How Foreign Investors Can Buy Distressed Assets in India in 2026, IBC, FEMA, FDI Approvals & Deal Checklist

Distressed asset acquisition in India has entered a new regulatory phase in 2026, driven by convergent changes to the Insolvency and Bankruptcy Code, the FEMA Non-Debt Instrument framework updated in May 2026, revised FDI screening rules introduced through the March 2026 Press Note, and fresh RBI clarifications governing cross-border payment and repatriation mechanics. For foreign private-equity funds, strategic acquirers and their transaction counsel, these changes reshape every stage of a deal, from bid structuring and approval routing through to post-acquisition repatriation planning.

This guide provides a single, practical regulatory crosswalk and a step-by-step deal checklist that answers the central compliance question facing every inbound buyer: can a foreign investor acquire this distressed asset via an IBC sale, prepack or liquidation under the automatic FDI route, and if not, what structure mitigates the risk?

IBC Sale Routes and How Foreign Bidders Participate

The Insolvency and Bankruptcy Code, as amended by notifications issued by the Ministry of Corporate Affairs (MCA), provides three principal channels through which a foreign investor can acquire a distressed Indian company or its assets. Understanding which channel applies, and what IBC foreign buyer approvals each one demands, is the first decision point in any transaction.

CIRP: Resolution Plan by Foreign Bidder

The Corporate Insolvency Resolution Process remains the primary pathway. Once the NCLT admits an application and appoints a Resolution Professional (RP), the RP invites expressions of interest from prospective resolution applicants. A foreign bidder submits a resolution plan to the Committee of Creditors (CoC), which must approve it by a vote of not less than 66 per cent by value. The approved plan is then sanctioned by the NCLT. Key considerations for foreign bidders include:

• Section 29A eligibility. The foreign bidder must not be disqualified under Section 29A of the IBC, for example, connected parties of the defaulting promoter, wilful defaulters or entities with NPAs older than one year are barred. This check extends to the bidder’s affiliates and related parties.
• CoC commercial negotiations. The CoC retains wide discretion to negotiate plan terms, haircuts and implementation timelines. Foreign bidders should expect requests for performance guarantees, escrow arrangements and regulatory condition-precedent clauses.
• Post-sanction regulatory filings. NCLT sanction does not automatically satisfy FEMA, FDI or RBI requirements. The buyer must separately complete FEMA reporting, obtain FDI clearance (automatic or government route) and file prescribed forms with the authorised dealer (AD) bank.

Liquidation Sale

Where CIRP does not yield a viable resolution plan, the NCLT orders liquidation. The Liquidator conducts a sale of assets, either as a going concern or on a piecemeal basis, through an auction or private treaty process administered under the IBBI (Liquidation Process) Regulations. Foreign buyers can participate directly, but must ensure that any purchase of immovable property or shares triggers the correct FEMA and FDI filings. The liquidation route is often faster for asset-only purchases, though the buyer typically acquires assets free of existing liabilities (subject to the NCLT order), making it attractive for strategic acquirers who want a clean slate.

Prepack Insolvency for Foreign Investors

The pre-packaged insolvency resolution process allows eligible corporate debtors (MSMEs, and under the 2026 amendments, a broader category of debtors meeting prescribed thresholds) to negotiate a resolution plan with creditors before formal admission. A foreign investor can participate as the incoming acquirer in a prepack insolvency, but must pre-validate whether the transaction falls under the automatic or government FDI route before the base resolution plan is filed with the NCLT. Industry observers expect the expanded prepack framework to become an increasingly common channel for distressed asset acquisition in India, given its compressed timelines and lower stigma for operating management.

Private Workouts and One-Time Settlements

Outside the formal IBC framework, foreign investors may acquire stressed assets through RBI-guided restructuring frameworks, one-time settlements with lenders or direct negotiations. These transactions still require full FEMA and FDI compliance but bypass the NCLT approval process entirely.

Documentation Pack Requested by the RP and NCLT

When a foreign buyer submits a resolution plan or bids in a liquidation auction, the RP and NCLT routinely request an expanded documentation pack. Preparing these materials early accelerates CoC evaluation and avoids adjournments:

• KYC and corporate structure. Full organisational chart showing the ultimate beneficial owner, constitutional documents, board resolutions authorising the bid, and powers of attorney.
• Source-of-funds evidence. Audited financial statements, bank reference letters, escrow bank confirmation and, where applicable, commitment letters from fund investors or co-bidders.
• Regulatory approvals roadmap. A written plan confirming which FDI route applies, anticipated FEMA filings, and timeline for obtaining any government-route clearance. The CoC increasingly insists on this before shortlisting foreign bidders.
• Section 29A compliance certificate. Self-declaration and supporting evidence confirming non-disqualification under the IBC eligibility provisions.
• Proof of financial capacity. Evidence that the bidder can fund the upfront payment and any deferred consideration contemplated by the resolution plan.

For a detailed overview of the insolvency filing process, see our guide on how to file for insolvency in India. The 2026 IBC amendments have also introduced changes to resolution timelines and the mandatory admission framework that directly affect bidder planning.

FEMA and NDI (May 2026), Subscription, Transfer and Ownership Mechanics for Inbound Buyers

The Foreign Exchange Management Act and the Non-Debt Instrument (NDI) Rules, as updated by the Reserve Bank of India in May 2026, govern how foreign capital enters and exits India for equity and equity-linked transactions. These FEMA NDI rules 2026 are the operational backbone of any foreign investor distressed purchase in India, determining subscription mechanics, transfer pricing floors, reporting deadlines and repatriation permissions.

What Changed Under the May 2026 NDI Updates

The May 2026 FEMA amendments introduced several changes that directly affect buying distressed assets in India:

• Tightened FDI screening for indirect transfers. Where a foreign fund acquires shares of an Indian company through a multi-layered offshore holding structure, the amendments require disclosure of the entire chain up to the ultimate beneficial owner. Failure to disclose can result in the transaction being treated as non-compliant, with potential unwinding consequences.
• Liberalised investment thresholds in the insurance sector. Foreign investors acquiring distressed insurance-related assets now benefit from higher automatic-route ceilings, reducing government-route delays for certain sectoral acquisitions.
• Revised valuation rules for distressed transfers. The pricing guidelines under the NDI Rules have been recalibrated to acknowledge that distressed assets trade below fair market value. In IBC-sanctioned transactions, the NCLT-approved plan price is generally accepted as the transfer price for FEMA compliance purposes, provided the transaction is at arm’s length.
• Compressed reporting timelines. AD bank reporting for inbound equity investments now carries tighter deadlines, requiring filings within specified days of allotment or transfer rather than the previously more relaxed windows.

Transfer Mechanics: Share Deals Versus Asset Deals

The FEMA/NDI framework treats share acquisitions and asset acquisitions differently, and the distinction carries significant practical consequences for structuring a distressed asset acquisition in India:

• Share deal (acquisition of equity in corporate debtor). The foreign buyer subscribes to or purchases shares of the Indian corporate debtor. This triggers NDI reporting obligations, pricing guidelines (subject to the distressed valuation carve-out) and sectoral cap compliance. Post-acquisition, the foreign investor holds equity in an Indian company and repatriation follows the dividend or capital gains route.
• Asset deal (purchase of specific assets from liquidation estate). The foreign buyer acquires identified assets (plant, machinery, IP, contracts) rather than shares. FEMA implications depend on whether the buyer uses an Indian SPV to hold the assets (in which case the SPV subscription is the FDI-regulated event) or attempts to directly hold Indian immovable property (which is subject to separate FEMA restrictions on non-residents holding agricultural land, plantation property or farmhouse property).

Case Example: SPV Subscription Versus Direct IBC Share Purchase

Consider a Singapore-based PE fund acquiring a distressed Indian manufacturing company through CIRP. The fund has two structural options. In Option A, it incorporates a new Indian SPV, subscribes to the SPV’s equity (triggering NDI reporting and automatic-route FDI compliance), and the SPV then submits the resolution plan as the acquiring entity. In Option B, the fund directly acquires shares of the corporate debtor under the NCLT-sanctioned plan, with the transfer price set at the CoC-approved amount. Option A provides structural flexibility for future exit (the fund can sell SPV shares offshore), while Option B is simpler but locks the fund into direct Indian equity holdings subject to domestic capital-gains taxation on exit.

FDI Screening and Sectoral Route After the March 2026 Press Note Changes

The DPIIT’s March 2026 Press Note refined the criteria for determining whether a foreign acquisition falls under the automatic or government FDI route. For FDI approvals on a distressed acquisition, the decision tree is critical because government-route clearance adds weeks to an already time-pressured IBC timeline.

Decision Flowchart: Automatic Versus Government Route

The following questions determine which route applies:

1. Sector check. Is the target company’s principal business on the prohibited list (e.g., lottery, gambling, chit funds, certain real-estate activities)? If yes, foreign acquisition is barred. If no, proceed.
2. Sectoral cap check. Does the proposed foreign holding exceed the sectoral cap for the relevant industry (e.g., defence at 74 per cent with conditions, telecom at 100 per cent automatic, multi-brand retail at 51 per cent government route)? If the cap is breached, restructure or obtain government approval.
3. Land-border investor check (Press Note 3 of 2020, as amended March 2026). Does the investor, or any entity in its beneficial ownership chain, have citizenship, registration or incorporation in a country sharing a land border with India (China, Bangladesh, Pakistan, Nepal, Myanmar, Bhutan, Afghanistan)? If yes, government approval is mandatory regardless of the sector or transaction size.
4. Change of control or beneficial ownership trigger. Does the acquisition result in a change of control or material change in beneficial ownership that triggers enhanced scrutiny under the revised March 2026 guidelines? If yes, additional disclosure and potentially government-route processing apply.

Practical Drafting to Reduce Government-Route Risk

Where a transaction sits on the boundary of the automatic and government routes, experienced deal counsel draft specific protective provisions:

• Regulatory condition precedent clause. The resolution plan or share purchase agreement includes a condition precedent that closing is contingent upon receipt of all required FDI approvals, with a long-stop date reflecting realistic government-route processing times.
• Representations on beneficial ownership. The foreign buyer warrants that no land-border country entity holds a direct or indirect interest above a specified threshold, with an indemnity for breach.
• Step-down structuring. Where feasible, the foreign investor restructures its holding chain to route investment through a jurisdiction that does not trigger the land-border rule, provided this restructuring has genuine commercial substance and is not a colourable device.

Financing, Payments and Repatriation, RBI/ECB Rules 2026, Cross-Border Lending and Tax

Foreign bidders must plan not only how to get capital into India but also how to get returns out. The repatriation rules in India, governed by FEMA and periodically clarified by RBI circulars, interact with income-tax withholding obligations to create a layered compliance requirement.

When RBI/ECB Clearance Is Required

If the foreign investor funds the acquisition partly through external commercial borrowings (ECBs), for instance, by lending to an Indian SPV that then bids in the CIRP, the RBI ECB rules 2026 apply. Key parameters include:

• Eligible borrower and lender. The Indian SPV must qualify as an eligible borrower, and the foreign lender must fall within the permitted lender categories under the ECB framework.
• End-use restrictions. ECB proceeds generally cannot be used for investment in capital markets or real estate. However, the RBI has clarified that ECBs for acquiring stressed assets through the IBC process may be permissible where the end-use is manufacturing or infrastructure, subject to sector-specific conditions.
• All-in cost ceiling. The interest rate, fees and other charges on the ECB must fall within the RBI’s prescribed all-in cost ceiling, currently benchmarked to the applicable reference rate plus a specified spread.

Repatriation Mechanics and Tax Interaction

Once the distressed asset is acquired and the Indian entity generates returns, repatriation follows prescribed channels:

• Dividend repatriation. Dividends paid by the Indian company to its foreign shareholder are freely repatriable under FEMA, subject to applicable withholding tax under the Income Tax Act and any relief available under a Double Taxation Avoidance Agreement (DTAA).
• Capital gains on exit. When the foreign investor eventually sells its Indian equity or assets, capital-gains tax applies. The rate depends on the holding period, asset type and applicable DTAA. The buyer should plan for withholding-tax obligations at the time of sale and obtain a lower withholding certificate from the income-tax authorities where eligible.
• Escrow and step-down repatriation. Many transactions use an escrow mechanism where part of the acquisition consideration is held in an Indian escrow account, released upon satisfaction of post-closing conditions (regulatory filings, asset transfers, employee-related obligations). Repatriation of escrow balances follows standard FEMA capital-account procedures.

Practical Deal Timeline and Approvals Checklist for Distressed Asset Acquisition in India

The following step-by-step checklist consolidates the regulatory requirements into a practical workflow. Timelines are indicative and vary based on sector, transaction complexity and the NCLT bench’s caseload.

Phase 1, Pre-Bid Due Diligence (Weeks 1–4)

1. Identify the opportunity. Monitor IBBI’s website, NCLT cause lists, India Investment Grid and specialist distressed-asset platforms for published invitations for expressions of interest.
2. Conduct preliminary sector and FDI route analysis. Determine whether the target falls under an automatic or government FDI route sector. Confirm whether the land-border investor rule applies to any entity in the buyer’s ownership chain.
3. Engage Indian counsel and insolvency professionals. Appoint a team with combined IBC and cross-border investment experience to manage the regulatory crosswalk.
4. Assemble the documentation pack. Prepare KYC, corporate-structure charts, source-of-funds evidence, Section 29A compliance certificates and the regulatory-approvals roadmap described above.
5. Open an escrow account with an AD bank. Establish the escrow early so that proof of funds and escrow-bank confirmation letters are ready for the CoC and RP.

Phase 2, Bid Submission and CoC Process (Weeks 5–16)

1. Submit expression of interest and resolution plan. File the plan with the RP within the timeline prescribed by the NCLT order. Ensure the plan includes the regulatory condition-precedent clause and escrow mechanics.
2. Engage with the CoC. Present the financial and operational proposal, respond to CoC queries on regulatory risk, and negotiate plan terms including haircut, implementation timeline and performance guarantees.
3. CoC vote. The CoC votes on the resolution plan. A minimum of 66 per cent approval by value is required.
4. NCLT sanction hearing. The approved plan is submitted to the NCLT for sanction. The NCLT may impose modifications or conditions before sanctioning the plan.
5. Parallel FDI application (if government route). If the transaction requires government-route approval, file the application with DPIIT through the Foreign Investment Facilitation Portal as early as commercially possible, ideally during the CoC negotiation phase rather than after NCLT sanction, to avoid post-sanction delays.

Phase 3, Post-Award Closing and Filings (Weeks 17–24)

1. Receive NCLT sanction order. Obtain a certified copy of the order and distribute to the AD bank, registrar of companies and other regulatory stakeholders.
2. Complete FEMA/NDI filings. File the prescribed forms with the AD bank within the compressed timelines mandated by the May 2026 NDI updates. Include the NCLT order, share-allotment documentation and foreign-inward-remittance certificates.
3. Receive FDI approval (if government route). Government-route approvals typically take 8–16 weeks from filing, though the timeline can extend for sensitive sectors or complex ownership structures.
4. Complete share allotment or asset transfer. Execute share certificates, update the registrar of companies, register property transfers (where applicable) and update statutory registers.
5. Release escrow. Upon satisfaction of all closing conditions, instruct the escrow agent to release funds to the liquidator, RP or selling creditors as specified in the resolution plan.
6. File post-closing compliance. Complete RBI annual return on foreign liabilities and assets (FLA return), income-tax filings (advance tax if applicable) and any sector-specific post-acquisition notifications.

Structuring Examples and Precedent Clauses

The following three worked examples illustrate common structuring approaches for buying distressed assets in India. Each includes a recommended contractual provision that deal teams should consider incorporating.

Example A, PE Fund Bidding Through an Indian SPV

A Cayman Islands–domiciled fund incorporates a wholly owned Indian subsidiary (SPV) under the Companies Act. The SPV subscribes to fresh equity funded by the fund’s capital call, files the NDI forms with the AD bank and submits the resolution plan as the acquiring entity. The plan includes a regulatory condition precedent: “Completion of this Plan shall be conditional upon the Acquiring Entity receiving all approvals, consents and filings required under FEMA, the NDI Rules and the Consolidated FDI Policy, including confirmation from the Authorised Dealer bank that all prescribed filings have been accepted without objection.”

Example B, Strategic Acquirer Buying Assets in Liquidation

A European manufacturer participates in a liquidation auction to acquire plant, machinery and intellectual property from the liquidation estate. The buyer uses its existing Indian branch office (registered under FEMA) to hold the assets. The auction terms include an indemnity clause: “The Liquidator represents that the assets being transferred are free from all encumbrances, claims and liabilities, except as expressly disclosed in the Asset Schedule, and shall indemnify the Purchaser against any pre-existing liability not so disclosed.”

Example C, Cross-Border Prepack With Conditional Escrow

A US-based distressed-debt fund acquires a controlling stake in an Indian MSME through the prepack insolvency route. The base resolution plan is negotiated with the promoter and existing lenders before filing with the NCLT. The transaction uses a conditional escrow mechanism: “The Buyer shall deposit the Plan Consideration into an escrow account with [AD Bank], to be released to the Financial Creditors upon (i) NCLT sanction of the Base Resolution Plan, (ii) completion of all FEMA filings, and (iii) receipt of a no-objection certificate from the DPIIT, if applicable.”

For additional context on the cross-border insolvency regime under recent IBC amendments, including recognition of foreign proceedings and cooperation between courts, see our dedicated analysis.

Conclusion

A successful distressed asset acquisition in India in 2026 requires foreign investors to navigate an interlocking set of regulatory frameworks, the IBC for the insolvency process, FEMA and the NDI Rules for investment mechanics, the Consolidated FDI Policy (as amended by the March 2026 Press Note) for route determination, and RBI/ECB circulars for financing and repatriation. The practical effect of the 2026 regulatory changes is that buyers must validate their FDI route earlier in the deal process, file FEMA reports within tighter windows, disclose beneficial ownership more comprehensively and structure escrow and payment mechanisms with greater regulatory precision.

Engaging experienced insolvency and cross-border investment counsel at the earliest stage, ideally before submitting an expression of interest, remains the most effective way to compress timelines, avoid regulatory risk and close the transaction on commercially viable terms.

Sources

1. Ministry of Corporate Affairs (MCA), Insolvency and Bankruptcy Code text and amendment notifications
2. Insolvency and Bankruptcy Board of India (IBBI), guidance, prepack documents and liquidation regulations
3. Reserve Bank of India (RBI), FEMA / NDI rules, circulars and ECB guidance
4. Department for Promotion of Industry and Internal Trade (DPIIT), FDI policy and Press Notes
5. Invest India / India Investment Grid, stressed asset market guidance
6. Shardul Amarchand Mangaldas, Distressed asset opportunities in India