From NRI/OCI to Global Individuals: Recasting Schedule III under FEMA (Non‑Debt Instruments) (Third Amendment) Rules, 2026
Summary:The Foreign Exchange Management (Non-debt Instruments) (Third Amendment) Rules, 2026, notified on 12 June 2026, significantly liberalize and strengthen India’s portfolio investment framework for overseas individuals. The amendment expands eligibility under Schedule III from only NRIs and OCIs to all individuals resident outside India, enabling them to invest in listed Indian companies on a repatriation basis. It implements the Union Budget 2026 proposal by increasing the per-investor limit from 5% to less than 10% and the aggregate investment limit from 10% to 24%. The amendment also mandates prior Government approval where investments result in transfer of ownership or control to entities or beneficial owners from countries sharing a land border with India, using the beneficial ownership standards under the Prevention of Money-laundering Act. It further aligns FEMA with SEBI’s FPI Regulations, introduces cross-schedule aggregation of holdings, and provides that investments reaching 10% or more may be reclassified as FDI unless excess holdings are divested within the prescribed timeline.
Statutory backdrop and pre‑amendment position
The Foreign Exchange Management (Non‑Debt Instruments) Rules, 2019 (NDI Rules) are the principal rule set governing Foreign Direct Investment (FDI) and certain portfolio investments in equity instruments and other non‑debt securities in India. Prior to the 2026 changes, Schedule III of the NDI Rules specifically catered to investments by Non‑Resident Indians (NRIs) and Overseas Citizens of India (OCIs) on a repatriation basis, typically through the Portfolio Investment Scheme (PIS) route, with a per‑investor limit of 5% and an aggregate NRI/OCI limit of 10% in a listed Indian company.
Under the pre‑amendment framework, other foreign individuals (for example, non‑Indian foreign nationals not qualifying as NRI/OCI) could not directly use this Schedule III route for listed equity, and foreign portfolio investment was largely channeled through registered Foreign Portfolio Investors (FPIs) under Schedule II. A non‑resident holding of 10% or more in a listed company was treated as FDI rather than FPI, based on the definition of “foreign portfolio investment” in the NDI Rules.
Notification details and commencement
The Ministry of Finance (Department of Economic Affairs) has now notified the Foreign Exchange Management (Non‑Debt Instruments) (Third Amendment) Rules, 2026 by S.O. 3030(E) dated 12 June 2026. The notification clarifies that these rules come into force from the date of their publication in the Official Gazette, i.e., 12 June 2026, and they further amend the 2019 NDI Rules issued under the rule‑making powers in the Foreign Exchange Management Act, 1999
The Third Amendment sits alongside a series of earlier amendments to the NDI Rules from 2019 to 2026, including other 2026 notifications that tightened the FDI regime for investments involving entities or beneficial owners from land‑bordering countries.
a) Shift from “NRI/OCI” to “individual person resident outside India”
A central theme of the Third Amendment is the deliberate widening of the investor universe from NRI/OCI to any “individual person resident outside India”, with NRIs and OCIs now treated as a sub-set of this broader category. In Chapter V of the principal rules, the earlier heading “Investment by non-resident Indian or an overseas citizen of India” has been replaced with a new heading referring to investment by “an individual person resident outside India including a non-resident Indian or an overseas citizen of India”.
Correspondingly, in rule 12, the sub-heading that earlier read “Investment by NRI or OCI – A NRI or an OCI may make investments as under” has been substituted so that it applies to “an individual person resident outside India including a NRI or an OCI”, reflecting the expanded investor class. This change aligns with the Budget 2026 policy signal that the portfolio route for individuals would no longer be confined only to the Indian diaspora and OCI cardholders, but would be opened more widely to global individual investors subject to safeguards.
b) Revised rule 12(1) – investments by overseas individuals on repatriation basis
Rule 12(1) has been completely substituted to mirror this policy shift and to align Schedule III with the new construct of an “individual person resident outside India”. Under the substituted provision, an individual person resident outside India may, on a repatriation basis, purchase or sell equity instruments of a listed Indian company and other securities, in the manner and subject to the terms and conditions specified in Schedule III.
A critical proviso has been added: where such individual investment results in transfer of ownership or control of a listed Indian company to entities or citizens of a country sharing land border with India, or where the beneficial owner of such investment is a citizen of any such country, prior Government approval is mandatory. The rule explicitly cross-refers the definition of “ownership of an Indian company” to rule 23 of the NDI Rules and adopts the definition of “beneficial owner” from section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 (PMLA), with determination criteria taken from rule 9(3) of the PML (Maintenance of Records) Rules, 2005
c) Alignment with Union Budget 2026 announcements
Union Budget 2026 announced that “Individual Persons Resident Outside India” would be permitted to invest in equity instruments of listed Indian companies through the Portfolio Investment Scheme and that the per-investor limit would be raised from 5% to 10%, with the aggregate limit for all such individuals increasing from 10% to 24%. Public commentary at the time highlighted that this move aimed to attract a broader pool of overseas retail and HNI investors, including non-diaspora foreign individuals, thereby deepening Indiaʼs capital markets.
The Third Amendment now translates these Budget announcements into the NDI Rules by re-drafting Schedule III limits and eligibility in terms of “individual person resident outside India” and by embedding the enhanced 10% individual and 24% aggregate caps directly into the rules. This ensures that the statutory framework and the capital market regulations move in lock-step, reducing interpretative gaps between policy statements and operational rules.
d) Land-border and beneficial ownership filters – continuity and tightening
The land-border country filter first came to prominence when the Government tightened the FDI regime in 2020 for investments originating from or routed via countries sharing land borders with India, and was further elaborated through subsequent Press Notes and notifications, including Press Note 2 of 2026. Press Note 2 of 2026 and related commentary emphasizes a multi-limb test of beneficial ownership that looks at direct or indirect rights or entitlements to capital, profits, voting rights or control, individually or collectively, and treats such investments as being “vested in” a neighboring country if these thresholds are met.
The Third Amendment carries this policy into the portfolio investment space for individuals by mandating prior Government approval wherever the individual investor or the beneficial owner falls within the land-border country nexus and the transaction results in transfer of ownership or control of a listed Indian company. By importing the PMLA definition of “beneficial owner” and relying on PML Rulesʼ thresholds, the amendment synchronizes FEMAʼs investment control tests with Indiaʼs anti-money-laundering framework, thereby promoting consistency across regulatory silos.
e) Changes to rule 13 – transfer of equity instruments by overseas individuals
Rule 13, which governs transfer of equity instruments, has also been realigned with the new individual-centric construct. The sub-heading “Transfer of equity instruments by NRI or OCI” has been replaced with “Transfer of equity instruments by an individual person resident outside India including a NRI or an OCI”, and the opening portion of the rule is recast to cover any such individual holding equity instruments of an Indian company or units in accordance with the rules.
Under the substituted sub-rule (1), an individual person resident outside India holding equity instruments or units on a repatriation basis may transfer them by way of sale to any person resident outside India, subject to conditions in the Schedules. However, where the Indian company operates in a sector requiring Government approval under the FDI policy, prior Government approval is required for such transfer, and where the transfer leads to change in ownership or control in favour of entities or citizens from land-border countries (or beneficial owners from such countries), Government approval is again mandated, with the same explanations on “ownership” and “beneficial owner” as in rule 12.
f) Schedule II tweak – FPI individual/group limits and 10% threshold
Although the Third Amendment is primarily about overseas individuals under Schedule III, it also amends Schedule II dealing with foreign portfolio investors. In paragraph 1(a)(i) of Schedule II, the proviso has been substituted to clarify that the total holding of a foreign portfolio investor in a listed Indian company under Schedules II, III or any other schedule, including holdings through an “investor group”, must remain below the prescribed individual limit; where investment reaches 10% or more, clause (iii) of that paragraph applies.
The explanation defines “investor group” by reference to the SEBI (Foreign Portfolio Investors) Regulations, 2019, ensuring that the aggregation rules applied by SEBI for FPI category-level limits are mirrored in the FEMA framework. This harmonisation matters because the NDI Rules treat investments of less than 10% in listed companies as foreign portfolio investment, and the 10% cut-off functions as a bright line for conversion from FPI-type exposure to FDI classification.
g) Overhaul of Schedule III – portfolio route for overseas individuals
The most operationally significant changes lie in Schedule III, which has been substantially overhauled. First, the heading has been expanded from “Non-Resident Indian (NRI) or Overseas Citizen of India (OCI)” to “an individual person resident outside India including a Non-Resident Indian (NRI) or Overseas Citizen of India (OCI)”, signaling that any overseas individual (not just NRI/OCI) can now use this route, subject to conditions.
h) New paragraph (1) – purchase or sale of listed equity instruments
Paragraph (1) of Schedule III has been fully substituted to set out the new framework for purchase or sale of equity instruments of a listed Indian company by an individual person resident outside India on a repatriation basis, through a recognized stock exchange. The rule requires such individuals to route their trades through a branch designated by an Authorized Dealer (AD) bank, maintaining the banking oversight and reporting channel that previously existed for NRI/OCI PIS transactions.
The substituted paragraph lays down quantitative limits both at the individual and aggregate level: the holding of any individual person resident outside India must be less than 10% of the total paid-up equity capital on a fully diluted basis, or less than 10% of the paid-up value of each series of debentures, preference shares or share warrants; at the same time, the combined [2] [1] holding of all such individuals under this Schedule in a given company must not exceed 24% of the paid-up equity capital (fully diluted) or 24% of the paid-up value of each series of such instruments.
i) Cross-schedule aggregation and the 10% reclassification trigger
A proviso clarifies that the total holding of an individual person resident outside India in a listed Indian company under Schedules II, III or any other schedule of the NDI Rules must be less than the above individual limit of less than 10%. Where the holding reaches 10% or more, the provisions of clause (c) of sub-paragraph (a) of paragraph 1 of Schedule III apply, which essentially deal with consequences of breach and reclassification of such exposure.
This proviso is crucial because it prevents circumvention of the 10% FPI–FDI boundary by splitting holdings across multiple routes (e.g., part under Schedule II via FPI and part under Schedule III as an individual). The combined exposure of the same individual across schedules is tested against the 10% threshold, and a breach triggers either mandatory divestment within a short window or automatic treatment of the entire holding as FDI.
j) Breach, mandatory divestment and FDI reclassification
Clause (c) of the substituted paragraph (1) addresses what happens when an overseas individual breaches the prescribed limit of “less than 10%”. If an individual person resident outside India acquires more than the permitted threshold, the excess investment must be divested within five trading days from the date of settlement of the trades that caused the breach, thereby imposing a very tight corrective timeline.
If the investor chooses not to divest, then the entire investment in the concerned company by that individual is treated as foreign direct investment, and the individual is barred from making further portfolio investment in that company. In such cases, the investor, through the designated branch of the Authorised Dealer, must bring the breach and consequent reclassification to the notice of the depositories and the concerned company within seven trading days from the settlement date; divestment and reclassification are subject to conditions prescribed by SEBI and RBI for FPIs, and any breach of aggregate or sectoral caps during the short interim period between acquisition and sale or conversion to FDI within the prescribed time will not be treated as a contravention of the NDI Rules.
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