RBI Releases Draft FEMA (Foreign Investment) Rules, 2026 to Replace NDI Rules, 2019

Why RBI Is Rewriting the NDI Rules

Foreign investment into India is presently governed by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules"). Per the RBI press release dated 21st July 2026, 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, consistent with India's evolving economic priorities.

Pursuant to that announcement, a committee was constituted by the Central Government to undertake a comprehensive review of the extant regulatory framework. Based on the committee's recommendations, and in consultation with the Central Government and other stakeholders, RBI has prepared a draft of the rationalised Rules — the Foreign Exchange Management (Foreign Investment) Rules, 2026 — and placed it on its website for public comment.

Salient Features Highlighted by RBI

The press release identifies four salient features of the proposed draft Rules:

• Simplified and principle-based framework — rationalisation of provisions, harmonisation of definitions, and a simplified regulatory architecture to enhance clarity and reduce regulatory complexity.
• Alignment with the FDI Policy — clear demarcation of procedural FEMA provisions from policy and sector-specific requirements, improving regulatory coherence and facilitating timely policy changes.
• Enhanced ease of doing business — streamlined procedures, reduced compliance burden, and greater operational flexibility through a transparent, investor-friendly framework.
• Future-ready regulatory framework — adoption of principle-based, investee-neutral, and investor-neutral provisions aligned with evolving business practices, while preserving necessary regulatory safeguards.

Chapter I — Preliminary: Applicability and Definitions

Rule 1 provides the short title — Foreign Exchange Management (Foreign Investment) Rules, 2026 — and states the Rules shall come into force on the date of publication in the Official Gazette once finalised.

Rule 2 sets applicability: the Rules apply to any foreign investment in equity of an eligible investee entity by a person resident outside India, or transfer thereof.

Key Definitions (Rule 3)

Other defined terms include "entry routes" (Government route and Automatic route per the FDI policy at Annexure-II), "equity," "foreign investment policy," "Overseas Citizen of India (OCI)," "sectoral cap," and "sectoral conditions."

Note: Terms used but not defined in these Rules take the meaning assigned to them under the FEMA Act, 1999, or the rules and regulations made under it.

Powers of RBI (Rule 4)

Restriction on Foreign Investment (Rule 5)

Save as otherwise provided in the Rules or the regulations/directions listed in Annexure-III, no person shall make, transfer, or receive any foreign investment. RBI may, on application and for sufficient reasons, permit any foreign investment or transfer subject to terms and conditions it considers necessary.

Chapter II — Foreign Investment in an Eligible Investee Entity

Rule 6A — Modes of Acquisition or Transfer

Subject to Rule 8 conditions, a person resident outside India or an FCE may make foreign investment, on repatriation or non-repatriation basis, by:

• Subscription to an issue;
• Purchase from any person;
• Gift between natural persons — where the gift is made on a repatriation basis from a non-repatriation holder, the recipient must be a close relative under the Companies Act, 2013, and the value transferred in a financial year must stay within Liberalised Remittance Scheme limits;
• Pledge — subject to Rule 8 conditions applying once the pledge is invoked;
• Transfer by an erstwhile OCB, per the FEM (Withdrawal of General Permission to OCBs) Regulations, 2003, and Rule 8 conditions.

Other permissible investments include acquisition/transfer of depository receipts under the Depository Receipts Scheme, 2014; NRI/OCI subscription to the National Pension System (with repatriable annuity/accumulated savings), subject to PFRDA eligibility; and foreign investment on an international stock exchange, per Annexure-I.

Rule 6B — Issue of Equity by Eligible Investee Entities

An eligible investee entity may issue equity to a person resident outside India or an FCE, subject to the conditions in Annexure-I and Annexure-II.

Rule 7 — Transfer to a Person Resident in India

A person resident outside India may transfer equity of an eligible investee entity to a person resident in India by sale, gift, or pledge. Investment via swap of equity of a company (or equity capital of a foreign company, as defined under the FEM (Overseas Investment) Rules, 2022) is also permitted, as is an investment vehicle issuing units against a swap of equity of an SPV it proposes to acquire.

Chapter III — Conditions Applicable on Foreign Investment

General Conditions (Rule 8(1))

• Compliance with the foreign investment policy (Annexure-II) — entry routes, sectoral caps, sectoral conditions. FCE investment need only comply for sectors specifically prescribed for that purpose; bonus/rights issues that don't change shareholding pattern are exempt from these conditions.
• SEBI registration is required for stock exchange investment by non-individual persons resident outside India, unless exempted or the person is a foreign central bank or RBI-notified entity.
• Investment via rupee vostro accounts on a recognised stock exchange must follow the manner specified by RBI.

Pricing Guidelines (Rule 8(2))

Pricing guidelines do not apply to subscription of equity issued on a rights basis. Foreign investment on a non-repatriation basis does not require compliance with the pricing rule, but remains barred from prohibited sectors under the foreign investment policy.

Chapter IV — General Provisions: Who Bears the Compliance Onus

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.

Annexure-I — Direct Listing on International Stock Exchanges

This Annexure codifies the Direct Listing of Equity of Companies Incorporated in India on International Stock Exchange(s) Scheme in detail, setting out issue and listing conditions, eligibility, transfer, voting rights, and pricing in one place.

Issue and Listing Conditions

A public company may issue or offer equity on an international stock exchange if it meets eligibility criteria, complies with the Companies Act, 2013 and the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024, stays within sectoral caps under Annexure-II, denominates equity in INR held in dematerialised form, and — if also listed in India — complies additionally with SEBI regulations, ranking pari passu with domestically listed equity. If not listed in India, MCA-prescribed conditions apply instead.

Eligibility Criteria

Investment, Transfer, Voting Rights and Pricing on International Exchanges

• FPI on an international exchange must follow entry routes, sectoral caps, and Annexure-I pricing guidelines; the beneficial owner of such investment must not be a person resident in India, except for broker-dealers/investment bankers acting on behalf of constituents.
• FPI resulting in 10% or more holding must be divested per the international exchange regulator's guidelines, or SEBI guidelines in their absence — counting equity held in India by the same person toward the 10% limit.
• Transfers between persons resident outside India must follow entry-route conditions; transfers to a person resident in India are permitted only in specific events: delisting offers, an IBC-approved resolution plan, buy-back, merger/amalgamation, or transmission on succession/inheritance.
• Voting rights must be exercised directly by the resident-outside-India equity holder, or through a custodian acting strictly on that holder's instructions.
• Pricing: book-building for initial listing where not already listed in India; not less than the price applicable to a corresponding domestic issuance mode where already listed in India; subsequent post-listing issuances follow the international exchange's own pricing norms.

The Annexure closes with explanatory definitions for "public company," "appropriate regulator," "beneficial owner," "foreign depository," "fugitive economic offender," "Indian depository," "offer document," and "wilful defaulter," largely cross-referencing the Companies Act, 2013, the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, the Depositories Act, 1996, and the Fugitive Economic Offenders Act, 2018.

Annexure-II and Annexure-III

Annexure-II is the Foreign Investment Policy (FDI policy) issued by the Government of India, as amended from time to time — referenced but not reproduced within the Rules themselves. Annexure-III lists the RBI regulations and directions applicable to foreign investment or its transfer.

Key Change — NDI Rules, 2019 vs. Draft Foreign Investment Rules, 2026

Compliance Checklist — Engaging with the Draft Rules

CorpLawUpdates Analysis

This draft is best understood as a structural reset of India's foreign investment rulebook rather than a routine amendment cycle. The explicit supersession language, the Budget 2026-27 mandate, and the dedicated review committee all point to a deliberate, top-down rationalisation exercise — not a reaction to a specific market event or enforcement gap, unlike most circulars this platform typically covers.

The clearest structural improvement is the explicit division of labour between RBI (procedural administration) and DPIIT (policy interpretation) under Rule 4. Under the NDI Rules regime, practitioners often had to triangulate between RBI circulars and DPIIT press notes to resolve ambiguity.

The consolidation of the international stock exchange direct listing regime into a single, detailed Annexure-I is also significant. Previously scattered across separate scheme notifications, having eligibility, pricing, transfer-back events, and voting rights in one place should materially ease due diligence for companies considering an overseas listing route — a mechanism that remains relatively new and closely watched in the Indian market.

Practitioners should treat the definitions in Rule 3 — particularly "ownership," "control," and "foreign controlled entity" — as the highest-priority section to scrutinise during the comment period, since these thresholds determine which structures attract FDI-level scrutiny versus lighter FPI treatment. Given the scale of this rewrite, firms with active inbound investment structures should not wait for the final notification to begin gap-testing their existing arrangements against the draft; the 31st August 2026 comment deadline is also a practical opportunity to seek clarity on ambiguous provisions before they become binding law.