The Reserve Bank of India (RBI) has proposed the most extensive rewrite of the country’s foreign-investment rules since 2019, seeking to simplify compliance while introducing a control test that analysts say could have far-reaching consequences for minority investors and cross-border deals.

The central bank released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026, on Tuesday, 21 July, and invited comments until 31 August. Once finalized and notified, the rules would replace the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

The draft seeks to move India toward a more principle-based framework by consolidating definitions, widening the range of eligible investment vehicles and separating procedural rules under the Foreign Exchange Management Act from sector-specific foreign direct investment policy.

The RBI said the changes were intended to reduce regulatory complexity, streamline procedures and create a more transparent and investor-friendly system. They follow a review announced in the Union Budget for 2026-27.

Yet one provision intended to clarify foreign control has already generated uncertainty.

The 10% question

The draft says control may arise from the right to appoint a majority of directors or influence management and policy decisions. That influence may be exercised through shareholdings, management rights, shareholder agreements or voting arrangements carrying at least 10% of voting rights.

The wording appears in a provision used to trace indirect foreign investment through overseas entities connected to the direct investor. It does not explicitly state that any foreign investor with a 10% stake in an Indian business will automatically be treated as controlling it.

The draft separately defines a foreign-controlled entity as an Indian company, limited liability partnership or investment vehicle owned or controlled by a person resident outside India. Ownership and control would be assessed under rules set by the relevant sector regulator or, where no such rules exist, under Indian company, partnership or securities law.

The 10% threshold may be intended mainly to identify links between overseas entities in an indirect investment chain, rather than to replace existing tests of control over Indian businesses analysts said.

Legal advisers say the final rules should clarify whether the threshold applies only to offshore ownership structures or could also affect assessments of control over Indian investee companies.

Minority investors may need to revisit rights

Foreign private-equity and venture-capital investors frequently hold minority stakes while negotiating board representation, information rights and vetoes over major decisions.

These provisions can cover changes to capital structure, large borrowing, acquisitions, asset sales, related-party transactions or amendments to constitutional documents. They are generally intended to protect the investor’s capital rather than allow it to run the company’s daily operations.

A numerical voting threshold linked to management or contractual rights could blur that distinction.

Anuroop Omkar, founding partner at AK & Partners, told Reuters that the draft introduces a numerical benchmark that does not currently exist and could widen the situations in which an overseas investor is considered to exercise control, bringing additional compliance obligations.

Others said the proposed approach to foreign-controlled entities, ownership and indirect investment could materially affect the analysis of cross-border structures. Companies may need to review existing governance arrangements and investment structures depending on the final wording.

The issue is likely to be particularly relevant to mergers and acquisitions, private-equity deals and joint ventures, where contractual rights are often distributed among shareholders rather than concentrated with the largest owner, analysts added.

A broader investment framework

The draft extends beyond the control question. It expressly covers foreign investment in companies, limited liability partnerships and a wider group of Securities and Exchange Board of India (Sebi)-regulated vehicles, including real estate investment trusts, infrastructure investment trusts, alternative investment funds, venture-capital funds and some mutual funds and exchange-traded funds.

Registered partnership firms and proprietary concerns are also included among eligible investee entities.

The framework consolidates several modes of investment, including subscriptions, purchases, gifts, pledges, depository receipts and investment through international stock exchanges.

It also permits non-resident Indians and Overseas Citizens of India to subscribe to the National Pension System, subject to eligibility under pension law, with accumulated savings and annuity payments allowed to be repatriated.

The draft defines foreign direct investment as foreign investment of at least 10% in the equity of a company or limited liability partnership. Investment below 10% would be treated as foreign portfolio investment.

This marks a conceptual shift because the existing framework generally classifies any foreign investment in an unlisted Indian company as FDI, regardless of the percentage held.

Direct overseas listings

The rules also consolidate conditions under which Indian public companies may issue or list shares on permitted international exchanges.

For unlisted Indian companies making an initial overseas listing, the issue price could be determined through the book-building process allowed by the relevant international exchange.

The draft also restricts the circumstances in which internationally listed shares can be transferred back from a non-resident to an Indian resident. These include delisting offers, insolvency resolution plans, buybacks, mergers and transfers by inheritance or succession.

RBI and government roles separated

Another significant change is the division of responsibilities between the RBI and the Department for Promotion of Industry and Internal Trade.

The RBI would administer and interpret the FEMA rules and set operational requirements covering payments, reporting and implementation.

The department would retain responsibility for interpreting the government’s foreign-investment policy, including sectoral caps, prohibited sectors, conditions and whether investment requires government approval.

The separation could make it easier to update sectoral policy without repeatedly amending the FEMA rulebook. It could also reduce the overlap between central-bank regulations and government industrial policy, analysts said.

Yet a more principles-based regime places greater weight on regulatory interpretation, circulars and future clarifications. That may give regulators flexibility but leave investors with less certainty when structuring complex transactions, they added.