India: Draft Foreign Investment Rules Signal Major Simplification of FEMA Framework

India’s Reserve Bank of India has published draft Foreign Exchange Management (Foreign Investment) Rules, 2026, proposing a significant overhaul of the country’s foreign investment framework. Once notified, the new rules will replace the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and are intended to simplify the regulatory structure governing equity investment into India.

The proposed framework is considerably shorter and more streamlined than the current regime, relying heavily on India’s FDI Policy and separate RBI directions for sectoral caps, entry routes, prohibited sectors, payment methods, reporting and other procedural requirements. Existing restrictions, including government approval requirements and restrictions relating to investors from countries sharing a land border with India, are expected to remain in place.

Several substantive changes are also proposed. The concept of “non-debt instruments” would be replaced by a broader definition of “equity”, while the range of eligible investee entities would expand to include companies, LLPs, certain SEBI-registered investment vehicles, registered partnership firms and proprietary concerns. Significantly, the draft rules would allow foreign investors generally to invest in registered partnership firms and proprietary concerns without prior RBI approval.

The distinction between foreign direct investment (FDI) and foreign portfolio investment (FPI) would also change. Under the proposed framework, an investment of 10% or more in a company or LLP would constitute FDI, while holdings of up to 9.99% would generally be treated as FPI. This threshold would apply to both listed and unlisted companies and, for the first time, to LLPs. The draft rules also propose a single fixed pricing methodology for foreign investment transactions, replacing the current approach that allows greater flexibility around fair value.

Another important change concerns ownership and control. The existing concept of a “Foreign Owned or Controlled Company” would be replaced by a broader “Foreign Controlled Entity” test. Rather than relying solely on a 50% ownership threshold, control may be determined by applicable sectoral rules or the legislation governing the relevant entity. The new rules also introduce a 10% voting-rights threshold in certain indirect investment situations, potentially affecting the classification of downstream and related-party investments.

For foreign investors, one of the most commercially significant changes is the proposed shift in compliance responsibility. The draft rules place compliance obligations on both the foreign investor and the eligible Indian investee entity, rather than primarily on the Indian counterparty. Foreign investors may therefore need to undertake more extensive foreign exchange due diligence and address compliance risks more directly through transaction documentation, representations, warranties and indemnities.

Although the reforms are clearly aimed at reducing duplication and simplifying India’s foreign investment regime, a number of areas remain unclear and will depend on the final rules, FDI Policy and subsequent RBI directions. Foreign investors considering investments or restructurings in India should therefore monitor the final framework closely and assess how the changes may affect transaction structuring, pricing, ownership tests and ongoing compliance.

By Majmudar & Partners, India, a Transatlantic Law International Affiliated Firm.

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