The draft rules replace the six-year-old Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and separate the core FEMA framework from the government’s FDI policy
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The Reserve Bank of India's (RBI) proposed overhaul of the foreign investment framework could significantly reduce the time taken to implement foreign direct investment (FDI) policy changes, alter the way downstream investments are assessed and prompt investors to revisit governance and shareholder rights while structuring transactions.The draft rules replace the six-year-old Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and separate the core FEMA framework from the government's FDI policy. If implemented, entry routes and sectoral conditions will be governed by the FDI Policy.That separation could help eliminate the gap that has often existed between policy announcements and their implementation under FEMA, legal experts said.“The proposed Foreign Investment Rules may eliminate the time involved in implementing FDI reforms…by recognising the FDI Policy as the governing framework for entry routes and sectoral conditions, future policy changes may no longer require repeated amendments to the FEMA Rules, enabling quicker implementation and greater certainty for foreign equity investors,” said Makarand M Joshi, Founder Partner at MMJC Associates.The clarification on Controlled Entity (FCE), under which an Indian company, LLP or investment vehicle owned or controlled by a person resident outside India is treated as an FCE, is expected to bring greater clarity to downstream investment structures and foreign investments made through such entities. In the absence of clarity, law firms used to take their own view on the same, said Akshat Pande, Managing Partner at Alpha Partners."The FCE concept could simplify downstream investment by moving from a broad, multi-layer look-through regime to a more targeted sectoral test. But it will also make the ownership-and-control analysis more important. Holding companies, acquisition vehicles and funds may need to monitor their FCE status continuously, because a change in shareholding or governance rights could alter the compliance outcome," said Iqbal Khan, Senior Partner at Cyril Amarchand Mangaldas.Alay Razvi, Managing partner at Accord Juris said, “Compliance will shift from a transaction‑specific approach to group‑wide monitoring of control, voting changes and contractual rights, with future acquisitions and restructurings planned to avoid inadvertent breaches.” In practice, private equity platforms, sponsor‑driven structures and multinational groups will need to re‑examine governance rights, vetoes and voting arrangements that could cause an Indian company to be regarded as foreign controlled, he added.One key point that needs clarification is how investments made by financial investors backed by AIFs will be treated. “There is a risk that they could be reclassified as foreign-controlled, which may affect domestic investments,” Diviay Chadha, Partner at Singhania & Co. said.Businesses should not overlook Rule 9, which places compliance responsibility on both the foreign investor and the investee entity, creating dual accountability during implementation, said CA Ankita Shethia, Associate Director at S K Patodia & Associates LLP.Shareholder and voting agreements were already recognised under the Companies Act for determining ‘control’. “The potentially significant change is the draft's express reference to agreements carrying 10 per cent or more voting rights. Unless the final text ties that threshold to genuine control over management or policy, ordinary minority-protection rights could be drawn unnecessarily into a control analysis,” Khan said.Published on July 22, 2026
