FEMA (Foreign Investment) Rules 2026: what changes once the NDI Rules are replaced.

The draft FEMA (Foreign Investment) Rules 2026 would replace the 19-year-old NDI Rules with a simplified, principle-based framework — here is what is actually changing, and what stays exactly the same until it is notified.

For nineteen years, every rupee of foreign direct investment (FDI) into an Indian company, LLP or investment vehicle has been governed by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 — universally shortened to the NDI Rules. In July 2026, the Reserve Bank of India and the Department of Economic Affairs released a draft Foreign Exchange Management (Foreign Investment) Rules, 2026 (the Draft FI Rules) intended to replace them. As of this note, the Draft FI Rules remain a draft: public comments closed on 31 August 2026, and the Rules take legal effect only on formal notification in the Official Gazette. Founders and investors should treat this as a near-term certainty to plan for, not yet a binding regime to comply with — the NDI Rules continue to govern every transaction today.

Why a replacement at all

The NDI Rules were built around a "non-debt instrument" taxonomy — a list-based approach enumerating which instruments (equity shares, compulsorily convertible instruments, units, and so on) counted as foreign investment. Nineteen years of amendments bolted on press-note changes, sector caps and country-specific curbs (notably the 2020 land-border amendment) onto that original structure, leaving a rulebook that practitioners generally agree has become difficult to apply cleanly. The Draft FI Rules drop the instrument-list approach in favour of a single, principle-based test: does a transaction involve "equity" investment by a person resident outside India into an "eligible investee entity"? Everything else is meant to follow from that test rather than from a separate enumeration.

What actually changes

Three structural shifts stand out. First, the eligible investee entity concept widens beyond companies and LLPs to expressly cover investment vehicles, partnership firms and proprietary concerns, closing gaps that required case-by-case RBI clarification under the NDI Rules. Second, the draft redraws the FDI/FPI 10% threshold test — the line that decides whether an inbound equity holding is treated as portfolio investment or as direct investment carrying sectoral-cap and approval-route consequences. Third, it recasts the definition of a "foreign controlled entity", tightening how downstream ownership and control are traced through holding structures — directly relevant to anyone testing automatic-route eligibility for a step-down subsidiary. The draft also codifies, for the first time in the rules themselves, the pathway for direct listing of Indian companies on permitted international exchanges, and it continues to carve out investments into IFSC-registered financial institutions (GIFT City), which sit outside this framework entirely.

What stays the same

The core architecture founders already rely on survives largely intact. The automatic route/government route split, the concept of sectoral caps, and the basic mechanics of Overseas Direct Investment (ODI) reporting under the companion FEMA ODI framework are not being junked — they are being re-expressed inside a cleaner rule structure. Reporting obligations under FIRMS (the RBI's reporting portal for Form FC-GPR, FC-TRS and related filings) are expected to continue in substance, though filing mechanics may be updated once the companion FDI Policy and RBI regulations that operationalise the Draft FI Rules are issued — those have not yet followed. The government has also indicated that actions already taken under the NDI Rules will be grandfathered, so a transaction structured and reported today should not need to be redone once the new Rules take effect.

What to do now

Until notification, keep filing and structuring under the NDI Rules as they stand — there is no transitional provision to comply with yet. Founders raising a round, NRIs investing into an Indian startup, and foreign investors setting up an Indian subsidiary should build a short compliance checkpoint into their cap-table and funding-round timelines for whenever the Gazette notification lands, since the threshold and control-tracing changes could affect how a particular holding is characterised. If your structure depends on a specific NDI Rules concept — a hybrid instrument, a downstream investment chain, or a sector with a tight FDI cap — it is worth flagging that dependency now so it can be re-tested the day the Draft FI Rules are notified.

How Advisory Monks Consulting helps

We track RBI and DPIIT notifications on foreign investment as part of our Cross-Border Tax and India Entry practices, and flag clients whose structures sit close to a threshold the Draft FI Rules would redraw. If you are mid-raise or mid-structuring, we can map your current filings against both the NDI Rules and the draft so nothing needs unwinding later.

This note is general information based on publicly available drafts as of October 2026, not individualised tax or legal advice — the Draft FI Rules may change before notification, and you should confirm the current position with a qualified advisor before acting.

This note is general guidance, not tax or legal advice. Positions depend on your specific facts — speak with a partner before acting.