Summary: The Government of India has expanded access to the Indian stock market by amending the Foreign Exchange Management (Non-Debt Instruments) Rules, allowing any individual resident outside India, irrespective of Indian origin, to invest in listed Indian companies under the portfolio investment framework previously available mainly to NRIs and OCIs. Investments must be made on a repatriation basis through an Authorised Dealer (AD) bank and comply with Schedule III limits. Individual investments are capped below 10% of a company’s paid-up equity, while aggregate holdings under this route cannot exceed 24%. If these limits are breached, investors must divest the excess within five trading days or the investment will be reclassified as FDI, with additional compliance consequences. Transfers between non-resident individuals are permitted subject to sectoral approvals. However, investments resulting in ownership or control benefiting entities or citizens of countries sharing a land border with India continue to require prior Government approval, reflecting a balanced approach between market liberalisation and national security.
Introduction
The Government of India has made an important change to the Foreign Exchange Management (Non-Debt Instruments) Rules, which govern how persons living outside India can invest in Indian companies. In simple terms, the facility for accessing the Indian stock market under the FPI route was, until now, largely limited to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs). The rule has now been widened to include any individual living outside India, regardless of Indian origin.
Widening the Investor Base
The amendment changes the relevant heading and provisions so that “any individual person resident outside India”, irrespective of Indian roots, can now invest in Indian companies under the same framework that was earlier reserved for NRIs and OCIs. In effect, a foreign national with no Indian citizenship or ancestry can now buy and sell shares of listed Indian companies through this route, on the same terms that previously applied only to NRIs and OCIs.
Dealing in Shares of Listed Companies
The amended Rules allow any individual resident outside India to purchase or sell equity instruments of a listed Indian company, subject to the following:
- The investment must be made on a repatriation basis (meaning the invested amount and any profits can be remitted out of India)
- All fund movement must route through a specially designated Authorised Dealer (AD) bank branch
- The investment must remain within the limits and conditions laid down in Schedule III of the rules
Sensitive Investments Require Prior Approval
Where an investment by a foreign individual results in a change of ownership or control of a listed Indian company, and that change benefits an entity or citizen of a country sharing a land border with India, prior approval from the Government of India is mandatory. This provision is clearly aimed at protecting national security and economic interests, particularly given India’s heightened sensitivity to investments originating from neighbouring countries.
The Investment Cap: How Much Can One Person Hold?
A key practical feature of this amendment is the cap on individual and aggregate foreign holdings in a listed Indian company.
- Individual-level cap ensures that no single foreign individual investing through this route can accumulate a stake large enough to influence or control the company independently. Each individual investor’s holding must remain below 10% of the company’s total paid-up equity capital (on a fully diluted basis), or below 10% of each series of debentures, preference shares, or share warrants.
- Aggregate-level cap recognise combined holdings of all individual’s resident outside India, investing under this schedule, in a single Indian company cannot exceed 24% of the total paid-up equity capital, or 24% of each series of debentures, preference shares, or share warrants, on a fully diluted basis.
- Investor group’s combined holding stays below the prescribed individual limit, standard FPI rules apply. However, once the combined holding reaches 10% or more, the investment is treated differently, attracting stringent additional FPI-related provisions.
What Happens If the Cap Is Breached?
- The excess holding must be divested within 5 trading days of the breach
- If the investor chooses not to divest, the entire investment is reclassified as FDI, and the investor is barred from making further portfolio investments in that company
- The investor, through their AD branch, must notify the depositories and the company within 7 trading days of the breach
- Reclassification follows the same SEBI and RBI norms applicable to Foreign Portfolio Investors (FPIs)
- Notably, the temporary breach occurring between acquisition and the eventual sale or FDI conversion is not treated as a contravention under the rules, provided it is resolved within the prescribed timeline
Transfer of Shares
A transfer of equity shares between two individual’s residents outside India is permitted, but with conditions:
- If the company operates in a sector requiring government approval, the same approval applies to the transfer
- If the transfer results in control passing to a citizen or entity of a land-border-sharing country, prior government approval is required
Conclusion
This amendment reflects India’s broader approach to foreign investment policy opening doors wider while keeping a watchful eye on sensitive areas. By extending the individual investment route beyond NRIs and OCIs to any person resident outside India, the government signals confidence in its capital markets and a readiness to attract a more diverse global investor base. Yet the unwavering insistence on prior approval for investments linked to land-border-sharing countries makes clear that this liberalisation is calibrated, not unconditional. For investors, companies, and compliance teams alike, the message is straightforward the rules have become more inclusive and standardised, but India’s underlying caution on strategic and security sensitive investments remains firmly intact.
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Disclaimer: This blog is intended for educational purposes only and should not be interpreted as advice. It is recommended to seek guidance from a qualified professional for advice relevant to your circumstances. For any feedback, inquiries, or suggestions, please feel free to reach out to the author at niranjan@snssindia.in / Contact No +91 982 586 0488.
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