At a glance
- The listed-equity investment route is broadened beyond NRIs and OCIs to individuals resident outside India, subject to the applicable caps.
- A cap breach must be cured within five trading days from the settlement date; otherwise, the entire holding may be reclassified as FDI.
- Beneficial-ownership review is critical where an investment structure connects to a citizen or entity from a country sharing a land border with India.
Why does this notification matter for foreign companies doing business in India?
The Foreign Exchange Management Act, 1999 (FEMA), and its subordinate rules on non-debt instruments form the operational core of India’s foreign investment framework. Equity shares and other non-debt instruments acquired by a non-resident in an Indian company are governed by the FEMA (Non-Debt Instruments) Rules, 2019.
The 12 June 2026 amendment simultaneously widens market access and sharpens compliance discipline. For foreign counsel advising family offices, high-net-worth individuals (HNIs), cross-border M&A clients, and international investors with any India exposure, the amendment affects both the eligibility question (who can now invest under the individual route) and the compliance question (what happens when caps are breached, and how prior-approval requirements catch structural arrangements).
The three changes below show how India is calibrating its foreign investment regime, liberalising where market opening advances economic policy, tightening where geopolitical concerns require sharper enforcement.
Change 1: Who can now invest in Indian listed equity under the individual investor route?
Bottom line: Not just Non-Resident Indians (“NRI”) or Overseas Citizens of India (“OCI”) but any individual resident outside India can now access the listed equity investment route. The amendment revises Chapter V, including Rule 12, Rule 13 and Schedule III of the FEMA (Non-Debt Instruments) Rules 2019 to replace “Non-Resident Indian (NRI) or Overseas Citizen of India (OCI)” with “an individual person resident outside India, including an NRI or an OCI.”
What this means for foreign counsel
The listed-equity investment route was previously limited to individuals holding NRI or OCI status. Foreign family offices, HNIs outside India, and overseas individual investors without NRI/OCI status had to route their listed-equity exposure through Foreign Portfolio Investor (“FPI”) structures (the SEBI-registered institutional route) or intermediate corporate vehicles. The amendment removes that eligibility barrier.
For counsel advising non-NRI/non-OCI clients such as European family offices, Middle Eastern HNIs, US and UK individual investors, and Singapore-based individual clients, the route is now directly available.
What are the individual and aggregate investment caps?
Individual cap: must remain below 10% (ten percent) of the total paid-up equity capital on a fully diluted basis, or less than 10% (ten percent) of the paid-up value of each series of debentures or preference shares or share warrants issued by the Indian company; and
Aggregate holding of all individual Person Resident Outside India (“PROI”): shall not exceed 24% (twenty four percent) of the total paid-up equity share capital on a fully diluted basis or shall not exceed 24% (twenty four percent) of the paid-up value of each series of debentures or preference shares or share warrants
The amendment’s central change is that the route is now available to a broader class of individual investors, subject to these caps.
Structural implications
Clients currently routing individual-level exposure through complex FPI or intermediate-vehicle structures should be reviewed against the simplified route. In some cases, redeployment from the more complex structure to the direct individual route may reduce compliance costs and structural complexity. In other cases, the FPI structure may still be preferable however the choice depends on the client’s aggregate India exposure, tax planning position, and long-term investment horizon.
Action point for foreign counsel
Review any non-NRI/non-OCI individual client currently accessing Indian listed equity through an FPI or intermediate vehicle for potential redeployment into the widened individual investor route.
Change 2: What happens if a foreign individual investor breaches the 10% or 24% cap under this amendment?
Bottom line: The excess must be divested within five trading days from the settlement date of the transaction that caused the breach. If not divested within that window, the investor’s entire holding in the company is reclassified as Foreign Direct Investment (“FDI”), and the investor is barred from further portfolio investment in that company.
Detailed mechanics
Trigger events
A breach can occur through:
- A subsequent purchase pushing an individual holding past the 10% threshold
- A corporate action (buyback, bonus issue, rights offering) that crosses an individual position over 10%
- Aggregate crossing where multiple non-resident individuals cumulatively cross the 24% threshold in the same company
When does the five-trading-day clock start?
Not from the trade date, and not from the date the breach is discovered by the investor but 5 trading days from the settlement date of the triggering transaction. Settlement date is the anchor.
What are the consequences if the breach is not cured?
If not cured within 5 trading days:
- The entire holding, not just the excess, is reclassified as FDI
- The investor is barred from further portfolio investment in the same company
- The reclassification triggers FDI-level compliance obligations (reporting to the Reserve Bank of India, valuation reporting, source-of-funds substantiation, and any sectoral approval requirements applicable to FDI in that sector) that the portfolio route did not require
Is there a partial remedy?
The mechanism does not provide for a graduated response. Cure within the window, or face full-position reclassification.
Practical implications
For clients with individual positions approaching the 10% cap, or where aggregate non-resident individual holdings approach 24%, contingency planning must be in place before the trigger event. This includes:
- Pre-agreed divestment mechanics such as broker instructions, escrow arrangements, or standing sale orders
- Compliance monitoring covering not just individual positions but aggregate non-resident individual positions in the same company
- Board and investment-committee awareness of the reclassification consequence
- Documentation supporting speed of decision-making when a corporate action is announced
- The five-day window is short. Discovering a breach on the third trading day post-settlement leaves two days to execute a divestment. For institutional or family office structures with layered decision-making, this may not be enough time.
Action point for foreign counsel
Establish real-time cap-monitoring dashboards and pre-agreed divestment protocols for any client whose position approaches the individual or aggregate caps.
Change 3: Does the Press Note 2/2020 prior-approval requirement now catch nominee, trust, and vehicle structures?
Bottom line: Yes. The amendment extends the Press Note 2/2020 prior-Government-approval requirement through beneficial ownership. Where the beneficial owner of an investment is a citizen of a country sharing a land border with India, prior Government approval is now required, regardless of whether the direct investing entity or citizen is from a land-border country.
The Press Note 2/2020 baseline
Introduced by the Department for Promotion of Industry and Internal Trade (“DPIIT”) in April 2020 after border tensions with China, Press Note 2/2020 required prior Government approval for any FDI from an entity of a country sharing a land border with India, OR from a citizen of such a country. The seven land-border countries are China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan.
The 2020 Rule caught direct investment from these countries. What it did not catch, because the drafting was directed at the direct investor, was structural arrangements where a land-border country citizen or entity was the ultimate beneficial owner but the immediate investing vehicle was structured through a non-land-border jurisdiction.
What does the amendment add?
The prior-approval requirement now applies where the beneficial owner of the investment is a citizen of a land-border country. Nominee arrangements, trust structures, and multi-tier investment vehicles no longer sidestep the requirement. The regulatory eye traces through structural layers to the ultimate individual.
What this catches in practice
- Trusts with land-border country citizen beneficiaries
- Nominee investment structures with land-border country ultimate ownership
- Multi-tier holding structures ending in land-border country nationals
- Family investment vehicles with land-border country individual beneficial ownership
- Layered SPVs where the intermediate entities are non-land-border but the ultimate beneficial ownership is land-border
Implications for foreign counsel
- Existing client portfolios with any nominee, trust, or vehicle structure touching a land-border country citizen need to be audited against the new requirement
- Pre-transaction beneficial-ownership disclosure to the RBI and DPIIT is the safer posture; corrective post-transaction approvals are procedurally harder and slower
- Cross-border M&A term sheets and share purchase agreements should now include explicit beneficial-ownership representations covering land-border country citizenship, backed by warranty and indemnity structures
Interaction with the widened individual investor route
Change 1 and Change 3 operate simultaneously. A non-NRI/non-OCI individual investor entering the market under the widened route (Change 1) still triggers the beneficial-ownership approval requirement (Change 3) if they are a citizen of a land-border country, or if the structure ultimately beneficially owns through such a citizen. The two changes must be read together, as the expanded scope does not create an exception to, or circumvent, the prior approval requirement.
What this means for your India-facing matters
For foreign counsel with India-facing corporate practice, the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026 trigger a specific action list:
- Audit existing client portfolios for beneficial-ownership exposure to land-border country citizens. For any nominee, trust, or vehicle structure touching a land-border country individual, the Government-approval requirement now traces through. Pre-transaction disclosure is the safer posture.
- Review clients previously excluded from the individual investor route. Non-NRI/non-OCI family offices, HNIs, and overseas individual investors currently in FPI or intermediate-vehicle structures may benefit from redeployment into the simplified individual route.
- Establish compliance monitoring for individual and aggregate cap headroom. For clients holding close to the 10% individual cap, or where aggregate non-resident individual holdings in the same company approach 24%, compliance monitoring should track both dimensions in real time.
- Build corporate action contingency planning. Buybacks, bonus issues, and rights offerings can trigger cap breaches without any action by the investor. Pre-agreed divestment mechanics should be in place before the corporate action.
- Update cross-border M&A documentation. Term sheets and Share Purchase Agreements should now include explicit beneficial-ownership representations covering land-border country citizenship, with corresponding warranties and indemnities.
- Brief in-house counsel and CFOs on the five-trading-day divestment window. The window is short and the penalty is absolute. Client-side decision-makers need to understand the mechanic before a trigger event, not after.
Frequently asked questions
Which countries are subject to the land-border prior-approval requirement under FEMA?
Seven countries sharing a land border with India namely China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan. The prior approval requirement applies to foreign direct investments made by entities incorporated in, or citizens of, countries sharing a land border with India which are mentioned above. Following the amendment, this requirement has also been extended to cover any investment structure where the beneficial owner is a citizen of, or is situated in, a country sharing a land border with India.
Does the FEMA (Non-Debt Instruments) (Third Amendment) Rules, 2026 change the individual or aggregate investment caps for foreign individuals in listed Indian equity?
No. The individual cap remains at less than 10% of paid-up equity capital (fully diluted basis) and the aggregate cap for all such non-resident individuals under this route remains at 24%. What changes is who can invest under those caps. The amendment widens eligibility from NRIs and OCIs alone to all individuals resident outside India.
What happens if a non-resident individual investor breaches the FEMA investment cap and does not divest within 5 trading days?
The entire holding, not just the excess, is reclassified as Foreign Direct Investment (“FDI”). The investor is barred from further portfolio investment in the same company. The reclassification triggers FDI-level compliance obligations, including source-of-funds substantiation, valuation reporting, and any sectoral approval requirements applicable to FDI in that sector.
When does the 5-trading-day divestment clock start under the FEMA (Non-Debt Instruments) (Third Amendment) Rules, 2026?
The clock starts on the settlement date of the transaction that caused the breach and not the trade date, and not the date on which the breach is discovered by the investor.
How can non-NRI and non-OCI individuals invest in Indian listed equity under the FEMA (Non-Debt Instruments) (Third Amendment) Rules, 2026?
This amendment permits any individual resident outside India, regardless of NRI or OCI status, to invest in listed equity under the individual investor route, subject to the individual cap of less than 10% of paid-up equity capital and the aggregate cap of 24% across all such non-resident individuals in the same company. The prior-approval requirement for land-border country citizens continues to apply.
Does the beneficial-ownership piercing rule for land-border countries apply to institutional investors and FPIs, or only to individual investors?
The Press Note 2/2020 requirement and its June 2026 beneficial-ownership extension apply principally to FDI investment. Application to FPI structures and other institutional routes depends on the specific investment mode and vehicle. Foreign counsel should verify against the specific structure and route in question is the FEMA framework treats portfolio and direct investment through separate rule-sets, and the interaction requires case-specific analysis.
Legal disclaimer
This article is for general informational purposes only and does not constitute legal advice. The application of FEMA, FDI policy and related regulatory requirements depends on the facts, investment route and structure of each transaction. Readers should obtain transaction-specific advice and verify the position against the final notified text and applicable regulatory guidance.
