Draft Foreign Investment Rules, 2026: Key Transactional Changes

The Reserve Bank of India (“RBI”) through notification dated July 21, 2026, has proposed a new framework for regulating foreign investment in India through the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 (“Draft FI Rules”). The Draft FI Rules seek to replace the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) and are intended to create a more streamlined framework for foreign investment transactions. The Draft FI Rules are open for public comments until August 31, 2026.

 

• A New Approach to Foreign Investment Regulation

One of the notable changes is the restructuring of the regulatory framework around the concept of foreign investment in equity. Rather than retaining the terminology of “non debt instruments”, the Draft FI Rules directly define “equity”. The definition extends beyond conventional equity instruments and includes units of SEBI regulated investment vehicles and participating interests or rights in oil fields or mines held by an Indian company or LLP.

The Draft FI Rules also introduce the broader concept of an “eligible investee entity”, covering companies, LLPs, specified SEBI registered investment vehicles, registered partnership firms and proprietary concerns. This could expand the range of Indian entities capable of receiving foreign investment, although questions remain regarding the registration requirements applicable to partnership firms and proprietary concerns.

 

• Key Considerations for Deal Structuring

The proposed framework may have a direct impact on the structuring of share acquisitions and secondary transactions. Unlike the NDI Rules, under which permissible modes of acquisition and transfer were distributed across multiple provisions and Schedules, the Draft FI Rules consolidate several such modes under Rule 6A. The Draft FI Rules permit foreign investment through (i) subscription to an issue; (ii) purchase from any person; (iii) gift and (iv) pledge, while also recognising investment through swaps in specified circumstances.

 

However, the proposed pricing guidelines is significantly more condensed than the existing regime. Under the NDI Rules, the pricing guidelines were distributed across Rule 21 and the relevant schedules, whereas the Draft FI Rules consolidate the pricing guidelines into the three limbs set out under Rule 8(2). For transactions not covered by the specific rules applicable to listed securities or international listings, pricing is proposed to be based on an internationally accepted arm’s length methodology certified by a Chartered Accountant, SEBI registered Merchant Banker or Cost Accountant. However, it is to be noted that the pricing guidelines as specified under Rule 8(2) of the Draft FI Rules shall not apply to subscription to equity of an eligible investee entity issued on rights basis.

 

• Regulatory Roles of RBI and DPIIT

The Draft FI Rules also provide greater clarity on the respective roles of RBI and DPIIT. RBI would administer the Rules and prescribe operational matters such as payment and reporting requirements, while DPIIT would retain authority over interpretation and issuance of regulations, directions, circulars etc., in relation to the foreign investment policy.

It remains to be seen how this distinction will operate in practice, particularly where a transaction raises questions involving both FEMA procedure and the substantive FDI policy.

 

• Treatment of Existing Transaction Mechanisms

Although the Draft FI Rules provide for continuity of actions undertaken under the existing NDI Rules, several transaction related provisions have not been expressly carried forward. These include mechanisms concerning deferred consideration, escrow arrangements and indemnity holdbacks, as well as specific provisions dealing with NCLT approved schemes, employee stock benefits and convertible notes issued by startups.

 

As a result, while the Draft FI Rules move towards a simpler regulatory architecture, the treatment of these omitted provisions will be important for transactions already under negotiation and for future deal structuring. The final framework, together with the RBI directions and clarifications that may follow, will therefore determine whether the proposed simplification translates into greater certainty for foreign investment transactions in practice.