The Reserve Bank of India (RBI) has officially released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 for public consultation, as reported by The Economic Times. The central bank announced that comments on the draft rules are invited until August 31, marking a significant step in the regulatory overhaul process. This public consultation phase follows the RBI's earlier preparation of a draft of rationalized rules for the Foreign Exchange Management (Non-Debt Instruments) framework, which was announced in the Union Budget 2026-27 to create a more contemporary, user-friendly framework for foreign investments. According to Rediff Money, the planned revisions follow Finance Minister Nirmala Sitharaman's announcement in the Union Budget 2026-27 to carry out a comprehensive review of the rules. Stakeholders can now submit suggestions via the 'Connect 2 Regulate' section of RBI's website or by email until August 31, 2026, as confirmed by the central bank.
The proposed framework represents a comprehensive restructuring of India's foreign investment regulations, designed to replace the existing Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ('NDI Rules') that currently govern foreign investment into India. The new rules are built on principle-based, investee-neutral and investor-neutral provisions that aim to replace prescriptive regulations with a framework that can accommodate evolving business practices while retaining necessary regulatory safeguards. According to The Economic Times, the Foreign Exchange Management (Foreign Investment) Rules, 2026 seeks to replace the seven-year-old set of rules with a single framework that would govern overseas fund flows into equity instruments across companies, limited liability partnerships, and specialized investment vehicles. The framework will include enhanced ease of doing business through streamlined procedures, reduced compliance burden, and greater operational flexibility for foreign investors. The Union Budget 2026-27 announced a comprehensive review of the NDI Rules with the stated goal of creating a more contemporary, user-friendly framework for foreign investments, with the proposed framework seeking to adopt principle-based, investee-neutral, and investor-neutral provisions in line with future business needs.
The most closely watched proposal in the draft extends the 10% threshold that distinguishes foreign direct investment (FDI) from foreign portfolio investment (FPI) to unlisted Indian companies, marking a significant shift from the current framework. Under the draft, foreign investments of 10% or more in unlisted companies would qualify as FDI, while holdings below 10% would be treated as FPI, as reported by The Financial Express. This represents a departure from the existing rules where the distinction applied only to listed companies, allowing minority investors in unlisted firms to invest through the FDI route. Legal and tax experts said the proposal could have significant implications for private equity (PE), venture capital (VC) and cross-border mergers and acquisitions (M&A), where minority investments are common. According to Prateek Jain, partner at Deloitte India, "There are many situations where PE or VC investors prefer to begin with a minority stake of less than 10%. Requiring them to obtain FPI registration could become a practical challenge." The industry is likely to recommend retaining the existing FDI framework for unlisted companies, a view broadly shared by authorized dealer banks, as the proposal raises questions about how sectoral caps and compliance requirements would apply to investments below 10% in unlisted Indian companies.
The draft introduces significant changes to how foreign control is defined, particularly for multi-layered overseas investment structures. The draft retains the existing definition of foreign-owned and controlled Indian companies while introducing a separate 10% test for multi-layered overseas investment structures, largely codifying principles that emerged from Press Note 3 governing investments from countries sharing land borders with India, such as China. The draft also introduces an explicit voting-rights threshold in the definition of "control", where rights under shareholder or voting agreements that allow an investor to exercise 10% or more voting rights would constitute control for FDI purposes. According to Somesh Jain, advocate at Chambers of Sachdev & Jain, "The definition of 'equity' would shift from a prescribed list of instruments to those classified as equity under applicable accounting standards, making accounting treatment, rather than legal form, decisive." Vivek Iyer, partner and financial services risk leader at Grant Thornton Bharat, noted that "For M&A and PE transactions, this places greater emphasis on how governance rights are negotiated and documented alongside the size of the investment." The framework also replaces the prescriptive instrument-by-instrument list under the 2019 NDI Rules with a substance-over-form approach based on applicable accounting standards, explicitly including units of SEBI-regulated investment vehicles (REITs, InvITs, AIFs) and participating rights in oil fields or mines.
The draft rules expand the scope of eligible foreign investment vehicles significantly while introducing broader framework provisions. The draft defines eligible investee entities to include companies, LLPs, investment vehicles such as REITs, InvITs, AIFs and venture capital funds, as well as mutual funds and exchange-traded funds that invest more than 50% in equity, with partnership firms and proprietary concerns also included within the framework, as confirmed by The Economic Times. Foreign investors and foreign controlled entities (FCEs) may make foreign investment on repatriation or non-repatriation basis through subscription to issues, purchase from any person, or gift between natural persons. The draft permits foreign investment through subscriptions, purchases, gifts, pledges, depository receipts and share swaps, and also allows investment vehicles to issue units against equity of special purpose vehicles proposed to be acquired by them. The proposal also broadens the framework for investments on a non-repatriation basis to all non-residents, extending beyond the current availability only to NRIs/OCIs. On gift transactions, the draft provides for such gift of shares up to the Liberalised Remittance Scheme limit under the automatic route, removing the current requirement for RBI approval and monetary limits of USD 50,000 for gifts to non-resident family members.
The draft rules introduce significant changes to India's overseas listing framework for public companies while maintaining existing regulatory clarity. The draft retains the distinction between direct and portfolio foreign investments with clear classification criteria, including consolidated provisions governing entry routes, sectoral caps and pricing, and incorporates the framework for direct listing of Indian companies on overseas stock exchanges. For pricing of transactions, the draft requires listed entities and investment vehicles to comply with Securities and Exchange Board of India (SEBI) regulations, while unlisted entities must follow internationally accepted valuation methodologies on an arm's-length basis certified by a chartered accountant, merchant banker or cost accountant. The draft also clarifies the treatment of investments made through special rupee vostro accounts, stating that foreign investments on Indian stock exchanges by investors holding such accounts will be undertaken in a manner specified by the RBI. The draft bars companies from overseas listings if they, their promoters or directors are debarred from capital markets, classified as wilful defaulters, declared fugitive economic offenders or are under investigation under the Companies Act. The proposal requires that foreign beneficial owners of shares listed overseas should not be Indian residents, with exceptions for broker dealers or investment bankers authorized by international regulators.
