting rights, or in any other manner.
Codification of Direct Listing on International Stock Exchanges
The Draft Rules consolidate the Direct Listing Scheme (originally notified in January 2024) into a single framework. Two notable changes are proposed: the removal of the floor price for an unlisted company’s initial overseas listing in favour of a book-building process, and express ring-fencing of transfers from non-residents to residents of internationally listed shares. The framework may provide foreign investors with an additional exit option through overseas listings, particularly for technology and growth-stage companies.
Absence of Land-Border Restrictions from the Draft Rules
The Draft Rules do not expressly include the land-border restrictions introduced under Press Note 3 of 2020 (as clarified by Press Note 2 of 2026), which require prior government approval for direct and indirect investments exceeding 10% from countries sharing a land border with India, including China. This should not be interpreted as a relaxation of those restrictions. They may continue to apply under the FDI Policy which is referenced under Annexure II of the Draft Rules, DPIIT notifications or other instruments.
Clearer Separation of RBI and DPIIT Roles
The Draft Rules aim to establish a clearer allocation of responsibilities between the RBI and DPIIT. The RBI would administer FEMA procedural and reporting requirements, while DPIIT would continue to determine investment policy, sectoral caps and entry routes. This separation should improve regulatory coherence and make it easier for investors to identify the relevant regulatory authority.
Onus of Compliance
The NDI Rules placed the onus of compliance of ensuring that the investment is within the applicable sectoral caps and attendant conditions are satisfied with the Indian investee entity. In contrast, the Draft Rules place responsibility for compliance with the Draft Rules on both the foreign investor and the eligible investee entity in case of direct investment and on both the transferor and transferee in case of transfer, thereby expressly extending the compliance requirements on the foreign investor in addition to the Indian entity.
What’s Missing
Several important areas are not expressly addressed in the Draft Rules, including employee share schemes (ESOPs), foreign venture capital investor (FVCI) investments, cross-border mergers and demergers, escrows, deferred consideration, indemnity holdbacks and acquisition of immovable property by non-residents. It is to be seen if these will be covered in the final rules or by reference under the Annexures or through separate regulations.
Conclusion
The Draft Rules signal a substantial shift towards a more coherent and commercially oriented foreign investment framework. If adopted, the Draft Rules would simplify several aspects of India’s foreign investment regime while also introducing important changes that could affect transaction structuring, governance arrangements and investment strategy. At the same time, key issues, including the proposed definition of control, the accounting-based definition of equity and the treatment of minority investments would benefit from further clarification before the Rules and Annexures are finalised.
