NDI Rules 2.0: RBI Proposes a Principle-Based Overhaul of India’s Foreign Investment Framework
- Gaurav Mishra & Anubhav Sharma
- 3 days ago
- 5 min read
On July 21, 2026, the Reserve Bank of India (“RBI”) released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 (“Draft Rules”) for public comments.[1] Once finalised, these Draft Rules will replace the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”).
The review stems from the Union Budget 2026-27, which called for a comprehensive rework of the NDI Rules to make India’s foreign investment framework simpler. A committee was subsequently constituted to carry out this review, and the Draft Rules reflect its recommendations, prepared by the RBI in consultation with the central government. Comments on the Draft Rules are invited through the RBI’s “Connect 2 Regulate” portal, or by email, until August 31, 2026.
Key Changes
Clear separation of law and policy:
The Draft Rules keep procedural matters, including definitions, entry routes, pricing, and reporting, within the Draft Rules themselves, while sector-specific requirements (caps, conditions, prohibited sectors) now sit separately as the “Foreign Investment Policy” in Annexure-II of Draft Rules. The RBI will administer the Draft Rules, while the Department for Promotion of Industry and Internal Trade (DPIIT) will interpret the underlying policy.[2] This separation should allow sectoral policy to be updated more easily going forward, without requiring a fresh notification of the entire Draft Rules each time.
Clearly defined control test:
The Draft Rules set out clear criteria for when an investment is treated as made indirectly through, or in concert with, another overseas person, using a beneficial-ownership threshold of more than 50% and a voting-rights threshold of 10% or more for persons acting individually or in concert.[2] In simple terms, the 50% test is about ownership: if a foreign investor holds more than 50% of the shareholding in the overseas entity it is investing through, that entity’s investment into India is treated as the investor’s own. The 10% test is about acting together: if two or more investors, through shareholding, management rights, or a voting agreement, jointly hold 10% or more of the voting rights, they are to be treated as jointly controlling the investee entity. The current NDI Rules borrow the definition of “control” from the Companies Act, 2013, which does not prescribe a percentage for when parties are considered to be acting in concert. This has left the position open to interpretation, to be decided on a case-by-case basis rather than under a clear rule. The Draft Rules close this gap by writing both thresholds straight into the definition itself.
Clear mechanics for the FDI/FPI threshold:
The 10% threshold separating Foreign Direct Investment (“FDI”) from Foreign Portfolio Investment (“FPI”) remains unchanged, but the way it is applied is set to change. Under the current NDI Rules, this distinction depends on whether the investee company is listed or unlisted. Currently, any investment in an unlisted Indian company is automatically treated as FDI. In contrast, for a listed company, the 10% threshold determines whether the investment qualifies as FDI or FPI. The Draft Rules remove this distinction altogether and apply a single, uniform 10% threshold to both listed and unlisted companies.[2]
Under the current NDI Rules, when a portfolio investor’s holding gradually increases and crosses the 10% threshold, the investor is given five trading days to divest the excess shareholding, failing which the entire investment is automatically reclassified as FDI, and the investor is thereafter barred from making any further portfolio investment in that company. The Draft Rules ease this position for shares held on an Indian stock exchange. Crossing the 10% threshold will no longer trigger an automatic, time-bound conversion. Instead, the investor may simply be reclassified as an FDI investor once the applicable FDI conditions are satisfied, without being subject to the current five-day divest-or-convert requirement.[2]
A wider range of “Eligible Investee Entities”:
The Draft Rules significantly expand the scope of entities that qualify as an “eligible investee entity” for the purpose of receiving foreign investment. In addition to companies and LLPs, the definition now expressly includes (a) SEBI-registered investment vehicles, such as REITs, InvITs, AIFs, venture capital funds, and mutual funds or ETFs that invest more than 50% of their corpus in equity (collectively referred to as “Investment Vehicles”) and (b) registered partnership firms and proprietary concerns registered under applicable domestic law. The NDI Rules presently contain separate provisions and schedules for investments in different types of entities. The Draft Rules instead first identify the entities that may receive foreign investment and then apply a common set of principles to investment in their equity. Under the current NDI Rules, partnership firms and proprietary concerns can receive foreign investment only from Non-Resident Indians (“NRIs”) or Overseas Citizens of India (“OCIs”) investing on a non-repatriation basis, and there is no general route through which other foreign investors can invest in them directly.[2] The Draft Rules change this by bringing partnership firms and proprietary concerns within the general “eligible investee entity” definition, thereby opening up a direct investment route for foreign investors generally, and not merely for NRIs and OCIs.
New rules for overseas listings:
As per Draft Rules, the issue price for an unlisted Indian public company listing abroad for the first time, may be determined through the book-building process of the relevant international exchange. This is not a new concept as the current NDI Rules already permit book-building for such listings, though they also require the book-built price to be no less than the company’s fair market value. The Draft Rules remove this fair-market-value floor, giving companies greater pricing flexibility on a first-time overseas listing.[2]
Pricing framework largely retained:
Beyond the removal of the fair market value floor in the book-building change noted above, the broader pricing framework carries over from the current NDI Rules with little change. SEBI regulations continue to govern pricing for listed companies and Investment Vehicles, and for all other cases, pricing must follow an arm’s-length, internationally accepted valuation methodology, certified by a Chartered Accountant, a SEBI-registered merchant banker, or a Cost Accountant.[2]
Onus of compliance:
Under the current NDI Rules, in the case of a fresh issuance of securities, responsibility for compliance rests on the company receiving the foreign investment. In the case of a transfer, the obligation rests on the resident party. However, the Draft Rules extend the accountability to the foreign investor as well, and, in the case of transfers, to both the transferor and the transferee.[2]
Conclusion
The Draft Rules are a rationalization of process, not a change in policy. Sectoral caps, entry routes and prohibited sectors continue to apply as before under the Foreign Investment Policy, and the Draft Rules do not signal any relaxation of these safeguards. However, a number of issues remain unresolved, including the status of provisions omitted from the current NDI Rules, and the manner in which the Draft Rules will operate alongside the RBI directions expected to be issued separately.
As this is still a draft, the ongoing consultation period is also an opportunity for stakeholders to raise concerns before the Draft Rules are notified.
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