FEMA (Non-Debt Instruments) Third Amendment Rules, 2026: Analysing Foreign Investment Liberalisation and Regulatory Safeguards
Summary
The Ministry of Finance notified the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026 on 12 June 2026 (Notification No. S.O. 3030(E)), amending the NDI Rules, 2019. It is the third liberalisation-linked amendment of 2026, following earlier changes to land-border investment restrictions and the insurance sector cap.
The core change replaces “non-resident Indian or overseas citizen of India” with “an individual” in Rule 9 and Rule 12, opening the Schedule III repatriable route for listed equity to any individual resident outside India, not just NRIs and OCIs. These investors no longer need SEBI FPI registration to invest directly. Schedule III caps are also revised: the old 5% individual / 10% aggregate limit for NRIs and OCIs is replaced by a 10% individual / 24% aggregate limit applying to all individual foreign investors collectively.
Alongside this widening, the amendment adds safeguards. A new proviso in Rule 12(1) requires prior Government approval where an investment gives control or beneficial ownership to a citizen of a land-bordering country, effectively importing Press Note 3-style scrutiny into individual portfolio investment for the first time. “Beneficial owner” is now defined by reference to the PMLA’s 10% ownership threshold. Separately, Schedule II removes the earlier flexibility that let companies raise the FPI aggregate ceiling above 24% by board and shareholder resolution, and introduces cross-aggregation rules requiring combined FPI and individual holdings to stay under 10%, with breach triggering divestment or reclassification as FDI.
The piece argues this is targeted liberalisation, not blanket deregulation formal eligibility is broadened while ownership concentration and land-border risks are more tightly monitored and flags open questions around applying the PMLA beneficial-ownership test to complex holding structures and the unclear approval process for individual land-border cases.
Foreign investment into Indian securities has always moved through defined gates. A foreign portfolio investor (FPI) registered with SEBI goes in through Schedule II of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). A Non-Resident Indian (NRI) or an Overseas Citizen of India (OCI) goes in through Schedule III. Everyone else-an individual living abroad who happens to be neither an FPI nor of Indian origin simply had no repatriable route into listed Indian equity as an individual. On 12 June 2026, the Ministry of Finance (Department of Economic Affairs) closed that gap through the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026 (Notification No. S.O. 3030(E)), which took effect the same day.
The amendment is narrow in its drafting, a handful of substitutions to Rule 9, Rule 12, and Schedules II and III of the NDI Rules but its effect on who can hold Indian listed shares is not narrow at all. At the same time, the Government has used the same notification to write the land-border screening regime under Press Note 3 directly into the text of the NDI Rules for the first time, and to tie the definition of “beneficial owner” to the anti-money-laundering framework. Liberalisation and tightening arrive in the same instrument. This piece works through both halves and asks whether the balance the Government has struck is a workable one for practitioners advising cross-border clients.
Where the 2019 Rules Left Things
The NDI Rules, 2019, made under Section 46 of FEMA, 1999, set out the routes through which a person resident outside India may acquire non-debt instruments in an Indian entity. Chapter V of the Rules, before this amendment, was headed “Investment by Non-Resident Indian or an Overseas Citizen of India,” and Rule 9(1) confined the repatriable purchase of listed equity under Schedule III to that class alone: NRIs and OCIs, subject to a 5% individual cap and a 10% aggregate cap on the paid-up equity capital of the investee company.
A foreign national with no NRI or OCI status, and no SEBI registration as an FPI, had no repatriable individual route into an Indian listed company. They could invest as a resident-outside-India shareholder on a non-repatriation basis in limited circumstances, or they could route money through a fund structure registered as an FPI, but there was no direct individual portfolio channel comparable to what an NRI enjoyed. That gap sat awkwardly against the Government’s broader 2026 push to widen access to Indian capital markets a push that had already produced two earlier amendments this year, one relaxing certain restrictions on investment from land-bordering countries and another opening the insurance sector to 100% foreign investment under the automatic route. The Third Amendment Rules are the third instalment in that sequence, and the one that reaches individual investors directly.
What the Amendment Changes
Investor eligibility widened: Rule 9(1) previously spoke of “a non-resident Indian or an overseas citizen of India.” The amendment substitutes the words “an individual,” extending the sub-rule to any individual person resident outside India, not only those of Indian origin. The Chapter V heading and the Rule 12 sub-heading are amended correspondingly, and Rule 12(1) is recast to read that “an individual person resident outside India” may, on a repatriation basis, purchase or sell equity instruments of a listed Indian company and other securities as specified in Schedule III. NRIs and OCIs remain covered; the drafting is “including a Non-Resident Indian (NRI) or Overseas Citizen of India (OCI)” but the class of eligible investors is no longer limited to them. A British, Singaporean, or Emirati individual with no ancestral or citizenship connection to India can now, in principle, hold Indian listed shares on a repatriable basis in their own name, without first becoming an SEBI-registered FPI.
A statutory land-border and beneficial-ownership check inside Rule 12 itself: The recast Rule 12(1) carries a proviso: where the investment by an individual PROI results in transfer of ownership or control of the listed Indian company to entities or citizens of a country sharing a land border with India, or where the beneficial owner of the investment is a citizen of such a country, the investment requires prior Government approval. This is the first time the land-border screening regime familiar from Press Note 3 (2020 series) on foreign direct investment has been written directly into the text of the NDI Rules for portfolio-style listed-equity investment by individuals. An accompanying Explanation defines “ownership of an Indian company” by reference to Rule 23 of the NDI Rules, and “beneficial owner” by reference to Section 2(1)(fa) of the Prevention of Money-Laundering Act, 2002, determined as per the criteria in Rule 9(3) of the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 a framework built around a 10% ownership or control threshold. The same 10% beneficial-ownership benchmark also appears in DPIIT’s Press Note 2 of the 2026 series on investment from land-bordering countries, so the amendment is, in effect, harmonising three separate strands of Indian regulatory practice FEMA, PMLA, and the DPIIT press-note regime around a single ownership test rather than leaving each to define beneficial ownership on its own terms.
Revised caps under Schedule III: The earlier Schedule III ceiling for NRIs and OCIs was 5% individually and 10% in aggregate for all NRIs and OCIs taken together. The amendment removes that specific restriction and substitutes a new formula: any individual PROI, including an NRI or OCI, must hold less than 10% of the paid-up equity capital of the listed company, and the aggregate holding of all such individual PROIs is capped at 24%. On its face this is a liberalisation for NRIs and OCIs too their individual ceiling doubles from 5% to a limit just under 10% even though the class of persons competing for that headroom has also widened considerably.
A tightened Schedule II proviso for FPIs: Schedule II, which governs FPI investment, previously allowed an investee company’s board and shareholders to raise the 24% aggregate FPI ceiling up to the applicable sectoral cap by resolution. That flexibility is removed. In its place, the amendment inserts a proviso requiring that the total holding of an FPI including through an “investor group” as defined under the SEBI (Foreign Portfolio Investors) Regulations, 2019 stay below the prescribed individual limit across Schedule II, Schedule III, or any other schedule of the NDI Rules, and that once an FPI’s holding reaches 10% or more, the consequences set out in clause (iii) of paragraph 1(a) of Schedule II apply. Put together with the Schedule III changes, the amendment closes a route by which a listed company could previously have chosen to accept a larger block of foreign portfolio capital than the general 24% ceiling permitted.
Cross-aggregation between Schedule II and Schedule III: The two changes above interact. An individual who holds shares both as a registered FPI (Schedule II) and, separately, as an individual PROI (Schedule III) cannot simply add up separate headroom under each schedule to exceed the 10% individual limit. Where combined holdings cross that threshold, the excess must be divested market commentary following the notification has pointed to a five-trading-day window for such divestment failing which the entire investment is liable to be reclassified as foreign direct investment, carrying a bar on any further portfolio investment in that company. The operational mechanics of moving a holding from the FPI classification to FDI classification were separately addressed by the RBI in a November 2024 notification on FPI reclassification, which the Third Amendment Rules now plug into for this new category of investor.
No FPI registration needed for the Schedule III route: Because SEBI’s FPI registration requirement attaches to the Schedule II route, an individual investing under the newly widened Schedule III can, subject to the caps and the land-border proviso, buy and sell listed equity without registering as an FPI at all. That is a genuine reduction in entry friction for a foreign individual whose intended holding sits comfortably under the 10% ceiling.
Consequential changes to payment and reporting: The RBI followed the Ministry’s notification with the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Amendment) Regulations, 2026, which require that repatriable Schedule III investment by an individual PROI be routed through a designated repatriable rupee account, clarify funding sources for NRI/OCI subscription to the National Pension System, and introduce a new reporting form, Form LEC (IFI), under which Authorised Dealer Category-I banks must report to the RBI every purchase or transfer of equity instruments by a person resident outside India on an Indian stock exchange.
Liberalisation: Who Actually Benefits
The headline change is real. Before 12 June 2026, an individual foreign national with no NRI or OCI status had no direct, repatriable, individual route into Indian listed equity. Now they do, and they do not need to set up or invest through a SEBI-registered FPI structure to use it. For a family office principal, a high-net-worth individual, or simply a foreign retail investor who wants direct exposure to specific Indian listed names rather than exposure through a pooled fund, that is a meaningful widening of formal eligibility.
Whether it becomes a meaningful widening of practical access is a separate question. The individual 10% ceiling and 24% aggregate ceiling are generous relative to the old 5%/10% NRI limits, but they still function as hard caps that a compliance team has to monitor continuously, particularly once cross-aggregation with any Schedule II holding is factored in. The designated repatriable rupee account requirement under the Reporting Regulations, the new Form LEC (IFI) reporting obligation resting on AD Category-I banks, and the land-border proviso’s own compliance burden establishing, and being able to demonstrate, that no ownership, control, or beneficial-ownership link runs to a land-bordering country mean that a foreign individual investor is not simply handed frictionless market access. They are handed a new door that still requires a functioning KYC chain, a repatriable account, and, for anyone whose ownership structure is not straightforwardly transparent, a beneficial-ownership determination that Indian banks and, potentially, the Government will need to satisfy themselves on before money moves.
Why the Safeguards Stayed and Strengthened
It would be a mistake to read the Third Amendment Rules as straightforward deregulation. Two things in the same notification cut the other way. First, the land-border proviso in Rule 12(1) extends PN-3-style scrutiny, previously associated mainly with foreign direct investment, into the individual portfolio-investment space for the first time. Second, the removal of the board-and-shareholder route to raise the FPI aggregate ceiling above 24% under Schedule II takes away a flexibility that some listed companies had used to accommodate larger strategic FPI positions.
Read together, the amendment widens the front door for individual investors generally while narrowing the side door that let any single class of foreign shareholder- FPI or otherwise accumulate an outsized block without fresh scrutiny once the individual limit is approached. That is a coherent, if unstated, policy choice: broaden who can come in, but hold the line on how concentrated any one investor’s position can become, and hold a firmer line still where the investor’s ownership traces to a land-bordering jurisdiction. The alignment of the “beneficial owner” definition with the PMLA’s 10% threshold serves the same end, it gives banks and regulators one settled ownership test to apply across the FEMA, PMLA, and DPIIT frameworks rather than three potentially different ones.
Where the Text Leaves Room for Difficulty
A few points in the drafting will need to be worked through in practice rather than on paper. The Explanation ties “beneficial owner” to the PMLA framework, which is itself a control-and-ownership test built for anti-money-laundering purposes, not originally designed for capital-markets shareholding analysis; applying it to diffuse or multi-layered foreign holding structures, family trusts, or nominee arrangements will not always produce an obvious answer, and Authorised Dealers will carry the practical burden of forming a view before allowing remittances. The interaction between the Schedule II proviso’s reference to “investor group” under the SEBI FPI Regulations and the Schedule III individual limit also needs care: a family office that holds part of its India exposure through a registered FPI vehicle and part through an individual family member investing directly under Schedule III will need to track both holdings against a single 10% ceiling, which is not a trivial reconciliation exercise for compliance teams used to treating the two schedules as separate universes. Finally, the amendment does not, on its own text, spell out every procedural detail of how “prior approval of the Government” under the land-border proviso is to be sought for an individual portfolio investment the existing PN-3 approval process was built around FDI proposals routed through the Foreign Investment Facilitation Portal, and market participants will be watching for clarification on whether the same channel now applies to individual Schedule III investments or whether a separate process will emerge.
What This Means for Compliance Teams
For Indian listed companies, the practical task is monitoring: shareholding registers and registrar records now need to capture whether a foreign individual shareholder holds under Schedule III, whether any land-border ownership or control issue exists, and whether combined FPI and individual PROI holdings by the same beneficial owner are approaching the 10% threshold. For Authorised Dealer banks, the new Form LEC (IFI) reporting obligation is a fresh recurring compliance line item, and the repatriable rupee account requirement changes how these transactions must be structured operationally. For foreign individual investors and their advisers, the practical checklist includes confirming citizenship and country-of-control facts before investing, opening the correct account structure, and building in ongoing monitoring against the 10% individual cap, since breach triggers a short divestment window and a real risk of automatic reclassification into the FDI regime with a bar on further portfolio investment. For legal and tax advisers structuring cross-border holdings particularly for clients with any connection, direct or through intermediate entities, to a land-bordering country the beneficial-ownership analysis under the PMLA-linked Explanation is now a threshold question that has to be answered before, not after, an investment is made.
Conclusion
The Third Amendment Rules do not open India’s capital markets to the world without conditions. They open a specific, individual, repatriable route that did not exist before, to a wider class of foreign natural persons, while keeping the ownership caps, the land-border screening, and the beneficial-ownership test firmly in place and in the case of the Schedule II board-resolution flexibility, tightening what existed before. That is targeted liberalisation, not a general opening of the gate. Whether it meaningfully expands India’s attractiveness to foreign individual investors will depend less on the headline eligibility change than on how smoothly the ancillary machinery works in practice: how quickly Authorised Dealers can operationalise beneficial-ownership checks under the PMLA-linked test, how the Government’s approval process for land-border cases is administered for cases that are not classic FDI proposals, and how easily compliance teams can track combined FPI and individual holdings against a single cap across two schedules that used to be watertight compartments. The direction of travel in FEMA’s foreign investment regime through 2026 has been consistently towards wider formal access paired with sharper, more consolidated scrutiny of ownership and control. This amendment fits that pattern exactly, and its success will be measured by execution rather than by the text of the notification itself.
