Elementor #5086

Foreign investment into Indian companies has, over the last few years, been shaped less by headline sector caps and more by the quiet machinery of beneficial-ownership scrutiny. In 2026 that machinery acquired sharper teeth. The Ministry of Finance notified two separate amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the “NDI Rules”) — one on  May 2^nd, 2026 and another on June 12^th, 2026 — and together they recalibrate how cross-border mergers and acquisitions must be diligence, structured and documented.

The two instruments pull in somewhat different directions. The May 2026 amendment is the control-focused package that matters most for M&A. The June 2026 “Third Amendment” is primarily a liberalisation of the portfolio route for individual foreign investors, but it carries one limb of direct relevance to acquisitions of listed companies. This article takes both in turn and then translates them into practical steps for deal teams.

The regulatory backdrop

Inbound investment in equity instruments of Indian companies runs through Section 6 of FEMA, 1999 read with the NDI Rules, which the Central Government frames under Section 46. Investment is permitted either on the automatic route, up to applicable sector caps, or on the Government (approval) route. A useful starting point is that a contravention of FEMA is regulatory and compoundable in character — it does not, by itself, void the underlying transaction.

The land-border restriction has its origins in Press Note 3 of 2020, which required that an entity of a country sharing a land border with India — or an investment whose beneficial owner is situated in or is a citizen of any such country — invest only under the Government route.[ii] In practice these jurisdictions are China (including Hong Kong), Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan. The 2026 amendments take that policy and embed it firmly within the Rules.

The May 2026 amendment: the control package

This is the instrument of principal significance for acquisitions that change ownership or control.

Rule 6(a) is rewritten

Rule 6(a) now provides expressly that a person resident outside India may subscribe to, purchase or sell equity instruments of an Indian company only in accordance with Schedule I and the conditions specified there.[iii] The effect is to route all non-resident dealing in equity instruments through Schedule I’s conditionality — sector caps, entry routes and the land-border restriction included.

Downstream and indirect transfers are now caught

This is the single most important change for deal structuring. Government approval is no longer assessed only at the point of inbound investment. Where a subsequent change in the ownership of existing or future FDI causes the beneficial ownership to fall within the restricted land-border category, prior approval is required. A secondary sale between two non-residents, an upstream change of control at the foreign parent, or an intra-group reorganisation can each trip the wire. Layered holding structures no longer neutralise the restriction; what matters is the destination of beneficial ownership, not the residence of the immediate transferor.

Beneficial ownership, defined by the PMLA

“Beneficial ownership” is now tied to the definition under the Prevention of Money-Laundering Act, 2002 and its record-maintenance rules, importing the established control and ownership thresholds (the 10% / 15% / 25% control concepts, depending on the nature of the investing entity) and the test of effective control over the investing or investee entity.[iv] For diligence purposes, this means tracing the acquirer chain to its ultimate beneficial owners and applying money-laundering-standard control tests at each layer.

Reporting, multilateral funds and carve-outs

• A standalone reporting limb. Even where prior approval is not required, investments with indirect ownership links to land-border countries remain subject to RBI reporting — a compliance obligation separate from the approval gate.
• Multilateral funds. Investment through a multilateral bank or fund is not attributed to any particular country, nor is any country treated as its beneficial owner — a structuring avenue for DFI- or sovereign-fund-anchored consortia.
• Citizens of, or entities incorporated in, Pakistan may invest only through the Government route and only in sectors not otherwise prohibited, with defence, space and atomic energy excluded.
• Oil-field interests. The issuance or transfer of participating interests or rights in oil fields by Indian companies to non-residents is treated as foreign investment governed by Schedule I — relevant to upstream energy deals.

The June 2026 Third Amendment: portfolio liberalisation, with a control twist

The Third Amendment is mostly about opening the listed-securities route to a wider class of individual investors, but one limb reaches control transactions.[v]

A wider individual investor base

In Rule 9, and consequentially in Chapter V and Schedule III, “Non-Resident Indian or Overseas Citizen of India” is replaced by “an individual” / “individual person resident outside India including an NRI or OCI.” Any individual resident outside India may now buy or sell equity of a listed Indian company on a repatriation basis under Schedule III (Rule 12), and transfer such instruments by sale or gift to another person resident outside India (Rule 13).

The listed-company control gate

Rules 12 and 13 now require prior Government approval where an investment or transfer results in the ownership or control of a listed Indian company passing to an entity or citizen of a land-border country, or where the beneficial owner belongs to such a country. The Press Note 3 gate is thereby made explicit for listed-target acquisitions, open offers and large block trades.

Thresholds and the re-characterisation trap

• Schedule III caps an individual’s holding at below 10%, with an aggregate ceiling of 24% across such individual investors;
• Schedule II tightens foreign portfolio investor aggregate-holding limits, with stricter provisions where a holding reaches 10% or more; and
• a breach must be cured within the prescribed period, failing which the holding is treated as foreign direct investment — bringing with it the full Schedule I conditionality, including the approval requirement where the beneficial owner is a land-border person.

For a strategic acquirer building a stake, this means monitoring against the 10% line from the very first tranche.

What this means for cross-border M&A

Due diligence

Ultimate beneficial ownership tracing is now a legal prerequisite, not merely good practice, and must be conducted on PMLA control tests. Map the acquirer chain to its ultimate owners and test, at each layer, whether control or the requisite ownership percentage sits with a land-border person. Any positive finding triggers a Press Note 3 analysis at the very threshold of the transaction.

Structuring

Determine at the outset whether the structure attracts the Government route, and whether any contemplated post-closing transfer — an exit, a secondary, a reorganisation — would itself trigger approval under the downstream-transfer limb. Where commercially available, a qualifying multilateral-fund channel avoids country attribution. Interposing holding vehicles to dilute the restriction no longer works.

Conditions precedent

Where the chain reaches a land-border jurisdiction, build Government approval in as a condition precedent to completion, with a long-stop date calibrated to realistic approval timelines and a clear allocation of approval risk — walk-away, price adjustment or extension. Draft the CP to capture approval not only at primary entry but on any restructuring needed to close.

Representations, warranties and covenants

• A discrete representation that no person in the acquirer chain is, or is beneficially owned or controlled by, a land-border person, save as disclosed;
• a covenant to obtain and maintain all FEMA approvals and to make the requisite RBI filings, including the standalone reporting limb; and
• transfer-restriction, tag and drag mechanics in the shareholders’ agreement drafted so a permitted transferee cannot inadvertently trip the approval requirement after closing.

Listed targets and the Takeover Code

For listed targets, the Rule 12/13 limb means an open offer or block trade that passes control to a land-border beneficial owner needs prior Government approval under the NDI Rules, in addition to compliance with the SEBI (SAST) Regulations. The sequencing of the two regimes, and its effect on offer timelines, belongs in the transaction timetable from day one.

Compliance and risk matrix

Principal triggers, the regulatory requirement, and the recommended deal-stage action.

This article is for information purpose only and should not be taken as legal advice. To know further details, clarification, assistance or any advice on cross border investment- inbound or outbound, mergers and acquisition structuring, advisory, beneficial-ownership analysis, Government-route approvals, transaction documentation and RBI reporting, you may connect with us at admin@equicorplegal.com  / 08448824659  or visit www.equicorplegal.com

[i]Vijay Karia v. Prysmian Cavi e Sistemi Srl, (2020) 11 SCC 1.

[ii]Press Note 3 (2020 Series), DPIIT, 17 April 2020; carried into r. 6 and Schedule I of the NDI Rules, 2019 by amendment.

[iii]NDI Rules, 2019, r. 6(a), as substituted by the FEM (NDI) (Amendment) Rules, 2026 (notified 2 May 2026), made under s. 46, Foreign Exchange Management Act, 1999.

[iv]Prevention of Money-Laundering Act, 2002 (Act 15 of 2003), and the PML (Maintenance of Records) Rules, 2005, r. 9.

[v]NDI Rules, 2019, rr. 9, 12 and 13 and Schedule III, as amended by the FEM (NDI) (Third Amendment) Rules, 2026 (Gazette, 12 June 2026); operationalised through the FEM (Mode of Payment and Reporting of Non-Debt Instruments) (Amendment) Regulations, 2026.