RBI Proposes Single Framework To Replace Seven-Year-Old Foreign Investment Rules

The Reserve Bank of India (RBI) on Tuesday published draft rules that would consolidate the fragmented regulations governing overseas capital flows into Indian equity instruments under a single unified code, replacing the Foreign Exchange Management Non-Debt Instruments Rules that have been in place since 2019.

Key Definitions And Thresholds

The proposed Foreign Exchange Management (Foreign Investment) Rules 2026 cover companies, limited liability partnerships and specialised investment vehicles under one roof, pulling together entry routes, sectoral caps and pricing norms that have accumulated across multiple instruments since 2019.

The framework also brings in provisions for direct listing of Indian companies on overseas exchanges for the first time within a unified code.

RBI will administer the rules. The Department for Promotion of Industry and Internal Trade retains its role in interpreting foreign investment policy.

What Stays The Same

The basic difference between foreign direct investment (FDI) and foreign portfolio investment (FPI) remains the same. An investment of 10% or more in a company or limited liability partnership is treated as FDI. Any holding below that threshold is classified as FPI. If an FPI investor's stake rises above 10%, it can be reclassified as FDI, subject to regulatory conditions.

What The Draft Defines

The rules introduce formal definitions for several concepts that previously lacked regulatory clarity:

• Ownership: Beneficial holding above 50%.

• Control: ability to appoint most of the directors or influence key management decisions. It can also come through agreements that give 10% or more voting rights.

• Foreign-controlled entities: Resident companies, limited liability partnerships and investment vehicles owned or controlled by overseas investors.

• Eligible investees: Companies, limited liability partnerships, real estate investment trusts, infrastructure investment trusts, alternative investment funds, venture capital funds, mutual funds and exchange-traded funds investing more than 50% in equity, plus partnership firms and proprietary concerns.

Pricing And Overseas Listing Bar

Listed entities follow Securities and Exchange Board of India valuation norms. Unlisted entities must use internationally accepted methodologies certified by a chartered accountant, merchant banker or cost accountant. Rights issues are exempt.

Companies whose promoters or directors are debarred from capital markets, classified as wilful defaulters, declared fugitive economic offenders or are under investigation under the Companies Act cannot access overseas listing routes under the draft.

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