RBI Issues Draft Foreign Exchange Management (Foreign Investment) Rules, 2026

The Reserve Bank of India (RBI) has invited public comments on the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 (Draft Rules) until August 31, 2026. The Draft rules propose to supersede the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. Once notified, the Rules will be issued under the Foreign Exchange Management Act, 1999 (FEMA) and administered by the RBI, while interpretation of the Foreign Investment Policy (FDI Policy) will continue to vest with the Department for Promotion of Industry and Internal Trade (DPIIT).

The Draft Rules apply to foreign investment in the equity of an eligible investee entity by a person resident outside India and to the transfer of such investment. The term “eligible investee entity” has been defined to include companies, limited liability partnerships (LLPs), SEBI-registered investment vehicles — Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), Alternative Investment Funds (AIFs), Venture Capital Funds, and mutual funds or exchange-traded funds (ETFs) or any other investment vehicle investing more than fifty per cent in equity as well as partnership firms and proprietary concerns. Investments in financial institutions established in an International Financial Services Centre (IFSC) remain outside its scope.

The Draft Rules also revise several key definitions. “Foreign investment” includes both direct investment by a person resident outside India and specified indirect investment through a foreign-controlled entity or another overseas entity under common ownership or control. The distinction between foreign direct investment (FDI) and foreign portfolio investment (FPI) continues to be based on the ten per cent threshold. The Draft further defines “control” to include the right to appoint a majority of directors or to control management or policy decisions, directly or indirectly, including through shareholding, management rights, shareholders’ agreements or voting agreements conferring ten per cent or more voting rights.

Chapter II of the rules consolidates the permissible modes of foreign investment. A person resident outside India or a foreign-controlled entity may acquire equity by way of subscription, purchase, gift or pledge, subject to the prescribed conditions. The Draft Rules also recognise investment through depository receipts, permit eligible NRIs and Overseas Citizens of India to subscribe to the National Pension System, and provide for foreign investment and transfer of equity on international stock exchanges in accordance with Annexure I. Eligible investee entities may correspondingly issue equity to persons resident outside India or foreign-controlled entities.

The proposed framework continues to require compliance with the FDI Policy, including the applicable entry route, sectoral caps and sector-specific conditions. Pricing of foreign investment in listed companies and investment vehicles is to be determined under the applicable SEBI regulations, while transactions involving companies listed on international stock exchanges are governed by the pricing provisions contained in Annexure I. In all other cases, pricing must be based on an internationally accepted valuation methodology on an arm’s length basis and certified by a chartered accountant, merchant banker or cost accountant. The Draft also provides for reclassification of foreign portfolio investment into FDI where the ten per cent threshold is crossed.

An important addition is Annexure I, which lays down the framework for the direct listing of equity of Indian companies on international stock exchanges. It prescribes eligibility conditions for companies and existing shareholders and conditions governing issuance and transfer of equity, pricing, voting rights and disclosures while requiring compliance with the Companies Act, 2013, the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 and other applicable securities and foreign exchange laws. Two conditions stand out.

The beneficial owner of shares bought on an international exchange cannot be a person resident in India, except where a broker-dealer or investment banker is acting for its clients. And where a portfolio investor’s overseas holding reaches ten per cent, it must sell down — unlike a holding on an Indian exchange, which can simply be reclassified as FDI. Annexure I also lists the only situations in which overseas-listed shares can later pass to an Indian resident: delisting offers, buy-backs, a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, mergers under the Companies Act, 2013, and inheritance.

The Draft rules also clarify that the RBI will administer the Rules and prescribe operational requirements relating to payment, reporting and implementation, while interpretation of the FDI Policy will continue to rest with the DPIIT. Responsibility for compliance has been placed on the foreign investor and the eligible investee entity or, in the case of transfers, on the transferor and transferee.

Overall, the Draft seeks to consolidate the existing foreign investment framework while incorporating provisions relating to overseas listing and restructuring the regulatory framework governing foreign investment in equity.