RBI Proposes New FEMA Foreign Investment Rules 2026 to Replace NDI Rules: Key Changes for FDI and FPI

On July 21, 2026, the Reserve Bank of India (RBI) released a draft Notification proposing the Foreign Exchange Management (Foreign Investment) Rules, 2026, under Press Release No. 2026-2027/726. These proposed rules, if finalised, would entirely supersede the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the NDI Rules) in their entirety. The draft represents a ground-up replacement of the existing regulatory framework governing foreign investment into India, rather than a routine or incremental amendment.

This initiative stems from the Union Budget 2026-27, which announced a comprehensive review of the NDI Rules with the stated goal of creating a more contemporary and user-friendly framework for foreign investments, consistent with India's evolving economic priorities. A committee constituted by the Central Government undertook a comprehensive review of the extant regulatory framework and submitted its recommendations. Based on these recommendations, and in consultation with the Central Government and other stakeholders, the RBI prepared the draft of the rationalised Rules. Public comments on the draft are due by August 31, 2026, and can be submitted via the "Connect 2 Regulate" portal on RBI's website or by email with the subject line "Feedback on Draft Foreign Investment Rules."

Structural Overview and Salient Features

The RBI's press release identifies four salient features of the proposed draft Rules. First, the draft introduces a simplified and principle-based framework through rationalisation of provisions, harmonisation of definitions, and a simplified regulatory architecture designed to enhance clarity and reduce regulatory complexity. Second, the draft aligns procedural FEMA provisions with the FDI Policy by clearly demarcating procedural provisions from policy and sector-specific requirements, improving regulatory coherence and facilitating timely policy changes. Third, the draft aims to enhance the ease of doing business by streamlining procedures, reducing compliance burden, and providing greater operational flexibility through a transparent, investor-friendly framework. Fourth, the draft envisions a future-ready regulatory framework by adopting principle-based, investee-neutral, and investor-neutral provisions while preserving necessary regulatory safeguards.

Significantly, the draft Notification issued by the Ministry of Finance, Department of Economic Affairs, states that the new rules are made "in supersession of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, except as respects things done or omitted to be done before such supersession." This language confirms a complete overhaul of the existing framework, not an amendment. For companies dealing with corporate restructuring under the Companies Act, 2013, the new rules will have direct implications on the foreign investment aspects of such transactions.

Applicability and Key Definitions

Rule 2 of the draft sets the scope of applicability: the Rules apply to any foreign investment in equity of an eligible investee entity by a person resident outside India, or any transfer thereof. Notably, the Rules do not apply to investments made by a person resident outside India in a financial institution set up or incorporated in an International Financial Services Centre (IFSC), where "financial institution" carries the meaning assigned under the IFSCA Act, 2019.

The definition of "eligible investee entity" under Rule 3 now expressly covers four categories: (i) a company or body corporate incorporated in India under the Companies Act, 2013 or any Central or State Act, excluding societies and trusts; (ii) a limited liability partnership (LLP) registered under the LLP Act, 2008; (iii) a SEBI-registered investment vehicle, including Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), Alternative Investment Funds (AIFs), Venture Capital Funds, and mutual funds or ETFs investing more than 50% in equity; and (iv) a registered partnership firm or proprietary concern. The definition of "equity" under the draft Rules covers three categories: instruments classified as equity under applicable accounting standards, units of a SEBI-registered investment vehicle, and a "participating interest or right" in oil fields or mines held by an Indian company or LLP. This third category is a notable, easy-to-miss inclusion for extractive-sector foreign investment structures.

Redefined FDI and FPI Threshold

One of the most consequential changes in the draft is the restated definition of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Under the proposed rules, FDI is defined as foreign investment of 10% or more in the equity of a company or LLP. Correspondingly, foreign portfolio investment is defined as foreign investment of less than 10% in the equity of a company or LLP. While the 10% threshold itself is not new, the draft extends its application explicitly to unlisted companies as well, resolving a long-standing ambiguity in the existing framework that had caused practical difficulties for compliance teams.

The draft also addresses the reclassification mechanics: foreign portfolio investment on a recognised stock exchange that results in a person resident outside India holding 10% or more of a company's equity may be reclassified as FDI, subject to compliance with applicable FDI conditions and RBI/SEBI directions. Investors who have filed complaints with SEBI regarding portfolio investment issues should take note of how this reclassification mechanism could affect their holdings.

Foreign Controlled Entity: Replacing the FOCC Concept

The draft introduces the concept of a "Foreign Controlled Entity" (FCE), replacing the earlier concept of a "Foreign Owned or Controlled Company" (FOCC). Under the proposed framework, an FCE is defined as a resident company, LLP, or investment vehicle that is owned or controlled by a person resident outside India. Crucially, the determination of ownership and control for FCE purposes follows whatever provisions the relevant sectoral regulator has stipulated in consultation with the Central Government. Where no sectoral regulator has laid down such provisions, the determination falls back to the entity's own governing law: the Companies Act, 2013 for companies, the LLP Act for LLPs, or the SEBI AIF Regulations for AIFs, among others.

It is important to note that the 50% ownership and 10% voting-rights control thresholds do not appear in the FCE definition itself. Instead, these thresholds appear under the definition of "foreign investment in equity," where they apply when a foreign investor invests indirectly through another person resident outside India that it owns or controls. This distinction is critical for downstream investment structuring and has implications for companies navigating regulatory compliance obligations in India.

Codification of Direct Listing on International Exchanges

Annexure-I of the draft Rules consolidates and codifies the Direct Listing of Equity of Companies Incorporated in India on International Stock Exchange(s) Scheme. Previously, the provisions governing overseas direct listing were scattered across separate scheme notifications and circulars. The draft brings eligibility criteria, pricing guidelines, transfer restrictions, voting rights provisions, and permitted transfer-back events into a single, detailed annexure.

Under Annexure-I, a public company may issue or offer equity on an international stock exchange provided it meets specified eligibility criteria, complies with the Companies Act, 2013 and the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024, and stays within sectoral caps under Annexure-II. For companies considering conversion from private to public status, the direct listing route now offers a clearly codified pathway. Transfer of equity from a person resident outside India to a person resident in India on an international exchange is permitted only in specific events: delisting offers, IBC-approved resolution plans, buy-back, merger or amalgamation, and transmission on succession or inheritance.

The eligibility criteria include disqualifying conditions: a company, its promoters, promoter group members, or directors must not be debarred from accessing the capital market, associated with another debarred Indian company, classified as a wilful defaulter, under Companies Act inspection or investigation, or be a fugitive economic offender. The recent SEBI amendments regarding open market buyback through stock exchanges should also be considered in the context of the transfer-back provisions under Annexure-I.

Division of Powers Between RBI and DPIIT

Rule 4 introduces an explicit division of powers between the RBI and the Department for Promotion of Industry and Internal Trade (DPIIT). The RBI is designated as the administrator of the Rules and is empowered to interpret them, issuing regulations, directions, circulars, instructions, and clarifications for effective implementation. However, the power to interpret the foreign investment policy itself, and to issue directions, circulars, and clarifications on the policy, is reserved exclusively for DPIIT. RBI separately specifies the mode of payment, reporting requirements, and other operational requirements from time to time.

This explicit demarcation addresses a long-standing practical challenge faced by foreign investment practitioners, who previously had to triangulate between RBI circulars and DPIIT press notes to resolve ambiguities. By codifying this division directly into the Rules, the draft should, in principle, reduce this regulatory back-and-forth, provided both bodies consistently honour the boundary in their future clarifications.

Permissible Modes of Acquisition and Transfer

Chapter II of the draft Rules sets out the permissible modes by which a person resident outside India or an FCE may make foreign investment. The permitted modes include: subscription to an issue; purchase from any person; gift between natural persons (subject to specific conditions regarding repatriation basis, close relative requirements under the Companies Act, 2013, and Liberalised Remittance Scheme limits); pledge (subject to Rule 8 conditions applying once the pledge is invoked); and transfer by an erstwhile Overseas Corporate Body. Additionally, the draft permits acquisition or transfer of depository receipts, NRI/OCI subscription to the National Pension System, and foreign investment on an international stock exchange per Annexure-I. For entities dealing with SARFAESI notices involving foreign-held security interests, the pledge and transfer provisions under the new framework deserve close attention.

Pricing Guidelines and Compliance

Rule 8 lays down the conditions applicable to foreign investment. For companies listed on a recognised Indian stock exchange or for investment vehicles, pricing is determined per relevant SEBI Regulations. For public companies listed on an international stock exchange, pricing follows conditions prescribed in Annexure-I. For all other cases, pricing must follow an internationally accepted arm's-length methodology, certified by a Chartered Accountant, SEBI-registered Merchant Banker, or Cost Accountant. Pricing guidelines do not apply to subscription of equity issued on a rights basis.

Rule 9 places the onus of compliance with the Rules on the foreign investor and the eligible investee entity, or the transferor and transferee, as applicable, in a foreign investment transaction. This codification of compliance responsibility is significant for in-house counsel and compliance officers at investee companies, as it confirms that both the foreign investor and the Indian investee share the regulatory obligation to ensure that the investment complies with all applicable conditions.

Annexure-II and Annexure-III

Annexure-II of the draft Rules contains the Foreign Investment Policy (FDI policy) issued by the Government of India, as amended from time to time. This structural separation of the FDI policy from the procedural Rules is itself a significant change, as it allows the government to update the FDI policy independently without requiring amendments to the FEMA Rules. Annexure-III lists the RBI regulations and directions applicable to foreign investment or its transfer, providing a consolidated reference for practitioners seeking to identify the full regulatory stack applicable to a given transaction.

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Conclusion

The draft FEMA (Foreign Investment) Rules, 2026 represent the most significant overhaul of India's foreign investment regulatory architecture in years. The simplified definitions, the explicit RBI-DPIIT power split, the codification of the direct listing regime, and the refined FCE concept collectively aim to make India's foreign investment framework more accessible, coherent, and aligned with contemporary business practices. The critical exercise for practitioners during the comment period will be mapping existing foreign investment structures against the draft's definitions of "eligible investee entity," "FCE," and the ownership and control tests. Companies with active inbound investment structures should begin gap-testing their existing arrangements against the draft without waiting for the final notification. The comment deadline of August 31, 2026 also presents a practical opportunity to seek clarity on ambiguous provisions before they become binding law. Companies considering winding up proceedings or other corporate restructuring with foreign investment elements should closely monitor the finalisation of these rules.