Widening the gate of Indian Economy: Key changes under the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026

The Ministry of Finance (Department of Economic Affairs) on 12 June 2026, notified the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026[1] (‘Amendment Rules’), amending the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’). The Amendment Rules constitute the third amendment in the FEMA liberalisation cycle for the year 2026, following the first and second amendments, which respectively relaxed restrictions on investments from countries sharing a land border with India and liberalised foreign investment in the insurance sector opening the sector up till 100% under automatic route. The third amendment is yet another attempt to widen the gate for the Indian economy. For years, access to India's listed securities market was reserved specially for a defined class amongst which are foreign portfolio investors (FPIs) and non-resident Indians (NRIs) and overseas citizens of India (OCIs), this time the liberalisation is into the Indian capital markets.

Key changes

Firstly, a key change, which is introduced by the Amendment Rules is the expansion of investor eligibility under Rule 9 and Rule 12(1) read with Schedule III of the NDI Rules. Earlier, under the said rules, only Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) were permitted to invest in listed Indian securities on a repatriation basis. The Amendment Rules have broadened this framework by replacing references to ‘NRI or OCI’ with ‘an individual person resident outside India, including an NRI or an OCI.’ Consequently, individual persons resident outside India (PROIs) who are neither NRIs nor OCIs are open to invest under the Schedule III route. This single amendment opens up the Indian capital markets for various categories of investors be it retail or high net worth individual (HNIs) around the globe to route their investment into India. Naturally, such liberalisation is not devoid of any control safeguard, a statutory individual limit of 10% and aggregate limit of 24% of the paid-up equity capital of the listed Indian company is imposed on such investments arriving under Schedule III of the NDI Rules. 

Secondly, Rules 12(1) read with Schedule III and 13(1) of NDI Rules governs the purchase, sale or transfer of equity instruments of a listed Indian company on a recognised stock exchange, on a repatriation basis. Prior to the Amendment Rules, there was no framework specifically prohibiting such purchase or sale of equity instruments routed through countries sharing a land border with India. Post Amendment Rules, where the investment results in transfer of ownership or control to, or the beneficial owner is a citizen of, a country sharing a land border with India, prior Government approval is required. This gives clarification on recognition of prohibition under the Press Note No. 3 (Series 2020)[2] (PN-3) framework to listed companies. Further, an interplay of investments under Schedule II and Schedule III is introduced by the Amendment Rules to expand the horizons of investment into a listed Indian company.

Thirdly, under the revised framework of Schedule II [read with Rule 10(1)], the erstwhile proviso that allowed a listed Company to increase the aggregate limit of investment from 24% of the paid-up equity capital by a Foreign Portfolio Investors (FPI) up to the sectoral cap/statutory ceiling through a board and shareholders’ approval, is now removed.

Fourthly, under the revised framework of Schedule III, the erstwhile restriction applicable to an NRI or an OCI of a 5% individual limit and aggregate limit for all the NRIs and OCIs put together at 10%, is also removed. This is substituted by new limits wherein individual PROIs (including NRIs and OCIs) holding in a listed Indian company must be less than 10% of its paid-up equity capital, while the aggregate holding of all such individual PROIs being capped at 24%.

Analysis

The aforementioned individual and aggregate limit under Schedule II and Schedule III are introduced by another layer of cross aggregate limit wherein the total holding of an individual FPI investing via Schedule II route and Schedule III route (as an individual PROI) must be less than the individual limit of 10%, otherwise, to the extent of the investment in excess of the 10% limit, it must be divested. Accordingly, where an individual PROIs aggregate holding exceeds 10%, the investment will no longer be treated as a portfolio investment under Schedule III and must comply with the applicable foreign direct investment (FDI) requirements, including any reclassification or divestment obligations under FEMA. The RBI notified the operational framework for reclassification from FPI to FDI during November, 2024[3].

While expanding the investor eligibility via Schedule III route, it recalibrated the investment routes for FPIs, however, in effect, the threshold or individual shareholding limit of the paid-up equity capital in a listed company remains the same as in the erstwhile provision i.e., 10%. The Amendment Rules technically opens multiple routes for investment by an FPI but keeping in check the threshold limits. The two routes under Schedules II and III or any other route under FEMA cannot be blended to defeat the cap of 10%. On the hindsight, the NRIs and OCIs benefits to a greater extent as they can now individually invest up to 10% in the paid-up equity capital of a listed company as against the erstwhile limits of 5%.

The Amendment Rules bring procedural ease in investments by foreign individuals. Earlier, only a FPI registered with the SEBI and separately NRIs/OCIs could have invested in the equity capital of a listed company under the Schedule II and Schedule III routes, respectively. FPI registration is the entry condition only for Schedule II route and not for Schedule III route. Now, with the Amendment Rules in place, investment by any individual PROI (including an NRI and OCI) in a listed company implies that the purchase, sale or transfer of shares of a listed Indian company on a repatriation basis might be possible without obtaining FPI registration with the SEBI (unless invested via Schedule II route), provided that they comply with applicable investment limits and other conditions prescribed under the NDI Rules.

The Amendment Rules further recognise the restriction under PN-3 framework applicable to the listed companies. Simultaneously, it also aligned the ‘beneficial owner’ framework with the 10% threshold defined under the Prevention of Money-laundering Act, 2002, as also adopted by Press Note No. 2 (2026 series)[4] and consequently notified under the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026, for receiving investments from land bordering countries.

Consequential amendments

In furtherance of the Amendment Rules, the Reserve Bank of India has issued the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Amendment) Regulations, 2026 (‘Reporting Regulations’), to harmonise the mode of payment and reporting framework for investments into India inter-alia routed via Schedule III of the Amendment Rules.

The Reporting Regulations now prescribe that Schedule III investments by an individual PROI (including NRIs and OCIs) on a repatriation basis must now be routed through a designated repatriable rupee account. It further clarifies on the funding sources for National Pension System (NPS) subscription by NRIs / OCIs through inward remittance from abroad through banking channels or out of funds held in any repatriable foreign currency or rupee account or NRO account, maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016. A new reporting mechanism vide Form LEC (IFI) is introduced, requiring Authorised Dealer Category-I banks to report to the RBI, transactions involving purchase / transfer of equity instruments by PROIs on Indian stock exchanges.

Way forward

The Amendment Rules signal towards India’s confidence and is a step towards liberalisation of investment through broader set of investors and multiple channels in the capital markets of India while keeping a regulatory check (i.e., beneficial ownership, sectoral caps, control including land border safeguards and reporting mechanism). This regulatory shift will deepen the investor base of Indian capital markets with wider global access. Further, this is one of the chapters of the bigger liberalisation framework of 2026, planned to achieve capital attraction and capital retention while increasing foreign exchange reserves of India.

[The author is a Senior Associate in the Corporate and M&A Team at Lakshmikumaran & Sridharan Attorneys, Hyderabad]

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[1] https://egazette.gov.in/WriteReadData/2026/273406.pdf.

[2] https://www.dpiit.gov.in/static/uploads/2025/07/c7586a2dee61bf88f73512a46d8a9ab1.pdf.

[3] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12749&Mode=0.

[4] https://www.dpiit.gov.in/static/uploads/2026/03/b9da5830b052c2f2d788593e97d07c63.pdf.