RBI’s Draft Foreign Investment Rules 2026: What Changes for FDI Compliance

International Trade & Investment | Banking & Financial Regulation — Aug 6 2026 — Candour Legal Editorial

The RBI’s draft Foreign Investment Rules 2026, released on 21 July 2026, propose the most comprehensive rewrite of India’s foreign direct investment framework since the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) came into force. Issued under Press Release 2026-2027/726, following the Union Budget 2026-27’s announcement of a comprehensive review of the NDI Rules, the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 would replace the NDI Rules in their entirety, shifting from a prescriptive, investor-centric structure to a principle-based, investee-neutral framework. The Reserve Bank of India has invited public comments through its ‘Connect 2 Regulate’ portal until 31 August 2026, giving corporates, foreign investors, and their advisors a narrow but genuine window to shape the final text before it takes legal effect.

In brief. The Reserve Bank of India published the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 on 21 July 2026, proposing to replace the NDI Rules, 2019 with a simplified, principle-based framework. The draft rules redefine the test for determining foreign ownership and control (the “FCE” or foreign-controlled entity test), move away from the blanket land-border investment restriction toward a more calibrated approach, propose to codify rules for overseas listing of Indian companies, and harmonise definitions across the FDI Policy and the Foreign Exchange Management Act, 1999 (FEMA). Public comments are open until 31 August 2026 via the RBI’s ‘Connect 2 Regulate’ portal or by email. The rules remain in draft form and are not yet in force.

Key Takeaways

• The RBI released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 on 21 July 2026 under Press Release 2026-2027/726, to replace the NDI Rules, 2019.
• The draft shifts from an investor-centric, prescriptive framework to a principle-based, investee-neutral and investor-neutral structure.
• A redefined foreign-controlled entity (FCE) test is proposed for determining when downstream investment conditions apply to an Indian company.
• The draft proposes a more calibrated approach to investment from land-bordering countries, in place of the blanket prior-approval requirement under Press Note 3 of 2020.
• Overseas listing of Indian companies is proposed to be codified within the same rules framework rather than through standalone circulars.
• Public comments are open until 31 August 2026 through the RBI’s ‘Connect 2 Regulate’ portal or by email with the subject line “Feedback on Draft Foreign Investment Rules”; the rules are not yet in force.

Why the RBI Is Rewriting the NDI Rules

The NDI Rules, 2019 have governed foreign direct investment into India for six years, layered on top of the Foreign Exchange Management Act, 1999 and the government’s FDI Policy circulars. Over that period, the rules were amended piecemeal — most consequentially by the land-border restriction introduced through Press Note 3 of 2020 — producing a framework that practitioners increasingly found difficult to reconcile with the FDI Policy it was meant to implement. The Union Budget 2026-27 formally announced a comprehensive review of the NDI Rules, and the RBI’s draft Foreign Exchange Management (Foreign Investment) Rules, 2026, released on 21 July 2026, is the result. The stated objective is to harmonise FEMA’s procedural provisions with the FDI Policy, reduce the compliance burden on investee companies, and adopt a framework flexible enough to accommodate evolving investment structures without requiring repeated amendment.

From Investor-Centric to Investee-Neutral: The Core Shift

The NDI Rules were built around classifying investors and prescribing sector-specific caps and conditions investor by investor. The draft rules propose an investee-neutral and investor-neutral architecture instead: rather than the compliance obligation attaching primarily to the character of the investor, it attaches to the nature of the investee entity and the instrument used. In principle, this should reduce the number of distinct compliance pathways a foreign investor must navigate depending on whether it is a foreign portfolio investor, a foreign venture capital investor, or a strategic investor, since the draft consolidates these into a more unified reporting and approval structure. For investee companies raising capital from a mix of investor types in a single round, a genuinely investee-neutral framework would meaningfully simplify closing mechanics — though the practical benefit depends on how the final rules define the boundaries between categories, which the draft leaves substantially to subordinate instructions.

The Redefined Foreign-Controlled Entity Test

A central technical change is to the test for determining when an Indian entity is treated as “owned or controlled” by a foreign investor for the purposes of downstream investment conditions — commonly referred to as the FCE, or foreign-controlled entity, test. The existing NDI Rules test, based on ownership of more than 50% of capital or the right to appoint a majority of directors, has generated extensive advisory work around structuring cap tables and board composition to stay on the correct side of the line, particularly for downstream investment by Indian entities that are themselves foreign-owned. The draft rules propose to redefine this test, though the RBI has not yet published the precise formulation in a form that allows a definitive before-and-after comparison. Corporate and funds counsel should treat this as the single highest-priority provision to review once the draft’s full operative text is available, given how much downstream-investment structuring depends on it.

Land-Border Investment Restrictions: A More Calibrated Approach

Press Note 3 of 2020 required prior government approval for any investment, direct or indirect, from an entity based in a country sharing a land border with India, or where the beneficial owner is situated in or is a citizen of such a country — a blanket restriction introduced after the India-China border standoff. The restriction has been criticised by investors and industry bodies as overbroad, catching legitimate portfolio investment routed through funds with even minimal beneficial-ownership links to the specified countries. The draft rules propose to move away from a blanket restriction toward what has been described as a more calibrated approach, though — as with the FCE test — the operative drafting will determine whether this meaningfully eases compliance or simply reformulates the same restriction in different language. Businesses currently navigating Press Note 3 approvals for pending or planned investments should track this provision closely, since transitional arrangements for pending applications have not yet been clarified.

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Codifying Overseas Listing

The draft rules also propose to bring rules governing the overseas listing of Indian companies — currently addressed through a separate framework permitting direct listing on specified international exchanges — within the same consolidated rules structure. Codification within a single instrument, rather than cross-referencing standalone notifications, is consistent with the RBI’s stated aim of reducing fragmentation, and should make the overseas-listing route easier for companies and their counsel to apply without cross-checking multiple regulatory instruments.

What Businesses Should Do Before 31 August 2026

The comment window closing on 31 August 2026 is the operative near-term deadline. Foreign investors, Indian investee companies, industry bodies, and law firms with a stake in the framework’s final shape have a genuine opportunity to flag drafting ambiguities before they harden into binding rules — a narrower opportunity than it may appear, given that six years elapsed between the NDI Rules, 2019 and this review. Businesses with pending Press Note 3 applications, downstream investment structures close to the current FCE threshold, or overseas listing plans in progress should review the draft text specifically against their own structures and consider submitting comments through the RBI’s ‘Connect 2 Regulate’ portal, rather than waiting for the final rules to be notified.

Looking Ahead

The RBI has not indicated a firm timeline for notifying the final rules beyond the 31 August 2026 comment deadline, and the draft’s most consequential provisions — the FCE test redefinition and the calibrated land-border approach — are precisely the ones where the gap between stated principle and operative text will matter most. Businesses should treat the current NDI Rules, 2019 as in force and binding until the final Foreign Exchange Management (Foreign Investment) Rules, 2026 are notified, while using the comment window to influence the provisions that remain open for change.

Frequently Asked Questions

What are the RBI’s draft Foreign Investment Rules, 2026?
They are draft rules published by the Reserve Bank of India on 21 July 2026 proposing to replace the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 with a simplified, principle-based framework governing foreign investment into India.

When is the deadline to comment on the draft rules?
The RBI has invited public comments until 31 August 2026, submitted through the ‘Connect 2 Regulate’ section of its website or by email with the subject line “Feedback on Draft Foreign Investment Rules.”

Are the NDI Rules, 2019 still in force?
Yes. The draft Foreign Exchange Management (Foreign Investment) Rules, 2026 are not yet notified or in force. The NDI Rules, 2019 continue to apply until the final rules are notified.

What is the FCE control test and why is it being redefined?
The FCE, or foreign-controlled entity, test determines when an Indian company is treated as foreign-owned or controlled for the purposes of downstream investment conditions. The draft rules propose to redefine this test as part of the broader simplification exercise, though the RBI has not yet published the precise revised formulation.

Does the draft change the land-border investment restriction under Press Note 3?
The draft rules propose a more calibrated approach to investment from land-bordering countries in place of the blanket prior-approval requirement introduced by Press Note 3 of 2020, though the operative drafting has not yet been finalised.

This analysis was prepared by the Candour Legal team. Candour Legal is a full-service Indian law firm with offices in Ahmedabad, Mumbai, and New Delhi, focused on FEMA compliance, cross-border investment structuring, and banking and financial regulation among its practice areas. The firm publishes analytical commentary on developments in Indian law at candourlegal.com.

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Candour Legal advises foreign investors, Indian investee companies, and funds on FEMA compliance, FDI structuring, and regulatory approvals under the evolving foreign investment framework.

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About the author

Manasvi Thapar, Advocate at Candour Legal, handles cross-border investment, regulatory, and commercial matters.

Further reading

• RBI’s FCNR(B) Forex Swap Facility 2026: What Banks, NRIs, and GIFT City Branches Must Know — a related RBI regulatory reform for cross-border flows
• GIFT City Category III AIF: The Route That Is Replacing Mauritius for F&O Traders — structuring options for foreign and NRI capital into India
• GIFT City — A Legal Perspective — the regulatory architecture for cross-border financial structuring