The Reserve Bank of India on Tuesday released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026, proposing to replace the existing Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, with comments invited from stakeholders until August 31.
The RBI said the objective is to move to a principle-based regulatory framework by rationalising provisions, harmonising definitions and simplifying the regulatory architecture to improve clarity and reduce the compliance burden for foreign investors.
The review was announced in the Union Budget for 2026-27 as part of the government’s plan to create a more contemporary and user-friendly framework for foreign investment, with a committee constituted post-Budget to recommend changes on which the draft rules are based, prepared by the RBI in consultation with the government and other stakeholders.
What the draft rules bring
The draft adds a broader definition of “eligible investee entity” by including companies, LLPs, investment vehicles, partnership firms and proprietary concerns. It also defines foreign investment as investment in equity by a person resident outside India, directly or indirectly through a foreign controlled entity or another controlled foreign person, and separately defines FDI as 10 per cent or more and foreign portfolio investment as less than 10 per cent.The draft expressly allows acquisition or transfer of equity by subscription, purchase, gift and pledge, and also covers depository receipts, NPS subscriptions for eligible NRIs and OCIs, and transactions on international stock exchanges. It also adds a dedicated annexure for direct listing of equity of companies incorporated in India on an international stock exchange.
The draft further says that foreign investment must comply with the foreign investment policy in Annexure-II, including entry routes, sectoral caps and sectoral conditions. It provides separate pricing rules for listed companies, public companies listed abroad and other cases, and states that foreign investment on a non-repatriation basis “shall not require compliance with the conditions prescribed in this rule,” except in prohibited sectors.
Legal experts describe the draft rules as “simplification of regulatory architecture” and an attempt to pull definitions, pricing principles and listing routes into one consolidated rulebook, while pushing sectoral caps and prohibited sectors into the FDI Policy.
“The draft rules have simplified regulatory architecture, harmonised definitions and aligned with the FDI Policy. One of the substantive changes include the explicit capture of indirect investment through foreign controlled entities (“FCE”) within the primary definition of ‘foreign investment’. Another important change is simplification of the pricing guidelines mandating the pricing to be exactly at Fair Market Value (FMV) whereas – the Foreign Exchange Management (non – debt instrument) rules, 2019, provided flexibility in pricing the transfer from resident to non resident at any price over the FMV and vice versa,” said Smruti Shah, partner, Cyril Amarchand Mangaldas.
“While the draft largely consolidates the existing framework, the proposed changes to the concepts of control and Foreign Controlled Entities (FCEs) stand out as the most significant. The reference to contractual rights entitling an investor to 10% or more voting rights within the definition of control could materially influence how foreign control is assessed under FEMA. If retained in its current form, it may require businesses to revisit governance structures and could have important implications for downstream investment analysis,” said Moin Ladha, partner, Khaitan & Co..
“The introduction of the FCE (Foreign Controlled Entity) concept, express recognition of indirect foreign investment & a more detailed control test could have practical implications for downstream investments and group structures involving foreign investors,” said Smrithi Nair, partner, Juris Corp.
Direct listing
Annexure‑I to the draft Rules pulls the Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme into the main foreign investment framework.
The scheme, notified in January 2024 under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, was designed to “provide an alternative channel for capital mobilisation by enabling Indian companies to access global capital markets, achieve improved valuations, broaden their investor base, and strengthen their global footprint.”
“In relation to direct listing, there are 2 substantive changes- (I) removal of floor price for unlisted company’s initial listings on international exchange, and (ii) Explicit ring-fencing of transfers from non resident to resident of internationally listed equity shares – it is limited to only the following 5 events : Delisting offers, resolution plans, Buy-backs, mergers and amalgamations, or acquisition of equity by transmission on succession or inheritance,” said Shah.
“The schedule related to direct listing of securities by Indian listed companies on International Stock Exchanges has been substantially amended to ease up such listings and clarifies many grey areas from before,” said Akshat Pande, managing partner, Alpha Partners.
“The inclusion of the direct listing framework within the Rules is an important step as it embeds the regime within India’s broader foreign investment framework and provides greater regulatory certainty. However, the pace of adoption is likely to depend more on commercial considerations such as valuation, liquidity, investor appetite, tax implications and listing costs than on FEMA itself,” said Ladha.
The draft also clarifies administration and compliance. It says the Reserve Bank will administer the rules, while the Department for Promotion of Industry and Internal Trade (DPIIT) will retain interpretation of the foreign investment policy and related directions. It also places the onus of compliance on the foreign investor and the eligible investee entity, or on the transferor and transferee in case of transfers.
“This amendment is expected to create a new market of Indian listed companies to get listing abroad and ensure more capital inflows into the country. This will also reduce the dependency on domestic capital for a successful public offer,” concluded Pande.
