FEM(NDI) Third Amendment Rules 2026 Explained | HRA

Legal basis: Foreign Exchange Management Act, 1999 — Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026, amending Schedule III (and Rules 12 and 13) of the FEM(NDI) Rules, 2019 — Effective: June 12, 2026 (date of notification). Source: Ministry of Finance, Department of Economic Affairs gazette notification. Last reviewed by CA Harun Raaj: September 2026.

The Ministry of Finance notified the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026 on June 12, 2026, amending Schedule III of the FEM(NDI) Rules, 2019 — the provision governing portfolio-style investment in Indian listed companies by persons resident outside India (PROIs). Until this amendment, Schedule III was available only to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs). From June 12, 2026, it is open to any individual person resident outside India, regardless of nationality or Indian origin.

What Changed

Before this amendment, a foreign national with no Indian origin who wanted a stake in a listed Indian company had only one practical route: Schedule II, the Foreign Portfolio Investor (FPI) route. That route requires SEBI FPI registration, a custodian, a depository participant, and anti-money-laundering compliance layered on top. Schedule III — the comparatively simpler NRI/OCI route — was closed to non-Indian-origin individuals.

Under the amended Rules, that same investor, now classified as an "individual PROI," may purchase listed Indian equity directly under Schedule III through an Authorised Dealer (AD) bank, subject to the thresholds set out below.

Key point: Individual non-resident investors who are not NRIs or OCIs can now access Indian listed equity through the Schedule III AD-bank route instead of the SEBI FPI route, provided they stay under the 10% individual holding threshold.

Who Is Affected

This change is relevant to Gulf-resident professionals of non-Indian origin, Singapore- and UK-based individual investors, diaspora investors without Indian citizenship or OCI status, and foreign family offices investing below the 10% threshold as individuals. NRIs and OCIs are unaffected — their existing rights and thresholds under Schedule III continue unchanged.

Old Route vs New Route for a Non-Indian-Origin Individual

Aspect	Before June 12, 2026	From June 12, 2026
Eligible Schedule III investors	NRIs and OCIs only	Any individual PROI, regardless of nationality or Indian origin
Access route for other foreign individuals	Schedule II (FPI registration required)	Schedule III via an Authorised Dealer bank
Infrastructure needed	SEBI FPI registration, custodian, depository participant, AML compliance	Designated bank account with an AD bank
Individual holding cap	Not applicable under Schedule III (route closed)	Below 10% of total paid-up equity, fully diluted

Investment Thresholds Under Amended Schedule III

Limit	Threshold
Individual PROI holding	Below 10% of total paid-up equity (fully diluted)
All individual PROIs in aggregate	Up to 24% of total paid-up equity
Cross-schedule cap	The 10% individual cap applies across all NDI schedules combined

If an individual PROI's holding touches or crosses 10%, divestment within 5 trading days is mandatory. Failure to divest triggers automatic reclassification of the entire holding as FDI, pulling in the downstream reporting obligations that come with that status — including FC-GPR filing within 30 days and applicable sectoral approval requirements.

National Security Safeguards

Rules 12 and 13 were tightened alongside the Schedule III expansion. Prior Government approval through the DPIIT route is now required when the investor is a national of, or an entity from, a country sharing a land border with India — China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, or Afghanistan — or when the beneficial owner of the investment is from such a country, even if the direct investor is routed through a third country. This safeguard applies across all NDI schedules, including the newly widened Schedule III, so the liberalisation does not extend to investors from, or beneficially owned from, these jurisdictions without prior approval.

Illustrative Example

A Singaporean national with no Indian background wants to buy 5 lakh shares representing a 3% equity stake in an NSE-listed Indian company. Before June 12, 2026, this required SEBI FPI registration. From June 12, 2026, the same investor may invest through an NRO or foreign currency account via an Authorised Dealer bank under Schedule III — provided the aggregate individual-PROI holding in that company stays under 24% and the beneficial ownership is not traced to a bordering country.

What Indian Listed Companies Need to Do Now

The expansion of Schedule III means a listed company's PROI register must now track non-NRI, non-OCI individual foreign shareholders, not just the NRI/OCI universe it monitored earlier. A breach of the 24% aggregate cap, or the 10% individual cap by any single PROI, can push part of the share register into FDI territory and trigger the reporting consequences that follow. Companies approaching either threshold should have their PROI monitoring process, and any board resolution to raise the aggregate limit, reviewed against the amended Schedule III before the cap is breached rather than after.

This is a general summary of the FEM(NDI) Third Amendment Rules, 2026, for information purposes. FEMA compliance is fact-specific — the correct treatment depends on the investor's residency status, beneficial ownership, and the company's sector — and should be reviewed against the full text of the notification before you act on it.

I'm CA Harun Raaj, Visakhapatnam. If you're an NRI, OCI, or foreign individual investor navigating this route, or a listed company that needs its PROI register reviewed against the amended thresholds, reach out.

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Frequently Asked Questions

Can any foreign national now buy Indian listed stocks without SEBI FPI registration?

For individual PROIs investing below the 10% threshold, yes — subject to the Schedule III conditions under the amended FEM(NDI) Rules and the border-country restriction under Rules 12 and 13. Investors holding 10% or more, or investing through funds or entities rather than as individuals, must still use the FPI or FDI route.

What happens if the 24% aggregate PROI limit is breached?

The company board may, by special resolution, raise the aggregate limit from 24% up to the applicable sectoral FDI cap. Without such a resolution, purchases that would breach the 24% aggregate cap are blocked at the exchange or depository level.

Does this change anything for existing NRI or OCI investors?

No. NRIs and OCIs continue to invest under Schedule III exactly as before the Third Amendment Rules, 2026. The amendment widens the pool of eligible individual investors; the 10% individual and 24% aggregate thresholds that already applied to NRIs and OCIs remain unchanged.

What operational route do individual PROIs use to invest under Schedule III?

Transactions route through a designated bank account, such as an NRO or foreign currency account, via an Authorised Dealer bank, as set out for the amended Schedule III route.

What happens if an individual PROI crosses the 10% holding threshold?

Divestment within 5 trading days is mandatory once the 10% threshold is touched or crossed. Failure to divest triggers automatic reclassification of the holding as FDI, bringing in FC-GPR filing within 30 days and applicable sectoral approval requirements.

Does the Schedule III expansion apply to investors from countries bordering India?

No, not without prior Government approval. Rules 12 and 13, tightened alongside the Schedule III expansion, require DPIIT approval where the investor or the beneficial owner is from a country sharing a land border with India, including China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan.

Is beneficial ownership checked even if the direct investor is from a third country?

Yes. Under Rules 12 and 13 as amended, the approval requirement applies if the beneficial owner of the investment is from a bordering country, even where the direct investor is routed through a third-country entity.

What should a listed Indian company do differently now?

The PROI register needs to track non-NRI, non-OCI individual foreign shareholders in addition to the existing NRI/OCI universe, since a breach of the 10% individual or 24% aggregate cap under the amended Schedule III can trigger FDI reclassification for that portion of the shareholding.

Topics:FEM NDI third amendment rules 2026Schedule III FEMA investmentnon-resident individual investing IndiaPROI holding limitsFPI vs Schedule III routeFEMA border country restrictionAuthorised Dealer bank investment NRI OCIFDI reclassification FEMA

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