Last updated: 4 August 2026
On 21 July 2026, the Reserve Bank of India put out a draft that quietly rewrites the rulebook behind every rupee of foreign money that enters an Indian company. The draft Foreign Exchange Management (Foreign Investment) Rules, 2026 would replace the Non-Debt Instruments Rules, 2019 in full. That single move touches every founder who has raised from an overseas fund, every NRI holding shares in a private company, and every startup planning a cross-border round. The comment window shuts on 31 August 2026, and the version that gets notified after that will decide how your next FC-GPR filing, your cap table, and your investor’s exit are judged. Getting the reporting wrong under FEMA already carries a penalty of up to three times the amount involved. The framework beneath that penalty is now changing.
What happened: RBI released the draft Foreign Investment Rules, 2026 on 21 July 2026 to replace the NDI Rules, 2019 in their entirety.
Comment deadline: 31 August 2026, through the RBI “Connect 2 Regulate” portal or by email titled “Feedback on Draft Foreign Investment Rules”.
Who is affected: Every company with foreign shareholders, foreign-funded startups, NRI and family-office structures, LLPs, and SEBI-registered investment vehicles receiving foreign money.
What changes: A principle-based framework, a redrawn 10% FDI-versus-FPI test, a new “foreign controlled entity” control test, codified overseas listing, and a cleaner split between RBI’s procedural rules and the government’s FDI policy.
Key action: Keep FC-GPR, FC-TRS and FLA reporting current, map your cap table against the 10% test, and file a comment before 31 August if any change hurts you.
The problem: the rulebook you comply with is being rewritten under you
Foreign investment into India runs on one core instrument: the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, usually called the NDI Rules. When your startup issues shares to a foreign fund, the sector cap, the pricing floor, the entry route and the reporting all trace back to that document. The draft Foreign Investment Rules, 2026 would supersede the NDI Rules, 2019 in full, keeping alive only what was already done or omitted before the switch. This is the first wholesale replacement of the foreign-investment rulebook since 2019.
The draft is described by the RBI as principle-based and investee-neutral. In plain terms, it tries to state a few clear tests instead of long lists of sector-by-sector exceptions, and it pushes the sector conditions into the government’s FDI policy where they can be updated faster. That sounds like relief, and for routine automatic-route rounds it may well be. The risk sits in the tests themselves. Two of them decide how your existing holdings are classified, and reclassification is where compliance status can flip without a single new share being issued.
The first is the FDI-versus-FPI line drawn at 10%. Foreign investment of 10% or more of the post-issue paid-up capital, on a fully diluted basis, is foreign direct investment. Below 10% it falls to the portfolio route and may require registration as a foreign portfolio investor. The draft redraws this test, and any redraw of a threshold forces a fresh look at holdings that sat comfortably on one side of the line. The second is the “foreign controlled entity” test, which decides when an Indian company that is itself foreign-owned or foreign-controlled must pass on FDI conditions to the companies it invests in downstream. The draft redefines ownership and control here, and that redefinition matters most for NRI holdings and family offices that invest through an overseas holding company, where a change in governance rights at the top can change the compliance character of the Indian investment below.
None of this pauses the reporting you already owe. FC-GPR within 30 days of allotment, FC-TRS within 60 days of a resident-to-non-resident transfer, and the annual FLA return by 15 July all continue. Section 13 of FEMA still allows a penalty of up to three times the amount involved in a contravention, or up to Rs 2 lakh where the amount cannot be quantified, plus Rs 5,000 for each day a contravention continues. The framework is in flux; the penalties are not.
Diagram 1: NDI Rules, 2019 versus the draft Foreign Investment Rules, 2026
| Feature | NDI Rules, 2019 (current) | Draft Foreign Investment Rules, 2026 |
|---|---|---|
| Drafting style | Detailed, schedule-heavy, sector lists inside the rules | Principle-based, investee-neutral, sector conditions moved to FDI policy |
| Eligible investee entity | Companies, LLPs and specified vehicles | Expressly covers companies, LLPs, REITs, InvITs, AIFs, VCFs, qualifying mutual funds and ETFs, registered partnership and proprietary firms |
| FDI vs FPI line | 10% threshold, stated across provisions | 10% threshold redrawn into a single, clearer test |
| Downstream / control | Owned or controlled test for indirect foreign investment | Redefined “foreign controlled entity” (FCE) ownership and control test |
| Overseas listing | Handled through separate rules and schemes | Direct listing on international exchanges codified within the rules |
| RBI vs government | Overlap between rules and policy | Sharper split: procedure with RBI, sector policy with DPIIT |
What the draft actually changes
The RBI has called this the widest rewrite of the foreign-investment framework since 2019, and the draft groups the changes into a few clear moves.
A principle-based structure. The draft separates procedure from policy. The mechanics of how foreign investment happens stay with the RBI under FEMA, while the sector caps and conditions live in the government’s FDI policy, set out in an annexure. The stated aim is “greater operational flexibility” and faster policy updates, because the government can revise a sector condition without amending the rules themselves.
A wider list of who can receive foreign money. The definition of an eligible investee entity is spelt out and expanded. It now expressly names companies, LLPs, SEBI-registered investment vehicles such as REITs, InvITs, AIFs and VCFs, mutual funds and ETFs that hold more than half their corpus in equity, and registered partnership firms and proprietary concerns. For fund structures and family offices, being named in the rules removes an old grey area about eligibility.
A redrawn 10% test and a new control test. The 10% line between direct and portfolio investment is restated in one place. Alongside it, the foreign controlled entity test is redefined. Analysts have flagged that the control test could reach minority investors and cross-border deals in ways the current rules do not, because a shift in governance rights, not just in shareholding, can decide whether an entity is foreign controlled.
Codified overseas listing and repatriation choice. The draft writes the direct listing of Indian companies on international exchanges into the rules, and it confirms that a person resident outside India, or a foreign controlled entity, may invest on either a repatriation or a non-repatriation basis. For startups eyeing a GIFT-IFSC or overseas listing path, having the route inside the rules reduces the reliance on stand-alone schemes.
In the RBI’s own framing, the draft aims to:
- reduce complexity and improve clarity;
- align the rules with commercial practice; and
- separate procedure under FEMA from sector policy set by the government.
Diagram 2: is your foreign shareholder FDI or FPI?
File FC-GPR within 30 days of allotment. Sector cap, pricing floor and downstream rules apply. FLA return every 15 July.
May require registration as a foreign portfolio investor and reporting through the FPI framework, not FC-GPR.
By the numbers
What you must do now
The draft is not law yet, so the work over the next few weeks is preparation and, where it matters to you, a written comment. Here is the order that keeps you safe on the current rules while you get ready for the new ones.
1. Keep every FEMA report current. Nothing in the draft pauses your existing duties. If you issued shares to a foreign investor, confirm FC-GPR went in within 30 days. If a resident and a non-resident swapped shares, confirm FC-TRS went in within 60 days. If your company has ever held foreign investment, file the FLA return by 15 July. A gap here is a live contravention regardless of which rulebook applies.
2. Map your cap table against the 10% test. List every foreign holder and their fully diluted percentage. Flag anyone sitting between roughly 8% and 12%, and anyone whose stake a coming round will push across 10%. A move across that line changes the route from FDI to FPI or the reverse, and with it the reporting you owe.
3. Trace your control and downstream structures. If foreign money reaches your company through an overseas holding company, an NRI vehicle or a family office, write down who owns and who controls each layer. The redefined foreign controlled entity test turns on control, not only on shareholding, so a founder veto or a board right can decide the outcome. Companies that make downstream investments should re-check whether Form DI obligations follow.
4. Read the draft against your own structure. Pull the draft from the RBI website and read the definitions of eligible investee entity, foreign controlled entity, and the 10% test against your actual shareholders. This is where you find out whether the new rules help you, leave you unchanged, or reclassify something.
5. File a comment before 31 August 2026. If any definition creates a problem for you, say so. Comments go through the “Connect 2 Regulate” section on the RBI website, or by email with the subject line “Feedback on Draft Foreign Investment Rules”. A short, specific comment on a single definition carries more weight than a general note.
6. Brief your board and your investors. Put a one-page note in front of the board covering what changes, what stays, and what you plan to comment on. Foreign investors and their counsel will ask, and a company that already has a view looks ready rather than reactive.
Diagram 3: from draft to notified rule
Draft released
public consultation opens
Comments close
Connect 2 Regulate / email
RBI reviews feedback
revisions to the draft
Final rules in the Gazette
NDI Rules 2019 superseded
The RBI has not fixed a notification date. Until the final rules are published in the Official Gazette, the NDI Rules, 2019 remain the law and your reporting duties run under them.
The deeper implication
According to CS Sapna Malpani, the headline of “simpler rules” hides the real work for a company secretary, which is classification. When a framework moves from long sector lists to a few broad tests, the tests do more of the deciding, and a company can find its foreign investment reclassified without any new transaction. The 10% line and the foreign controlled entity test are the two places where a startup’s compliance status can change on paper alone, and both are being redrawn at once.
The forward view is that once the rules are notified, the first year will see companies regularising holdings that the new tests classify differently from the old ones. The safe position is to arrive at that point with clean FC-GPR, FC-TRS and FLA records and a cap table already read against the 10% test, so that a reclassification is a note to the board rather than a scramble in the middle of a diligence round. Founders who treat the comment window as the moment to understand their own structure, not just to lobby, will be the ones who avoid surprises when the final rules land.
How this fits with what you already file
Founders confuse the framework with the forms. The Foreign Investment Rules, whether the 2019 or the 2026 version, set the tests: who may invest, in what, up to what cap, and on what basis. The forms sit on top of those tests and do not disappear. FC-GPR still reports a fresh issue of shares to a foreign investor. FC-TRS still reports a transfer between a resident and a non-resident. The FLA return still reports foreign assets and liabilities each year. The draft changes how you are classified; it does not remove the filing you do once you know your classification. The other pairing to keep straight is RBI versus the government. Procedure, reporting and the mechanics of investment stay with the RBI under FEMA. Sector caps and approval conditions stay with the government’s FDI policy through DPIIT. The draft makes that split cleaner, so a sector change will now show up in the policy annexure rather than in the rules.
Key takeaways
- ✓ RBI released the draft Foreign Investment Rules, 2026 on 21 July 2026 to replace the NDI Rules, 2019 in full.
- ✓ Comments close on 31 August 2026 via the “Connect 2 Regulate” portal or email to the RBI.
- ✓ The 10% test between FDI and FPI is redrawn, so holdings near that line can be reclassified.
- ✓ A redefined foreign controlled entity test turns on control, which affects NRI, holding-company and family-office structures.
- ✓ Eligible investee entities now expressly include LLPs, AIFs, REITs, InvITs and qualifying funds.
- ✓ FC-GPR (30 days), FC-TRS (60 days) and FLA (15 July) reporting continue unchanged in the meantime.
- ✓ FEMA Section 13 still allows a penalty of up to three times the amount involved for a contravention.
- ✓ Until the final rules are notified in the Gazette, the NDI Rules, 2019 remain the law.
Sources and references
- Reserve Bank of India, Draft Foreign Exchange Management (Foreign Investment) Rules, 2026 and press release, 21 July 2026 (rbi.org.in, “Connect 2 Regulate”).
- Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and FEMA, 1999, Section 13 (India Code, indiacode.nic.in).
- MMJC & Associates, analysis of the draft Foreign Investment Rules, 2026 (mmjc.in).
- TaxGuru, “RBI Invites Comments on Draft Foreign Investment Rules 2026 Replacing NDI Rules”, 22 July 2026 (taxguru.in).
- CorpLawUpdates, “RBI Releases Draft FEMA (Foreign Investment) Rules, 2026 to Replace NDI Rules, 2019” (corplawupdates.in).
- Business Today / The Hans India, coverage of the RBI draft foreign investment rules, 21 July 2026.
Get ahead of the new FEMA framework
Not sure whether your foreign shareholders sit on the FDI or FPI side of the 10% line, or whether your holding-company structure trips the foreign controlled entity test? A short review now is cheaper than a scramble during your next raise.
- Check what a delayed or missed FC-GPR or FC-TRS could cost with the MCA Penalty Calculator.
- See how a cap table read against FEMA works in the FDI Reporting Guide for Indian Startups.
- Book a FEMA compliance review for your company.
Talk to CS Sapna Malpani: Contact page or WhatsApp +91 96208 03375.
Frequently asked questions
What are the draft Foreign Investment Rules, 2026?
The draft Foreign Investment Rules, 2026 are new rules the Reserve Bank of India released on 21 July 2026 under the Foreign Exchange Management Act, 1999. They are proposed to replace the Non-Debt Instruments Rules, 2019 in full. The draft sets out a principle-based framework for foreign direct investment and foreign portfolio investment, redraws the 10% test that separates the two, redefines the foreign controlled entity test, and codifies direct overseas listing. Public comments are open until 31 August 2026, after which the RBI will review feedback before notifying the final rules.
When do the new Foreign Investment Rules 2026 come into force?
They are not in force yet. As of August 2026 the document is a draft open for public comment until 31 August 2026. The Reserve Bank has not announced a notification date. Until the final rules are published in the Official Gazette, the NDI Rules, 2019 remain the governing law, and all foreign investment reporting continues under them. Companies should treat the coming weeks as time to prepare, not to change how they file.
How do the draft rules change the FDI versus FPI 10% threshold?
Under the current NDI Rules, a foreign holding of 10% or more of a company’s post-issue paid-up capital, on a fully diluted basis, is foreign direct investment, and a holding below 10% falls to the foreign portfolio route. The draft Foreign Investment Rules, 2026 restate this test in a single, clearer place. The practical effect is that any holding near 10%, or any round that pushes a holder across the line, should be reviewed, because a change of side changes whether you file under the FDI framework or register and report as a foreign portfolio investor.
What is a foreign controlled entity under the draft rules?
A foreign controlled entity, or FCE, is an Indian entity that is owned or controlled by persons resident outside India. When such an entity invests in another Indian company, that downstream investment is treated as indirect foreign investment and must meet the applicable FDI conditions. The draft rules redefine the ownership and control test. Because the test turns on control, such as board rights or veto powers, and not only on the shareholding percentage, NRI structures, overseas holding companies and family offices should re-check where control actually sits at each layer.
Do I still file FC-GPR and FC-TRS while the rules are in draft?
Yes. The draft does not pause any reporting. If your company issues shares to a foreign investor, Form FC-GPR is due within 30 days of allotment. If shares transfer between a resident and a non-resident, Form FC-TRS is due within 60 days. The annual Foreign Liabilities and Assets return is due by 15 July. Missing any of these is a contravention under FEMA, and Section 13 allows a penalty of up to three times the amount involved. Keep every filing current regardless of the draft.
How can I submit comments on the draft Foreign Investment Rules, 2026?
The Reserve Bank has invited comments until 31 August 2026. You can submit them through the “Connect 2 Regulate” section on the RBI website, or by email with the subject line “Feedback on Draft Foreign Investment Rules”. A specific comment that points to a single definition, such as the 10% test or the foreign controlled entity test, and explains the effect on a real structure tends to be more useful than a general response. A practising company secretary can help frame a comment that reflects your company’s position.
Which companies should worry most about this change?
Foreign-funded startups, companies with NRI or overseas holding-company shareholders, family offices, LLPs receiving foreign money, and SEBI-registered vehicles such as AIFs and VCFs have the most to check. So do companies planning an overseas or GIFT-IFSC listing, since the draft codifies that route. If all your foreign holders sit well above or well below 10% and your control structure is simple, the change is likely to be administrative. If any holder sits near the line or invests through layers, review your position before the rules are notified.