India’s recent reforms governing foreign investment and foreign contributions reflect an increasingly calibrated regulatory approach, driven by a deliberate two-track intent. On one hand, the reforms facilitate the movement and administration of foreign funds through greater procedural efficiency. On the other, they preserve the safeguards that underpin regulatory oversight, transparency, and accountability.
This Article examines this balancing act through three recent regulatory developments: the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026[1] (“Third Amendment Rules“); the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Amendment) Regulations, 2026[2] (“Payment Regulations“); and the Foreign Contribution (Regulation) Amendment Rules, 2026[3] (“FCRA Rules“). Together, the three illustrate the same underlying thought of procedural and access-side liberalization of foreign funds, while maintaining targeted accountability.
The Liberalizing Mechanism
Two regulatory changes drive this shift towards liberalization: the Third Amendment Rules expand the pool of eligible investors, while the Payment Regulations reduce procedural friction on the execution side.
The Amendment Rules expanded access to Indian capital markets. As discussed in detail in our previous article, it broadens the scope of Schedule III of the Non-Debt Instrument Rules, 2019 (“NDI Rules“), which was earlier only available to Non-Resident Indians (“NRIs“) and Overseas Citizens of India (“OCIs“). Following the Third Amendment Rules, all Persons Resident Outside India (PROIs) may invest under Schedule III, thus widening the class of eligible investors while preserving the underlying architecture of thresholds and safeguards.
Subsequently, the Payment Regulations, issued by the Reserve Bank of India (“RBI“) on June 13, 2026, are the operational companion to the Third Amendment Rules and reflect a similar philosophy to the Third Amendment Rules at a different point in the investment lifecycle.
Prior to the Payment Regulations, investments on a repatriation basis were routed through designated banking channels, specifically Non-Resident External Accounts (“NRE Accounts“), creating an additional operational step for investors and their banking counterparts. An NRE Account is a rupee-denominated account held by an NRI or OCI, into which foreign currency can be remitted. The Payment Regulations relax this constraint in two material respects:
On Entry: Clause (1) of Part A of Schedule III of the Payment Regulations now permits consideration to be paid either as an inward remittance from abroad through banking channels, or out of funds held in any repatriable deposit account maintained under the Foreign Exchange Management (Deposit) Regulations, 2016, rather than an NRE account alone.
On Exit: The corresponding Clause (1) of Part B of Schedule III of the Payment Regulations similarly departs from the earlier position. Sale proceeds of equity instruments (net of taxes) may now be remitted abroad or credited to the investor’s designated rupee account instead of being funneled back through a single prescribed channel.
The practical effect is a meaningful reduction in the logistical friction that has historically accompanied cross-border portfolio investment into India. The expanded permissible banking channels through which foreign investment transactions may be completed have simplified the operational mechanics of capital deployment. The same logic extends symmetrically to disinvestment, where proceeds may now be credited across a wider set of permitted accounts, simplifying what was previously a more rigid and, at times, administratively cumbersome exit process.
The Cautionary Counterweight
The procedural liberalization reflected in these reforms should not be mistaken for a relaxation of the compliance framework governing foreign investment.
The Third Amendment Rules do not alter the fundamental guardrails under the Foreign Exchange Management Act (“FEMA“). Applicable sectoral caps and the automatic reclassification of portfolio holdings that breach the prescribed individual or aggregate thresholds remain fully intact, as further detailed in our previous article. Beneficial ownership scrutiny continues to apply irrespective of which account is used to route the underlying payment. The legislature’s evident position from the above is that easing how money moves can coexist comfortably alongside national security interests.
Even with respect to the Payment Regulations, Clause (2) of Part A of Schedule III requires the investor to designate one such repatriable rupee account and use it exclusively for Schedule III investments, so the widening of eligible account types comes paired with a segregation requirement and is not an unconditional free-for-all. This ensures that the invested funds remain traceable to a permissible foreign source, thereby maintaining transparency and financial safeguards over such investments in line with the previously limited scope.
Taken together, these developments suggest that the accountability framework governing foreign capital is becoming more precise. The Third Amendment Rules and the Payment Regulations reflect a coherent approach to the regulation of foreign investment, a common thread of measured effort to facilitate legitimate investment activity without disturbing the substantive oversight architecture.
On the Horizon
On July 21, 2026, the RBI released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 (“Draft Rules“) for public comments[4]. As per its notification, the RBI intends to undertake a comprehensive review of the NDI Rules to create a more contemporary, user-friendly framework for foreign investments, consistent with India’s evolving economic priorities. While the Draft Rules are not yet in force, it is nonetheless useful in gauging the direction of the legislature going forward, as has been addressed in the above sections.
The key provisions of the Draft Rules bear this out on both counts. On the liberalizing side, the Draft Rules propose to supersede the NDI Rules, 2019 in their entirety by departing from the current construct of ‘non-debt instruments’ and consolidating them into a single construct built around one overarching definition of ‘foreign investment’ as the organizing concept. At the same time, the safeguards embedded in the current regime relating to pricing and compliance have been retained, and FDI and portfolio investment continue to sit as threshold-based sub-classifications under foreign investment.
Parallel Emphasis on Accountability
This distinction between operational facilitation and regulatory oversight is not confined to the foreign investment regime. Although foreign contributions are governed by a distinct statutory framework, recent developments under the FCRA reveal a comparable emphasis on ensuring clear lines of accountability.
Earlier this year, the introduction of the proposed Foreign Contribution (Regulation) Amendment Bill, 2026 (introduced in the Lok Sabha on March 25, 2026) formed part of the continuing legislative engagement within the FCRA framework[5]. Although the aforementioned Bill was not enacted, its introduction is indicative of a broader effort to revisit the administration of foreign contribution and funds regulation.
That broader trajectory is reflected in the subsequently notified amendments to the FCRA Rules. Most notably, the FCRA Rules expand the definition of “key functionary” to expressly include directors, partners and trustees, thereby bringing a wider class of individuals within the statute. By more clearly identifying those responsible for ensuring compliance with the FCRA regime, the amendments reinforce the accountability architecture surrounding the receipt and utilization of foreign contributions.
While the foreign investment and foreign contribution regimes serve distinct statutory objectives, each reflects a measured preference for improving the administration of foreign funds without compromising the mechanisms through which such funds are supervised. If the recent FEMA reforms reduce friction in the entry and movement of foreign investment, the evolving FCRA framework correspondingly sharpens the governance and accountability obligations associated with foreign contributions.
Conclusion
This shift has real practical implications for companies/organizations with layered or complex ownership structures such as groups with a corporate social responsibility (“CSR“) wing, or investment vehicles that route capital through multiple intermediary jurisdictions. For these entities, the changes aren’t just a compliance footnote; they call for a fresh look at internal processes. On the FEMA side, in-house treasury and compliance teams should not read this as an invitation to relax internal due diligence on the source or ultimate beneficial ownership of investor funds. On the FCRA side, the ask is more concrete; companies running CSR foundations, trusts, or societies registered to receive foreign contributions are advised to look at mapping their existing governance structure. The move showcases a coherent economic policy stance of India.
[1] Notifications – Reserve Bank of India
[2] Reserve Bank of India – Foreign Exchange Management Act Notification
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