REGULATORY UPDATE
Notification: S.O. 3030(E) dated 12 June 2026 Effective Date: Immediate, from the date of publication in the Official Gazette.
Executive Summary
The Central Government has amended the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 to significantly expand the scope of the portfolio investment framework under Schedule III. The amendments replace the earlier NRI/OCI-specific regime with a broader framework applicable to any individual person resident outside India, including NRIs and OCIs. The notification also introduces specific safeguards where investments result in transfer of ownership or control of listed Indian companies to persons/entities connected with countries sharing a land border with India.
Key Highlights
1. Expansion of Eligible Investor Category
The earlier references to “Non-Resident Indian (NRI) or Overseas Citizen of India (OCI)” have been replaced with “an individual person resident outside India including a NRI or an OCI.” This change appears across Rule 9, Chapter V, Rules 12 and 13, and Schedule III.
Practical effect: Portfolio investment access under Schedule III is no longer confined only to NRIs and OCIs; it is extended to all individual persons resident outside India, subject to prescribed conditions.
2. Purchase and Sale of Listed Securities Under Schedule III
An individual person resident outside India may purchase or sell:
- Equity instruments of listed Indian companies; and
- Other eligible securities,
on a repatriation basis in accordance with Schedule III.
3. Government Approval Requirement for Bordering Countries
Prior Government approval is required where an investment or transfer results in:
- Transfer of ownership or control of a listed Indian company to entities or citizens of a country sharing a land border with India; or
- The beneficial owner of the investment is a citizen of such country.
The notification expressly links the determination of “beneficial owner” to the definition under the Prevention of Money-Laundering Act, 2002 and the PMLA Maintenance of Records Rules, 2005.
4. Changes to Transfer Provisions
Individual persons resident outside India holding equity instruments or units on a repatriation basis may transfer such holdings by way of:
- Sale; or
- Gift,
to another person resident outside India, subject to applicable sectoral conditions and Government approval requirements where relevant.
5. Clarification of Portfolio Investment Thresholds
Schedule III now expressly provides that:
- Individual holding must remain below 10% of the paid-up equity capital (fully diluted basis) of a listed Indian company.
- Aggregate holdings under the Schedule by all such persons remain capped at 24%, unless otherwise permitted under applicable rules.
6. Treatment of Breach of 10% Threshold
A detailed mechanism has been introduced for situations where the 10% limit is breached:
- Excess holding must be divested within five trading days from settlement of the trades causing the breach.
- If divestment is not undertaken, the entire investment in the company will be treated as Foreign Direct Investment (FDI).
- The investor will thereafter be prohibited from making further portfolio investment in that company.
- Notification to depositories and the concerned company must be made within seven trading days through the designated Authorized Dealer branch.
7. Amendments Affecting Foreign Portfolio Investors (FPIs)
Schedule II has been modified to clarify that total holdings of an FPI across various schedules, including holdings through an investor group, must remain below the prescribed individual limit. Investments reaching 10% or more trigger the applicable reclassification provisions. The term “investor group” is aligned with the SEBI (Foreign Portfolio Investors) Regulations, 2019.
Practical Impact
For Listed Companies
- Expanded investor eligibility may widen the pool of overseas retail and individual investors.
- Enhanced monitoring of ownership/control implications will be necessary, particularly in transactions involving investors linked to land-bordering jurisdictions.
For Foreign Investors
- Non-resident individuals (beyond NRIs/OCIs) gain access to the Schedule III portfolio investment route.
- Investors must carefully monitor the 10% threshold to avoid mandatory divestment or FDI reclassification consequences.
For Depositories, AD Banks and Compliance Teams
- Systems may need updating to accommodate the broader investor category.
- Enhanced beneficial ownership diligence will become important where investments could trigger Government approval requirements.
Effective Date
The amendments came into force on 12 June 2026, being the date of publication in the Official Gazette.
Closing Note
The amendment represents a notable liberalisation of the Schedule III portfolio investment framework by extending eligibility beyond NRIs and OCIs to all individual persons resident outside India, while simultaneously strengthening national security-related approval requirements and codifying consequences for breaches of portfolio investment limits.
(Shared for professional awareness and regulatory update.)
RV FCS Abhinav Agarwal
Partner
Atulya Corporate Advisors & CorpValuers
Corporate Law Advisors & Registered Valuers (IBBI – SFA)