"Our structure is already approved, so the new rules don't affect us": What the draft FEMA (Foreign Investment) Rules 2026 actually change for existing FDI structures

The RBI's public consultation on the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 closed on 31 August 2026. Within days, foreign parent companies with Indian subsidiaries started asking their India counsel a version of the same question: our FC-GPR is filed, our shareholding is clean, our sector is automatic route — this is a new-investor problem, right?

It is not. A rewrite of the Non-Debt Instruments Rules, 2019 is not a rewrite of the front door only. It re-draws definitions and thresholds that your existing holding is measured against every time you do something — issue new shares, transfer them, pledge them, gift them, or let your Indian company invest in another Indian company. If your structure was built to sit just inside a line, and the line moves, the structure moves with it.

What the regulation actually says

The operating law today is still the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, notified under Section 6(2) and Section 47 of FEMA, 1999. Nothing in the draft has legal effect yet. Until the Ministry of Finance notifies the final version in the Gazette, NDI 2019 governs your investment and every filing you make.

On 21 July 2026 the RBI released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 for comment through its "Connect 2 Regulate" portal, with a closing date of 31 August 2026. The stated aim is a principle-based, investor-neutral and investee-neutral framework: harmonised definitions, procedural FEMA provisions brought into line with the Consolidated FDI Policy, and a lighter compliance load. The draft replaces NDI 2019 in its entirety rather than amending it.

Four changes matter most to a company that already has foreign investment on its cap table.

The 10% FDI/FPI threshold extends to unlisted companies. Under NDI 2019, the 10% line that separates foreign direct investment from foreign portfolio investment applies in the listed-company context. The draft applies a single 10% test across the board — foreign investment of 10% or more in the equity of a company or LLP is FDI, below 10% is portfolio. For a private limited subsidiary that is 100% foreign-held this changes nothing. For structures with a spread of small foreign angel or ESOP-trust holdings in an unlisted Indian company, the classification of each holder — and therefore which reporting form applies to them — needs re-checking.

Direct and indirect foreign investment are consolidated under one definition. NDI 2019 treats indirect foreign investment separately, through the downstream investment framework in Rule 23. The draft folds direct and indirect investment into a single definition. That is a simplification with teeth: your foreign-owned or foreign-controlled Indian company (an FOCC) and its subsidiaries are assessed on one consistent basis rather than through two parallel sets of concepts.

Several downstream investment conditions are absent from the draft as published. The current regime requires, among other things, that the first-level Indian company making a downstream investment not use funds borrowed in the domestic market for that purpose, and that it obtain an auditor's certificate confirming compliance. Those requirements do not appear in the draft. If they stay out of the final version, the operational friction on FOCC-to-FOCC investment drops materially. If they are restored after consultation, planning built on the draft text collapses.

Pledge, gift and pricing are recalibrated. The draft broadens the pledge regime, relaxes the norms on gifting shares between residents and non-residents, and adjusts pricing requirements. Pricing is the one to watch: the pricing guideline is what sets the floor below which shares cannot be issued or transferred to a non-resident, and the ceiling above which a non-resident cannot sell to a resident. Any recalibration changes the arithmetic on your next round and on any secondary exit.

Practical implications

The risk here is not that the rules change. It is that a structure keeps operating on assumptions from the old rule set after the new one is notified, and the mismatch only surfaces at a transaction.

If a foreign holding is reclassified from portfolio to direct, or the reverse, the reporting obligation changes with it — and a filing made on the wrong form is not a filing. Under FEMA, a delayed or defective FC-GPR or FC-TRS is a contravention, curable through the compounding process under Section 15 read with the Foreign Exchange (Compounding of Proceedings) Rules, 2024. Compounding is not catastrophic, but it is a paid, disclosed proceeding that shows up in every subsequent diligence pack.

If pricing guidelines shift and your next allotment is priced against the old floor, the AD Category-I bank will not accept the FC-GPR. The allotment sits unreported past 30 days while you re-do the valuation. That is a self-inflicted contravention on an otherwise clean transaction.

The costliest version is at exit. A buyer's diligence runs across your entire FDI history — every allotment, every transfer, every downstream investment. Structural assumptions that were correct in 2024, applied unchanged to a 2027 transaction, produce diligence findings, an indemnity, or an escrow holdback. Foreign shareholders discover their FEMA housekeeping at precisely the moment it is most expensive to fix.

Step-by-step: what to do now

• Read the draft against your own cap table, not in the abstract. Pull the draft rules from the RBI's Connect 2 Regulate page and list every foreign holder in your Indian entity with their exact percentage. Flag anyone sitting near 10%.
• Re-run the FDI/FPI classification of each foreign holder under the proposed 10% test. For each holder whose classification would change, identify which form they would file on and note it. Do not act on it — NDI 2019 still governs — but know the answer before notification.
• Map your downstream chain. If your Indian company holds equity in any other Indian company, document the ownership and control position at each level, and note which conditions you currently satisfy under Rule 23 of NDI 2019 (including the source-of-funds restriction and the auditor's certificate). You need to be able to show compliance under the current rules whatever the draft eventually says.
• Close out pending filings under existing law before notification. Any allotment made must be reported in Form FC-GPR through the RBI's FIRMS portal within 30 days of allotment; any transfer between a resident and a non-resident must be reported in Form FC-TRS within 60 days of transfer or receipt of consideration, whichever is earlier. Clear the backlog now — reporting a legacy transaction after a rule change is meaningfully harder.
• Check your Annual Return on Foreign Liabilities and Assets (FLA) is filed. Every Indian company with foreign investment on its books files the FLA with the RBI by 15 July each year. If the 2026 filing was missed, regularise it before it becomes a line item in a diligence report.
• Speak to your AD Category-I bank now, not at transaction time. The AD bank is the entity that will actually accept or reject your filings under the new rules. Ask how they intend to handle the transition and whether they anticipate re-papering any of their internal checklists.
• Diarise the Gazette notification. The draft is not law. Watch for the Ministry of Finance notification under Section 46/47 of FEMA and read the transitional provisions in the final text — those provisions, not the substantive rules, determine what happens to your existing structure.

FAQ

Do the draft rules apply to my investment right now?
No. NDI 2019 remains fully in force. The draft has no legal effect until notified in the Gazette by the Central Government. Every filing you make today is made under NDI 2019.

Will my existing FDI need to be re-approved or re-reported when the new rules are notified?
Almost certainly not re-approved. Whether anything needs re-reporting depends entirely on the transitional and savings provisions in the final notified text, which are not settled. Historically, FEMA rule replacements have grandfathered completed transactions and applied the new framework prospectively — but that is a pattern, not a guarantee.

The consultation closed on 31 August 2026. Is it too late to have any input?
The formal comment window has closed and the RBI has indicated it will finalise after wider public consultation. Industry bodies and law firms continue to engage on specific provisions, so representations through those channels remain possible. The realistic posture for an individual investor now is to prepare for the final text rather than to shape it.

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This article is general information on Indian foreign exchange regulation and is not legal advice. The draft rules discussed are not in force. Verify the current position against the notified text before acting.

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See Also

• "Government approval takes forever": What the May 2026 DPIIT SOP actually requires
• "Only NRIs and OCIs can invest as individuals in India": What the FEMA NDI Third Amendment Rules 2026 actually changed
• "Foreign-owned e-commerce companies can't hold inventory in India": What FDI Policy actually requires after Press Note 3 of 2026