If you are structuring an India entry this quarter, you are almost certainly relying on the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 — the "NDI Rules" — as the rulebook for how a foreign company can hold equity in an Indian entity. That has been the correct assumption for six years. It is about to stop being correct. On 21 July 2026 the Reserve Bank of India released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026, which are intended to replace the NDI Rules, 2019 in their entirety. Comments are open until 31 August 2026. Foreign founders who lock their holding structure to the current text without watching the transition risk building on a framework that will be rewritten under them.

This is not a policy that has taken effect. It is a draft in public consultation. But the direction of travel matters for anyone signing a term sheet, drafting a shareholders' agreement, or planning FC-GPR filings over the next two quarters. Here is what the draft actually says, what stays the same, and what to do about it now.

What the regulation actually says

Foreign investment into India runs on a three-layer stack. FEMA 1999 (the Foreign Exchange Management Act) is the parent statute. Under it, two authorities issue subordinate rules: the Central Government sets the non-debt instrument rules (equity, and the sector caps), while the RBI issues the mode-of-payment and reporting regulations plus consolidated guidance through Master Directions. Since 2019, the equity layer has lived in the NDI Rules. Sector caps and entry routes are then layered on top through the DPIIT-administered Consolidated FDI Policy and periodic Press Notes.

The draft 2026 rules restructure this stack rather than reopen the sector caps. Four features are worth understanding:

1. A principle-based rewrite. RBI's stated aim is to rationalise provisions, harmonise definitions, and simplify the regulatory architecture to reduce the compliance burden. Where the NDI Rules grew into a dense schedule-by-schedule document amended dozens of times, the draft consolidates and restates. The intent is clarity, not liberalisation — most substantive positions carry over.

2. Clearer separation of procedure from policy. The draft splits procedural FEMA provisions (how you file, report, and value) from policy and sector-specific requirements (which sectors are open, at what cap, on which route). This matters practically: it is meant to let the government change a sector cap without amending the core FEMA rules, so future policy shifts move faster. For you, it means the "how to invest" mechanics and the "where you may invest" caps will sit in different instruments.

3. A redefined control test. The draft revisits how control of a foreign-controlled entity (FCE) is defined — the test that determines when an Indian company is treated as foreign-owned or foreign-controlled, which in turn triggers downstream investment restrictions. If your India entry involves a subsidiary that will itself invest further in India, the control definition decides whether those downstream steps count as indirect foreign investment.

4. Codified overseas listing rules. Provisions on Indian companies listing abroad are being brought into the rules directly, giving founders eyeing a future overseas listing a clearer statutory basis.

Crucially, the two routes are unchanged. Foreign investment still enters India either under the automatic route — no prior government approval, you simply invest and report afterwards — or the government approval route, where you must obtain prior permission before the investment. The automatic route continues to cover most sectors up to their caps; the approval route continues to apply to sensitive sectors (defence above threshold, certain media, and any investment from a country sharing a land border with India). The draft does not throw open new sectors; it reorganises the plumbing beneath them.

One distinction the draft preserves is the line between foreign direct investment (FDI) and foreign portfolio investment (FPI). An investment of 10% or more of the paid-up equity capital of a listed Indian company, on a fully diluted basis, is treated as FDI; below that threshold, and made by a registered foreign portfolio investor, it is FPI. The two are governed differently, reported differently, and carry different exit mechanics — and the draft's harmonised definitions are meant to make that boundary easier to apply, not to move it. For an unlisted private limited company, the entity most foreign founders actually incorporate, all foreign equity is FDI by default, so this line only starts to bite if you later list or bring in portfolio investors.

Practical implications — what happens if you get this wrong

The risk here is not that the draft rules trap you. It is that you plan against a moving target and misfile.

Getting the route wrong is the expensive error under any version of the rules. If your sector actually requires the government approval route and you invest under the automatic route without prior permission, the investment is a FEMA contravention. The consequence is compounding — a formal application to RBI to regularise the breach, with a monetary penalty, plus the reputational drag of a compliance history when you later seek repatriation or an exit. In border-country cases (Press Note 3 of 2020, carried through the current regime), the approval requirement is strict and there is no automatic-route shortcut regardless of sector.

The reporting failure is the more common one. Every equity issuance to a foreign investor must be reported on Form FC-GPR within 30 days of allotment, supported by a valuation certificate confirming the price is at or above fair value. Every transfer of shares between a resident and a non-resident is reported on Form FC-TRS, also within 30 days, routed through your AD (Authorised Dealer) bank. These reporting mechanics are exactly the kind of procedural provision the draft is restating — so if the rules finalise mid-transaction, you want to be certain which version's forms and timelines apply to an allotment made around the changeover. Late FC-GPR filing is itself a compoundable contravention with late submission fees that scale with delay and amount.

The strategic risk sits with downstream investment. If the draft's revised control test changes whether your Indian holding company is treated as foreign-controlled, the compliance obligations on its onward investments into other Indian companies change with it. A structure that is clean under the 2019 control definition could need reassessment under the 2026 one.

There is also a downstream cost to sloppy filing that founders consistently underestimate: exit friction. When you eventually sell your Indian shares, buy out a co-investor, or repatriate capital, your AD bank and the acquirer's diligence team will pull your entire FEMA reporting history. A missing FC-GPR from years earlier, or a downstream investment that was never correctly characterised, tends to surface at exactly the moment you are trying to close a transaction — and regularising it through compounding at that point can stall a deal for weeks. Clean, timely filing is not paperwork for its own sake; it is what keeps your exit liquid and your valuation intact.

Step-by-step: what to do now

Confirm your route under the current NDI Rules first. Identify your sector, its FDI cap, and whether it sits on the automatic or government approval route under the Consolidated FDI Policy 2025 as it stands today. The draft does not change your sector cap, so this analysis remains your foundation.
Screen for the border-country trigger. If any beneficial owner is from a country sharing a land border with India, you are on the government approval route irrespective of sector, and you file through the FIF/NSWS Portal (the unified filing and examination platform under the revised May 2026 SOP). Build the 60-day-plus approval timeline into your plan.
File FC-GPR within 30 days of every allotment, with a valuation certificate from a SEBI-registered merchant banker or chartered accountant using an internationally accepted methodology. Do not let the draft-rules uncertainty delay a filing that is due under the rules currently in force — the NDI Rules govern until the 2026 rules are notified.
Route every resident–non-resident share transfer through FC-TRS via your AD bank, again within 30 days. The AD bank is your reporting gateway; keep it looped in on any secondary transfer.
Map your downstream investments against the control test. If your Indian entity will invest further in India, document whether it is foreign-owned or foreign-controlled today, and flag the structure for re-review once the 2026 control definition is final.
Submit comments before 31 August 2026 if the draft affects you. RBI has invited stakeholder input. If a redefined control test or the procedure/policy split changes your structuring, this is the window to raise it — through counsel or directly.

FAQ

Are the NDI Rules 2019 still in force?
Yes. The 2026 rules are a draft in public consultation until 31 August 2026. Until RBI notifies the final version, the NDI Rules, 2019 remain the operative law — file and report against them.

Does the draft open new sectors to FDI?
No. It is a structural and procedural rewrite aimed at simplification and clarity, not a liberalisation of sector caps or entry routes. The automatic route and the government approval route both continue.

Will my FC-GPR and FC-TRS filings change?
The forms and the 30-day timelines are procedural provisions the draft restates rather than abolishes. Expect continuity in substance; watch the final text for any change to formats or the reporting portal, especially for transactions straddling the changeover.

Closing

The safest read of the moment: keep filing against the NDI Rules that are in force today, but structure with an eye on the 2026 rewrite — particularly the control test if you have downstream investment in your plan. Planning India entry? Start with a free structure review at makeitlegit.in.

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