FEMA Non-Debt Instruments (Third Amendment) Rules 2026: Foreign Individuals Can Now Invest in Indian Listed Securities

India has introduced noteworthy changes to its foreign investment framework through the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026, and the corresponding Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Amendment) Regulations, 2026, issued by the Reserve Bank of India (RBI).

Together, these amendments broaden the scope of eligible investors under Schedule III of the FEMA Non-Debt Instruments Rules. It expands access to India’s listed securities market and aligns payment, remittance, and reporting requirements with the revised investment framework.

The reforms mark a shift from a regime focused primarily on Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) to one that permits participation by a wider category of foreign individual investors while retaining national security safeguards and investment thresholds.

What has changed under the FEMA non-debt framework

Prior to the amendment, Schedule III of the FEMA (Non-Debt Instruments) Rules primarily permitted investments in listed Indian securities by NRIs and OCIs on a repatriation basis.

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The central government has now replaced references to “NRI or OCI” with the broader term “individual person resident outside India, including an NRI or an OCI.”

As a result, foreign individuals residing outside India can now access the same investment route that was previously available only to NRIs and OCIs.

This latest change substantially widens the pool of eligible overseas investors and is expected to enhance participation in India’s capital markets.

Investment opportunities available under Schedule III

Under the revised framework, an individual resident outside India may:

1. Purchase equity instruments of listed Indian companies
2. Sell equity instruments of listed Indian companies
3. Invest in eligible securities through recognized Indian stock exchanges
4. Invest on a repatriation basis, allowing proceeds to be taken outside India subject to FEMA requirements

The amendment effectively creates a more inclusive portfolio investment route for foreign individual investors while maintaining regulatory oversight.

Government approval requirements continue for sensitive investments

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While the amendment liberalizes access for foreign individuals, it does not dilute India’s national security safeguards. Prior approval from the central government remains mandatory where an investment either results in the following:

• Transfer of ownership or control of a listed Indian company to entities or citizens of a country sharing a land border with India, or
• Involves a beneficial owner who is a citizen of such a country.

These restrictions mirror India’s existing foreign investment screening framework introduced to monitor investments originating from jurisdictions that share land borders with India.

Revised rules for transfer of equity instruments

The amendment also expands transfer rights previously available to NRIs and OCIs.

An individual resident outside India holding equity instruments or units of an Indian company may transfer those holdings through sale or gift to another person resident outside India.

However, the transfer remains subject to certain conditions:

1. Government approval is required if the company operates in a sector where foreign investment requires prior government approval
2. Approval is also necessary if the transaction results in ownership or control shifting to entities or citizens of countries sharing a land border with India or where the beneficial owner is a citizen of such a country

These provisions ensure that liberalized investment access does not compromise regulatory scrutiny over sensitive transactions.

Investment limits under Schedule III

The amendment retains the portfolio investment character of Schedule III by imposing clear ownership thresholds.

Individual investment limit: An individual resident outside India may hold less than 10 percent of the paid-up equity capital of a listed Indian company on a fully diluted basis.

The same threshold applies to debentures, preference shares, and share warrants.

Aggregate investment limit: The combined holdings of all eligible individuals investing under Schedule III cannot exceed the following:

1. 24 percent of the total paid-up equity capital of the company on a fully diluted basis, or
2. 24 percent of the paid-up value of each series of debentures, preference shares, or share warrants

These limits preserve the distinction between portfolio investments and foreign direct investments.

What happens if an investor crosses the 10 percent threshold

The amendment introduces a clear mechanism for dealing with breaches of the individual investment cap.

If an investor’s holding exceeds the prescribed 10 percent threshold, two options are available.

Option 1– Divest the excess holding: The investor may reduce the holding below the threshold within five trading days from the settlement date of the transaction that caused the breach.

Option 2–Reclassify the investment as FDI: If the investor does not divest the excess holding, the entire investment in the company will be treated as foreign direct investment (FDI). The investor will no longer be permitted to make portfolio investments in that company under Schedule III. Additionally, appropriate notifications must be provided to the designated Authorized Dealer (AD) bank, depositories, and the concerned company.

The amendment further clarifies that temporary breaches during the prescribed divestment or reclassification period will not be treated as a contravention under FEMA.

ALSO READ: FEMA Guarantees Regulations 2026: RBI Guide for Investors

Clarification for foreign portfolio investors

The 2026 amendments also clarify the treatment of holdings across different FEMA investment routes.

A foreign investor’s holdings under Schedule II, Schedule III, or any other investment schedule must remain below the prescribed portfolio investment limits.

Where investments reach or exceed 10 percent, the relevant provisions governing FDI classification will apply.

Furthermore, it also aligns the definition of “investor group” with the definition prescribed under the Securities and Exchange Board of India (SEBI) foreign portfolio investor (FPI) regulations.

RBI aligns payment and remittance rules

Following these amendments, the RBI has revised the FEMA Mode of Payment and Reporting Regulations to operationalize the expanded investment framework.

How can investors fund their investments

Eligible individual residents outside India may make investments through the following:

1. Inward remittances from abroad through normal banking channels; or
2. Funds held in repatriable deposit accounts maintained in accordance with FEMA deposit regulations.

Investors must designate a repatriable rupee account that will be used exclusively for investments under Schedule III.

NPS investment rules

For subscriptions to the National Pension System (NPS), NRIs and OCIs may continue to use inward remittances, repatriable foreign currency accounts, repatriable rupee accounts, or NRO accounts.

Repatriation of sale proceeds

The RBI has also clarified the treatment of sale proceeds.

Equity instruments

Net sale proceeds may be remitted outside India or be credited to the investor’s designated repatriable rupee account.

Mutual funds and NPS investments

Sale proceeds may be repatriated overseas or be credited to eligible accounts maintained under FEMA deposit regulations.

These provisions ensure seamless movement of funds while maintaining regulatory compliance.

Changes for Indian companies listed on international exchanges

The RBI amendment also updates Schedule XI, which governs investments in equity shares of Indian companies listed on international exchanges.

Foreign investors may now make payments through:

1. Banking channels into the Indian company’s permitted foreign currency account
2. Inward remittances from abroad
3. Repatriable foreign currency or rupee accounts

Similarly, sale proceeds can be remitted outside India or credited to eligible bank accounts maintained under FEMA regulations.

The clarification provides greater certainty for investors participating in international listings of Indian companies.

New reporting requirement for AD banks

The RBI has introduced a revised reporting framework to reflect the broader investor category.

AD Category-I banks must now report purchases and transfers of equity instruments by individual foreign investors through a new reporting format known as Form LEC (Individual Foreign Investor – IFI). 

Form LEC (Individual Foreign Investor – IFI)

The reporting requirement replaces the earlier framework that primarily focused on NRI and OCI transactions and ensures that RBI receives transaction-level information for all eligible foreign individual investors.

Conclusion

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The Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026, along with the RBI’s corresponding payment and reporting amendments, expand India’s foreign investment framework by extending Schedule III investment benefits to all individuals resident outside India. These reforms broaden access to India’s listed securities market and clarify investment thresholds and FDI reclassification rules.

Additionally, the amendment streamlines payment and repatriation processes and establishes updated reporting requirements for banks. At the same time, the government maintains regulatory oversight and national security safeguards while facilitating greater foreign participation in India’s capital markets.

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