India’s foreign investment framework may be heading for one of its most significant regulatory changes since the introduction of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. On 21 July 2026, the Central Government released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026, proposing to replace the existing NDI Rules.
The proposed framework seeks to simplify the structure of foreign investment regulations, broaden the scope of eligible investments, introduce a more principle-based approach to pricing and clarify the responsibilities of foreign investors and Indian entities.
The proposed changes could have practical implications for foreign investors, Indian companies, LLPs, investment vehicles and other entities receiving foreign investment. At the same time, several provisions raise interpretational questions that may require clarification before the Rules are finalised.
The RBI has invited stakeholder comments until 31 August 2026.
Background
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) in India are currently governed by the Foreign Exchange Management Act, 1999 (FEMA), read with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) and the consolidated FDI Policy issued by the Department for Promotion of Industry and Internal Trade (DPIIT).
Together, these provisions establish the framework for sectoral caps, entry routes, pricing guidelines, downstream investment, reporting requirements and other conditions applicable to foreign investment in India.
During the Union Budget 2026-27, the Government announced a comprehensive review of the NDI Rules with the objective of making the foreign investment framework more contemporary and investor friendly.
Taking this forward, the Central Government released the Draft Foreign Exchange Management (Foreign Investment) Rules, 2026 on 21 July 2026.
The Draft Rules propose a significant restructuring of the existing framework. Instead of retaining the detailed sector-specific provisions within the Rules themselves, the proposed framework moves sectoral caps, entry routes and sector-specific conditions into a separate Annexure-II, which refers to the FDI Policy.
This represents a broader shift towards a simplified and principle-based regulatory framework.
2. Key highlights of the Draft Rules
Structure
The existing NDI Rules consist of 10 Chapters and 11 Schedules, with sectoral caps, entry routes and sector-specific conditions incorporated directly into the Rules.
The Draft Rules reduce this structure to four Chapters. Sectoral caps, entry routes and sector-specific conditions are proposed to be moved into Annexure-II, with references to the FDI Policy.
The proposed structure is therefore more condensed and separates the core foreign investment rules from the policy framework.
This could make the regulatory framework easier to navigate while also allowing policy-related changes to be addressed separately.
FDI and FPI definition
The Draft Rules propose a significant change to the way FDI and FPI are defined.
Under the existing framework, FDI broadly relates to investment by a Person Resident Outside India (PROI) through equity instruments in an unlisted Indian company or investment of 10% or more of the paid-up capital of a listed Indian company.
FPI relates to investment through equity instruments in a listed Indian company where the investment is below 10%.
Under the Draft Rules, FDI would mean foreign investment of 10% or more in the equity of a company or LLP, while FPI would mean foreign investment of less than 10% in the equity of a company or LLP.
One important consequence is that investments below 10% in unlisted entities would be classified as FPI.
This could simplify compliance for Indian parties where a foreign investor holds only a nominal investment in an unlisted Indian entity. The proposed framework may also encourage greater foreign investment and liquidity in Indian capital markets.
However, the broader definition also creates questions in situations involving differential voting rights and control.
Eligible Investee Entity
The Draft Rules introduce an express definition of an Eligible Investee Entity.
The proposed definition consolidates entities eligible to receive foreign investment, including companies, LLPs, specified investment vehicles such as AIFs, REITs and InvITs, registered partnership firms and proprietary concerns.
The Draft Rules also propose to broaden the scope of investors who can invest in certain entities.
Any PROI would be permitted to invest in registered firms and sole proprietorship concerns, VCFs and certain registered investment vehicles that invest more than 50% in equity, including mutual funds and ETFs.
This represents a departure from the existing framework, under which certain investments were restricted to specific categories such as NRIs, OCIs or FVCIs.
The Draft Rules also remove the earlier restriction limiting investment in partnership firms to a non-repatriable basis.
As a result, the proposed framework could allow any PROI to invest in a registered partnership firm or sole proprietorship concern on a repatriable basis.
The liberalisation also extends to mutual funds and VCFs, where the scope of eligible foreign investors would be broadened.
Equity definition
The definition of equity has also been substantially broadened.
Under the existing NDI Rules, equity instruments are specifically identified and include equity shares, compulsorily convertible debentures, compulsorily convertible preference shares and share warrants issued by an Indian company.
The Draft Rules instead propose to define equity by reference to applicable accounting standards. The definition would also cover units of investment vehicles under SEBI regulations and participating interests or rights in oil fields or mines of an Indian company or LLP.
While this principle-based approach could provide greater flexibility, it may also create interpretational challenges.
For hybrid instruments, particularly instruments such as CCDs and CCPS, entities may need to examine the accounting classification and terms of the instrument to determine whether it qualifies as equity for FEMA purposes.
For example, where a foreign investor subscribes to CCDs that contain both debt and equity components for accounting purposes, the Draft Rules do not clearly establish how those components would be treated separately under FEMA.
This could result in additional analysis and potential uncertainty for businesses issuing or receiving investments through hybrid instruments.
Downstream investment and Foreign Controlled Entity
The Draft Rules replace the existing concept of a Foreign Owned and Controlled Company (FOCC) with a broader concept of a Foreign Controlled Entity (FCE).
An FCE would include a resident company, LLP or investment vehicle owned or controlled by a PROI.
While the broad principles governing indirect foreign investment remain, the Draft Rules propose that ownership and control would be determined according to provisions prescribed by the relevant sectoral regulator in consultation with the Central Government or, where such provisions do not exist, under applicable Indian laws.
The specific condition relating to the right to appoint a majority of designated partners in an LLP has also been removed.
This change may simplify terminology, but it could also create uncertainty because ownership and control thresholds that were expressly provided under the existing framework are now linked to sectoral provisions or applicable Indian laws.
Indirect investment by PROI through another PROI
A new concept introduced by the Draft Rules is indirect investment in an Indian entity by a PROI through another PROI.
The proposed definition of foreign investment would include investment made indirectly through another PROI that is owned or controlled by the investing PROI or through another PROI under common ownership or control.
The Draft Rules prescribe thresholds for determining ownership and control.
This is significant because the existing framework primarily addresses indirect foreign investment through an Indian entity classified as an FOCC.
The Draft Rules seek to recognise indirect investment through a PROI as a separate concept alongside investment through an FCE.
The practical impact of this provision will need to be examined, particularly in determining whether investments made directly and indirectly by a PROI need to be aggregated when determining whether an investment qualifies as FDI or FPI.
Restriction on foreign investment
The existing framework primarily places restrictions on PROIs making or transferring investments in Indian entities unless permitted under the NDI Rules.
The Draft Rules adopt a broader approach.
They provide that no person can make, transfer or receive foreign investment unless it is permitted under the Draft Rules.
This means that the compliance obligation is no longer framed only around the foreign investor. Indian entities and other persons receiving or transferring foreign investment would also need to ensure that the transaction is permitted under the applicable framework.
This could increase the importance of regulatory due diligence for all parties involved in a foreign investment transaction.
Non-repatriation investment
The Draft Rules propose to broaden the persons eligible to make foreign investment on a non-repatriation basis.
Under the existing framework, this facility is available to specified categories, including NRIs and OCIs and entities owned or controlled by them.
The Draft Rules propose that any PROI or FCE may make foreign investment in India on both repatriation and non-repatriation bases through permitted modes.
While this represents a significant liberalisation, certain practical questions remain.
For example, NRO accounts and the USD 1 million annual repatriation limit are generally associated with NRIs and PIOs. The proposed extension of non-repatriation investment to other PROIs and FCEs therefore raises questions about how these provisions will operate alongside the existing regulatory framework.
Gift of equity instruments
The Draft Rules also propose to simplify the rules relating to gifts of equity instruments.
The existing gifting provisions are spread across multiple provisions and apply differently depending on the status of the transferor and transferee.
The Draft Rules expressly permit transfers of equity instruments by way of gift between natural persons.
For certain transfers involving non-repatriable investments and close relatives, the proposed framework removes the earlier 5% paid-up capital limitation and increases the value threshold from USD 50,000 to the applicable LRS limit, currently USD 250,000 per financial year.
The value transferred would also be considered for calculating utilisation of the LRS limit.
This could significantly facilitate certain family transfers and may make trust structures involving Indian settlors and non-resident beneficiaries more feasible, subject to the prescribed conditions.
Pricing guidelines
The Draft Rules move away from the detailed transaction-specific pricing framework under the NDI Rules towards a principle-based approach.
For companies listed on a recognised stock exchange, pricing would be determined according to SEBI Regulations.
For companies listed on an international stock exchange, pricing would be determined according to Annexure-I of the Draft Rules.
For other cases, pricing would be determined using an internationally accepted pricing methodology for valuation on an arm’s length basis.
The proposed approach provides greater flexibility compared with the existing floor and ceiling mechanisms.
However, an arm’s length standard can be inherently subjective. Differences between valuation approaches adopted by valuers or bankers could create practical challenges, particularly where there is no single objectively prescribed valuation outcome.
The impact on contingent earnouts would also require further evaluation.
Valuation of shares issued on rights basis
The existing NDI Rules require shares offered to PROIs on a rights basis to be priced at not less than the price offered to PRIs.
The Draft Rules propose that pricing guidelines would not apply to shares of an eligible investee entity offered on a rights basis.
This would provide companies with greater flexibility when structuring rights issues involving foreign investors.
At the same time, removing the existing pricing safeguard also eliminates the parity check that currently helps prevent shares issued to PROIs from being undervalued compared with those offered to PRIs.
Onus of Compliance
The Draft Rules expand the responsibility for foreign investment compliance.
Under the existing framework, responsibility generally depends on the nature of the transaction. For example, an Indian company may be responsible for reporting an issue of shares, while resident parties may be responsible for certain transfers and the first-level Indian entity may be responsible for downstream investment compliance.
Under the Draft Rules, foreign investors would also have compliance responsibilities across these scenarios.
This represents an important shift because foreign investors will need to take a more active role in ensuring that transactions comply with the applicable FEMA framework.
Investment through Rupee Vostro Account
The Draft Rules introduce provisions dealing with foreign investment through Rupee Vostro Accounts.
Foreign investment made by a PROI in a recognised stock exchange through a Rupee Vostro Account would be governed by RBI directions.
The inclusion of this mechanism provides a specific regulatory reference point for such investments and could support greater use of rupee-denominated inflows for foreign investment.
Points to ponder
While the Draft Rules propose several significant changes, certain areas remain unclear.
The Draft Rules do not expressly address or retain certain provisions relating to areas such as immovable property, deferred consideration, specific investment instruments and categories including ESOPs, convertible notes, rights and bonus issues and share warrants.
Questions also remain regarding investments by FVCIs in certain sectors.
Another important issue is the relationship between the Draft Rules and the FDI Policy. It is currently unclear whether the Government will issue a new FDI Policy or amend the existing FDI Policy, 2020 to incorporate the proposed changes.
The proposed expansion of non-repatriation investment to PROIs other than NRIs and OCIs also requires clarification, particularly regarding the interaction with existing account and remittance provisions.
The replacement of the term contribution to capital with equity in relation to partnership firms, LLPs and proprietary concerns also raises questions because equity may not naturally apply to each of these forms of entity.
Further, the proposed FPI definition focuses on ownership of capital below 10% without expressly factoring in control. This could create questions where differential voting rights result in ownership below 10% but provide majority voting power.
Our comments
The Draft Rules represent a significant proposed overhaul of India’s foreign investment framework since the introduction of the NDI Rules in 2019.
The proposed separation of the FDI Policy into a standalone annexure, together with the move towards a unified and principle-based framework, indicates an intention to simplify the regulatory regime and provide greater flexibility as investment structures evolve.
At the same time, the proposed framework introduces several areas that will require careful interpretation.
The Draft Rules clearly distinguish the respective roles of RBI and DPIIT, with RBI administering the FDI Rules while DPIIT focuses on the FDI Policy.
The express allocation of compliance responsibilities to foreign investors, alongside Indian parties, is also likely to increase the overall compliance and due diligence obligations associated with foreign investment transactions.
The proposed changes to pricing, FDI/FPI classification, downstream investment, non-repatriation investments and gifting could have a direct impact on how foreign investment transactions are structured and reviewed.
There are also provisions where further clarification would be valuable. For example, the rules governing transfers of shares of an Indian company listed on an international stock exchange by a PROI to a PRI could potentially be expanded to cover additional events such as voluntary dissolution, demerger and gifts between natural persons.
For stakeholders, the consultation period therefore provides an important opportunity to identify practical concerns and seek clarification before the Rules are finalised.
Comments on the Draft Rules have been invited until 31 August 2026.
Foreign investors and Indian entities considering new investments, restructurings or transfers would benefit from closely monitoring the final Rules and the corresponding position under the FDI Policy once the consultation process is complete.
Frequently Asked Questions
1. What are the Draft Foreign Investment Rules, 2026?
The Draft Foreign Exchange Management (Foreign Investment) Rules, 2026 propose to replace the existing Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and restructure India’s foreign investment framework.
2. When were the Draft Foreign Investment Rules, 2026 released?
The Central Government released the Draft Rules on 21 July 2026.
3. What is the deadline for submitting comments on the Draft Rules?
The RBI has invited stakeholder comments until 31 August 2026.
4. What is the proposed change to the FDI and FPI definitions?
The Draft Rules propose that FDI would cover foreign investment of 10% or more in the equity of a company or LLP, while FPI would cover foreign investment of less than 10%.
5. What is a Foreign Controlled Entity under the Draft Rules?
An FCE is proposed to mean a resident company, LLP or investment vehicle that is owned or controlled by a PROI.
6. Do the Draft Rules change pricing guidelines for foreign investment?
Yes. The Draft Rules propose a more principle-based pricing framework, including internationally accepted arm’s length valuation methodology for cases other than specified listed companies.
7. Will foreign investors have compliance responsibilities under the proposed framework?
Yes. The Draft Rules expressly extend compliance responsibility to foreign investors in addition to the relevant Indian parties.
8. What are some of the key areas that still require clarification?
The alert identifies several areas, including immovable property, deferred consideration, ESOPs, convertible notes, rights and bonus issues, share warrants, FVCI investments, non-repatriation investments by PROIs other than NRIs and OCIs, and the treatment of equity in partnership firms, LLPs and proprietary concerns.
9. Will the Draft Rules replace the existing FDI Policy?
The Draft Rules propose to move sectoral caps, entry routes and sector-specific conditions into Annexure-II, which refers to the FDI Policy. However, it remains unclear whether the Government will issue a new FDI Policy or amend the existing FDI Policy, 2020.
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