The Ministry of Finance has notified the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 (the “Draft FI Rules”), which aim to replace the existing Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the “NDI Rules”).
Some of the key proposed changes are set-out below.
1. Conceptual Framework & Definitions
Aspect
Existing NDI Rules, 2019
Draft FI Rules, 2026
Implication
Entity Definition
Fragmented definitions for “Indian company,” “Indian entity,” etc.
Unified umbrella term “eligible investee entity” covering companies, LLPs, registered partnership firms, proprietary concerns, and SEBI registered investment vehicles (AIFs, REITs, InvITs, Mutual Funds, etc.).
Simplifies identification of entities eligible for foreign investment and reduces interpretive ambiguity.
Instrument Definition
Separate classifications for “equity instruments” and “non-debt instruments.”
Consolidated definition of “equity” based on applicable accounting standards, including units of investment vehicles and participating interests in oil fields/mines.
Provides a single, principle-based definition that aligns with accounting norms.
2. Key Definitions – FCE & Control
Aspect
Existing NDI Rules, 2019
Draft FI Rules, 2026
Implication
Foreign Controlled Entity (FCE)
Separate concepts for “foreign investment” and “downstream investment” by a Foreign Owned or Controlled Company (FOCC).
Codified concept of a “Foreign Controlled Entity” (FCE) to simplify tracking of downstream investment.
Downstream investments are now consolidated under the unified definition of ‘foreign investment,’ streamlining compliance for multi-layered structures (particularly beneficial for PE/VC funds).
‘Control Test’
Qualitatively defined under the Companies Act or LLP Act, without a specific voting threshold.
New, explicit threshold introduced: control includes the right to appoint majority directors OR the right to 10% or more of voting rights (via shareholding, management rights, shareholders’ agreements, or voting agreements).
Brings much-needed clarity and predictability to the determination of foreign control.
3. FDI vs. FPI Classification
Aspect
Existing NDI Rules, 2019
Draft FI Rules, 2026
Implication
FDI / FPI Threshold
Based on a 10% threshold primarily for listed companies; all investments in unlisted companies and LLPs were treated as FDI.
10% threshold now applies uniformly to both listed and unlisted companies, and LLPs.
Aligns classification across all entity types. Investors holding less than 10% in unlisted entities may now be treated as FPIs, potentially simplifying compliance.
4. Gifting of Securities
Aspect
Existing NDI Rules, 2019
Draft FI Rules, 2026
Implication
Monetary Limit
Gift limit was $50,000 per financial year for repatriable transfers.
Gift limit raised to the Liberalised Remittance Scheme (LRS) limit of $250,000 for repatriable transfers.
Significant liberalization, allowing larger inter-se transfers between family members.
Permitted Donee
Broad category of “persons” permitted.
Restricted to “close relatives” as defined under the Companies Act, 2013.
Introduces a defined relationship test, ensuring gifting is limited to genuine family transfers.
5. Pricing Guidelines for Transfers
Aspect
Existing NDI Rules, 2019
Draft FI Rules, 2026
Implication
Valuation Approach
Floor and ceiling pricing based on Fair Market Value (FMV) with some room for negotiation between the floor and cap.
Shifts to a more rigid “determined price” based on internationally accepted pricing methodology for arm’s length valuation, duly certified by a Chartered Accountant, Merchant Banker, or Cost Accountant.
Reduces flexibility for negotiated transactions. Pricing must now be “determined” at FMV, leaving little room for discretion.
6. Downstream Investment & Compliance
Aspect
Existing NDI Rules, 2019
Draft FI Rules, 2026
Implication
Downstream Investment
Subject to a separate, often complex, set of reporting and compliance requirements.
Consolidated into a unified definition of ‘foreign investment’ itself.
Simplifies the regulatory treatment of downstream investments and reduces duplicative compliance burdens for FCEs.
Onus of Compliance
Generally implied, but not explicitly consolidated.
Explicitly stated (Rule 9): The onus of compliance rests on both the foreign investor AND the eligible investee entity (or transferor/transferee).
Creates joint responsibility, emphasizing the need for robust internal compliance mechanisms for all parties.
7. Overseas Listing of Indian Companies
Aspect
Existing NDI Rules, 2019
Draft FI Rules, 2026
Implication
Framework
Specific framework for overseas listing was not fully integrated in the NDI Rules.
New detailed Annexure I provides a comprehensive framework for direct listing of equity of Indian public companies on international stock exchanges (subject to compliance with sectoral caps, entry routes, and conditions).
Provides a clear roadmap for Indian companies seeking to access global capital markets directly.
Voting Rights
Not specifically addressed in the context of overseas listing.
Explicit requirement that voting rights on internationally listed equity shall be exercised directly by the non-resident holder or through a custodian only on their instructions.
Ensures voting control remains with the actual beneficial owner.
8. Other Key Operational Changes
Aspect
Existing NDI Rules, 2019
Draft FI Rules, 2026
Implication
Modes of Acquisition
Broadly covered, but with varying conditions.
Explicitly lists modes: subscription, purchase, gift (with conditions), pledge (with conditions), and swap of equity (for companies and investment vehicles).
Provides a clear, consolidated menu of permissible modes, reducing interpretive gaps.
Rights / Bonus Issues
Generally exempt, but conditions varied.
Explicitly exempts rights/bonus issues from sectoral caps/conditions, provided the shareholding pattern does not change.
Confirms that pro-rata issuances do not trigger fresh compliance burdens.
Non-Repatriation Basis
Permitted, but with certain restrictions.
Clarifies that non-repatriation investments are exempt from pricing and sectoral conditions, but not permitted in prohibited sectors.
Maintains flexibility while ensuring prohibited sectors remain off-limits.
Our Comments & Takeaways
The Draft FI Rules represent a significant step toward creating a principle-based, consolidated, and user-friendly foreign investment framework. The key themes are:
Simplification: Unified definitions and consolidation of downstream investment rules will reduce interpretive disputes and compliance costs.
Clarity: The new 10% threshold for unlisted entities and the explicit control test provide much-needed predictability.
Liberalization: The increased gifting limit and unified FPI/FDI treatment are welcome changes.
Caution: The stricter pricing guidelines (removing the floor/ceiling flexibility) require careful transaction planning. The joint onus of compliance also necessitates robust record-keeping.
We recommend reviewing your current and proposed investment structures, pricing mechanisms, and internal compliance protocols in light of these proposed changes.
