RBI Overhauls Foreign Investment Rules in India

The Reserve Bank of India (RBI) has unveiled a comprehensive overhaul of India’s foreign investment regulations through its draft Foreign Exchange Management (Foreign Investment) Rules, 2026. These proposed rules, released on July 21, 2026, aim to streamline compliance and expand investment avenues, replacing the 2019 regulations.

Key Figures from the Draft Rules

• Rules released on: July 21, 2026
• Public comments invited until: August 31
• Minimum voting rights for control test: At least 10 percent
• FDI equity ownership threshold: At least 10 percent
• FPI equity ownership threshold: Below 10 percent

Understanding the New ‘Control Test’

A significant change introduced by the draft rules is a revised ‘control test’ for evaluating foreign control within entities. This test is crucial for identifying connections between overseas entities in complex indirect investment structures.

• Control can be defined by the right to appoint a majority of directors.
• It also includes the ability to influence management and policy decisions.
• This influence may stem from shareholding arrangements, management rights, shareholder agreements, or voting arrangements with at least 10 percent of voting rights.

Analysts suggest this revised definition carries implications for minority investors, affecting foreign private equity, venture capital investors, and mergers and acquisitions.

Expanding Investment Horizons

The draft rules significantly broaden the scope of entities permitted to receive foreign investment in India. This expansion aims to encourage greater capital inflows.

• Companies
• Limited liability partnerships
• SEBI-regulated investment vehicles, including REITs, InvITs, and AIFs.
• Venture capital funds
• Certain mutual funds and exchange-traded funds

Furthermore, the framework consolidates various investment methods into a unified structure, covering subscriptions, purchases, gifts, pledges, and depository receipts. Non-resident Indians and Overseas Citizens of India will also gain the ability to subscribe to the National Pension System.

Clarifying Regulatory Roles and Definitions

To enhance clarity, the proposed regulations delineate responsibilities between key regulatory bodies. The RBI will focus on FEMA-related rules, payments, reporting, and operational requirements.

Conversely, the Department for Promotion of Industry and Internal Trade (DPIIT) will continue managing foreign investment policy, including sectoral caps, prohibited sectors, and approval processes. The draft also formally defines foreign direct investment (FDI) as foreign investment involving at least 10 percent equity ownership in a company or limited liability partnership, while investments below this threshold are categorized as foreign portfolio investment (FPI).

The public has until August 31 to submit comments on these draft rules, which are set to replace the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. The aim is to create a more streamlined and transparent regulatory environment for foreign capital.