The FEMA (Non-Debt Instruments) (Third Amendment) Rules, 2026: Liberalising Foreign Investment

On June 12, 2026, the Ministry of Finance (Department of Economic Affairs) notified the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026 (“Amendment Rules“), introducing significant changes to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules“). The Amendment Rules aim to broaden the category of eligible investors, while ensuring that investment from countries sharing a land border with India are subject to Governmental scrutiny. Rather than merely widening market access, the Amendment Rules seek to strike a careful balance between investment liberalisation and regulatory control. This Article analyses four of the most significant changes introduced by the Amendment Rules and their practical implications.

Expansion of the Schedule III Investment Route

Under the NDI Rules, Schedule III provided specific investment routes through which Non-Resident Indians (“NRIs“) and Overseas Citizens of India (“OCIs“) could invest in listed securities. The Amendment Rules have expanded the eligibility for these routes, making them available to all individual persons resident outside India (“PROIs“), subject to the land border safeguards discussed below. This change is intended to improve market liquidity, while making listed Indian companies more attractive to international investors.

Structured Framework for Investment Limits

Pursuant to the Amendment Rules, Paragraph 1 of Schedule III specifies that individual PROIs may purchase or sell equity instruments of listed Indian companies on a repatriation basis subject to the same being facilitated by an authorised dealer bank. Additionally, such purchase or sale shall be subject to the following thresholds:

1. an individual investor’s holding must remain below 10% (ten percent) of the total paid-up equity capital on a fully diluted basis, or less than 10% (ten percent) of the paid-up value of each series of debentures or preference shares or share warrants issued by the Indian company; and
2. the aggregate holding of all individual PROIs in a company shall not exceed 24% (twenty four percent) of the total paid-up equity share capital on a fully diluted basis or shall not exceed 24% (twenty four percent) of the paid-up value of each series of debentures or preference shares or share warrants.

Where an individual PROI crosses the 10% (ten percent) threshold, the PROI must divest the excess within 5 (five) trading days. Failure to do so shall result in the entire investment being reclassified as foreign direct investment (“FDI“), thereby attracting the full range of FDI conditions relating to sectoral caps, entry routes and reporting requirements. The automatic conversion of portfolio investment into FDI also reinforces the long-standing regulatory distinction between passive portfolio investments and strategic investments made under FDI which involve significant ownership interests.

It is important to note that, pursuant to the Amendment Rules, the total holding of an individual PROI in a listed Indian company across Schedule II, Schedule II or any other investment route under the NDI Rules is required to be compliant with the individual prescribed limit of less than 10% (ten percent). Without such restriction, individual PROIs could theoretically split investments across multiple investment routes while remaining under the prescribed thresholds. This restriction ensures that the regulators are required to assess the investor’s total economic participation by taking a holistic view of their investment, rather than assessing the individual PROI’s compliance with the applicable investment channels.

Transfer of Equity Investments

Pursuant to the Amendment Rules, Rule 13 permits individual PROIs holding equity instruments of an Indian company to transfer the said equity instruments in accordance with the rules prescribed therein, including the transfer of equity instruments by way of sale or gift to any other individual PROI, subject to the land-border safeguards. It is clarified therein that if Governmental approval is required prior to investment in the specific sector in which such equity instruments are held, the transfer pursuant to Rule 13 shall be subject to obtaining such Governmental approval.

Land-Border Safeguards

Although the Amendment Rules significantly expand investor eligibility, they simultaneously reinforce India’s national security framework. Rules 12 and 13 now expressly require prior Government approval where an investment or transfer results in: (i) ownership or control of a listed Indian company passing to entities or citizens of countries sharing land borders with India; or (ii) where the beneficial owner or such investment belongs to a country sharing a land border with India. The Amendment Rules further align the definition of a “beneficial owner” with the Prevention of Money Laundering Act 2002, thereby promoting consistency across the regulatory framework.

The liberalisation introduced by the Amendment Rules invariably increases the possibility of indirect investments in India through complex ownership structures. The Amendment Rules clearly address this concern by requiring authorised dealer banks, Indian listed companies and intermediaries to assess the jurisdiction of the individual PROI and also the beneficial ownership of the investment. This would result in the requirement of a more comprehensive due diligence framework, particularly where the investments involve layered corporate structures.

Conclusion

The Amendment Rules represent a measured liberalisation of India’s foreign investment regime. By extending the Schedule III investment route to all individual PROIs, the Government has significantly broadened access to Indian capital markets and created a more inclusive framework for foreign portfolio investment. Additionally, this liberalisation is accompanied by carefully calibrated safeguards. The introduction of cross-schedule investment monitoring, detailed mechanisms for addressing threshold breaches, and strengthened scrutiny of investments involving land-bordering countries collectively demonstrate that the liberalisation of the market has not come at the expense of regulatory oversight. If implemented effectively, these reforms have the potential to deepen India’s capital markets while preserving the integrity of its foreign investment framework.