RBI Floats Draft to Rationalise FEMA Non-Debt Instrument Rules

The Reserve Bank of India has released draft rules to replace the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, the main rulebook for equity and other non-debt foreign investment into India. Through RBI Press Release No. 2026-2027/726 dated 21 July 2026, titled "Rationalisation of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 - Draft Rules for Comments", the RBI invited public comments until 31 August 2026.

The RBI said the review follows the Union Budget 2026-27. A committee set up by the Government examined the framework, and the RBI prepared the draft rationalised rules on the basis of its recommendations. The press release lists four aims: a simplified, principle-based framework with harmonised definitions; clear alignment between FEMA provisions and the FDI Policy; easier procedures for ease of doing business; and a framework ready for evolving business practices.

What the draft proposes

The draft Foreign Exchange Management (Foreign Investment) Rules, 2026 would supersede the NDI Rules, 2019. The rules would be organised around foreign investment in "eligible investee entities" rather than a list of non-debt instruments. The main features in the draft text are set out below.

FDI and FPI defined by a 10% line

The draft defines foreign direct investment as foreign investment of ten per cent or more in the equity of a company or an LLP, and foreign portfolio investment as foreign investment of less than ten per cent in the equity of a company or an LLP. Placing LLPs alongside companies in both definitions means the same threshold would decide the character of an investment in either form.

Eligible investee entity

The term "eligible investee entity" covers companies, LLPs, investment vehicles (such as REITs, InvITs, AIFs, mutual funds and ETFs), partnership firms and proprietary concerns set up under Indian law. Investment vehicles may issue units to persons resident outside India.

Foreign controlled entity

A foreign controlled entity is described as a resident company, LLP or investment vehicle owned or controlled by a person resident outside India. For downstream investment, the draft requires such entities to meet sectoral conditions only for sectors that are specifically prescribed.

RBI and DPIIT roles separated

The draft states that the RBI will administer the rules and may issue regulations, directions, circulars and clarifications. Powers to interpret the foreign investment policy are vested in the Department for Promotion of Industry and Internal Trade (DPIIT).

Structure and pricing

The draft has four chapters (preliminary provisions, foreign investment in eligible investee entities, conditions applicable, and general provisions) and three annexures: the scheme for listing on international stock exchanges, the FDI Policy issued by the Government, and the RBI's regulations and directions. On pricing, the price of foreign investment is to follow SEBI regulations for listed companies, the conditions for international exchange listings, or an internationally accepted pricing methodology on an arm's length basis certified by a qualified professional. Investment on a non-repatriation basis is kept outside the rules except for prohibited sectors.

Consultation and status

Comments were accepted through the "Connect 2 Regulate" section of the RBI website and by email with the subject line "Feedback on Draft Foreign Investment Rules". The RBI's Connect 2 Regulate page now lists this consultation as closed, with the window having ended on 31 August 2026. The RBI has said it will finalise the rules after considering the feedback. Until the final rules are notified, the NDI Rules, 2019 and the existing FDI Policy continue to govern every transaction.

Who should track this

• Indian companies and LLPs with foreign shareholders: the 10% FDI/FPI line and the new foreign controlled entity definition will decide how existing and new holdings are classified.
• AIFs, REITs, InvITs and other investment vehicles: the draft brings them expressly within the eligible investee entity framework.
• Authorised dealer banks and reporting teams: reporting workflows built around the 2019 Rules will need to be mapped to the new structure once notified.
• CAs, CSs and valuers: pricing certificates, downstream investment checks and FEMA opinions will need to refer to the new rule numbers and definitions after notification.

What to do now

Deals signing before the final rules are notified should be documented under the NDI Rules, 2019. Where closing is likely to fall after notification, transaction documents should allocate the risk of a change in law and the responsibility for any fresh filings. Advisers can prepare a mapping of each current NDI rule used in their standard opinions to the corresponding draft provision, so that updates can be made quickly once the final text and its commencement date are known.

Updated on 27 September 2026: corrected the release date to 21 July 2026 (earlier shown as 24 July), added the RBI press release number, the draft Foreign Investment Rules, 2026 and their main definitions, the 31 August 2026 comment deadline and the closed status of the consultation, with links to the RBI documents.