INTRODUCTION
On June 12, 2026, the Ministry of Finance notified the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026 (“Amendment Rules”), introducing a series of changes to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). The NDI Rules form the cornerstone of India’s regulatory framework governing foreign investments in equity investments by foreign investors, non-resident Indians, and overseas citizens of India.
This article examines the key changes introduced under the Amendment Rules.
A Broader Investor Base: From NRIs and OCIs to All Individuals Resident Outside India
One of the most significant changes introduced by the Amendment Rules is the expansion of investment-related provisions that were previously available only to non-resident Indians and overseas citizens of India to now include all individual persons resident outside India. A non-resident Indian as an individual resident outside India who is a citizen of India (“NRI”), and an overseas citizen of India as an individual resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7-A of the Citizenship Act, 1955 (57 of 1955) (“OCI”).
The Amendment Rules replaces references to NRIs and OCIs with the broader term “an individual person resident outside India.”. As a result, the investment route under Chapter V of the NDI Rules is no longer limited to NRIs and OCIs and is now available to all individuals resident outside India, subject to the prescribed conditions and investment limits. Accordingly, any individual resident outside Indian can now buy or sell equity instruments of Indian companies listed on a recognised stock exchange. These transactions must continue to be undertaken on a repatriation basis, through a designated branch of an authorised dealer bank, and in compliance with the conditions set out in Schedule III of the NDI Rules.
The Amendment Rules similarly revise the provisions governing transfers of equity instruments under Rule 13 of the NDI Rules. Pursuant to the Amendment Rules, any individual person resident outside India including NRIs/OCIs, holding equity instruments of an Indian company on repatriation basis are permitted to transfer them by way of sale or gift to any person resident outside India.
Further, any investment by an individual person resident outside India that results in the transfer of ownership or control of the listed Indian company to either (i) entities or citizens of a country that shares a land border with India, or (ii) any investment where the beneficial owner is a citizen of such a country, will require prior approval of the Government of India. We have discussed the land border restriction in our previous article.
Clarification on Foreign Portfolio Investor Holding Limits
The Amendment Rules also amend Schedule II of the NDI Rules, which governs investments by foreign portfolio investors (“FPIs”). The Amendment Rules clarify that the 10% (ten percent) investment threshold for an FPI must be assessed by considering the investor’s aggregate holdings across Schedule II, Schedule III and any other applicable schedules under the NDI Rules, including holdings through an investor group. This change prevents investors from splitting their investments across different routes or related entities to remain below the prescribed limit. Where the aggregate holding reaches 10% (ten percent) or more, the consequences applicable under the NDI Rules for such investments, including reclassification as FDI, will apply.
New Framework for Individuals Resident Outside India under Schedule III
The Amendment Rules make significant changes to Schedule III of the NDI Rules, which sets out the framework for investments by individual persons resident outside India in listed Indian companies, to reflect the broader class of eligible investors. While the category of eligible investors has expanded, the prescribed investment thresholds continue to ensure that such investments retain their portfolio character. The limits have been revised upwards from the old NRI/OCI framework:
- Under the revised framework, the holding of any single individual person resident outside India must remain below 10% (ten percent) of the total paid-up equity capital of a listed Indian company on a fully diluted basis or below 10%(ten percent) of the paid-up value of each series of debentures, preference shares or share warrants.
- In addition, the total holdings of all the individual person resident outside India put together in the Indian company under this schedule must not exceed 24% (twenty four percent) of the total paid-up equity capital on a fully diluted basis or must not exceed 24% (twenty four percent) of the paid-up value of each series of debentures or preference shares or share warrants.
Further, where an individual’s investment under the NDI Rules breaches the 10% (ten percent) threshold, the Amendment Rules introduce a structured response mechanism:
- An investor who exceeds the prescribed threshold must either (i) divest the excess holding within 5 (five) trading days from the settlement of the transaction causing the breach, or (ii) allow the entire investment in the concerned company to be reclassified as FDI. In the latter case, the investor will not be permitted to make any further portfolio investments in that company.
- Further, in either case, the investor must notify the depositories and the concerned company of the breach within 7 (seven) trading days of the settlement date of the trades that caused it. This notification must be made through the designated branch of the authorised dealer bank.
The Rules further clarify that the divestment process and reclassification from portfolio investment to FDI will be governed by conditions specified by SEBI and the Reserve Bank of India. The Amendment Rules clarify that the breach of aggregate or sectoral limits during the window between acquisition and divestment/conversion will not be treated as a contravention under the NDI Rules, provided the divestment or conversion is completed within the prescribed time.
Conclusion
The introduction of the Amendment Rules is a meaningful and well-calibrated policy move. By extending the existing investment framework to all individuals resident outside India, the Government has signalled its intent to create a more inclusive and accessible foreign investment regime. In doing so, it opens India’s listed equity markets to a wider pool of global investors without dismantling the oversight architecture that regulators have carefully built over the years.
Authors: Aishwarya H., Anusha Dash
