Regulatory Update: Expanding Portfolio Investment Avenues in India

On 12 June 2026, the Ministry of Finance notified the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026, introducing significant changes to India’s foreign portfolio investment framework.  The reform broadens access to listed Indian securities by expanding the category of eligible individual investors beyond Non-Resident Indians and Overseas Citizens of India. Accordingly, for the first time, foreign individuals who are neither Non-Resident Indians nor Overseas Citizens of India may invest in listed Indian companies through the portfolio investment route on a repatriation basis, an investment alternative previously unavailable to them. At the same time, the Government has retained investment thresholds and national security safeguards to ensure regulatory oversight remains intact.

A. Statutory Changes

Expansion of eligible investors – The most significant amendment is the replacement of references to “NRI or OCI” with the broader expression “individual person resident outside India, including an NRI or an OCI” under Rules  12 and 13 so far as they relate to investments under Schedule III. , Rule 12 permits investments by individual persons resident outside India in equity instruments of Indian listed companies, and Rule 13 regulates transfers of such instruments by way of sale or gift between residents and non-residents or between non-residents. Schedule III specifically sets out the framework for portfolio investments in listed Indian companies by eligible individual investors.  As a result, foreign individuals who are neither NRIs nor OCIs can now invest in listed Indian companies under Schedule III on a repatriation basis. This route was previously restricted to only NRIs and OCIs.

Revised investment thresholds – In addition to widening the category of eligible investors, the reform has also increased the investment thresholds. The amended Schedule III prescribes that:

• Under the erstwhile regime an individual investor was allowed to invest up to 5% of the total paid-up equity capital on a fully diluted basis of a listed Indian company. Now, this limit has been increased to10% of the paid-up equity capital on a fully diluted basis of a listed Indian company.
• Additionally, aggregate investment by all such investors in a listed company was capped at 10% which could be raised to 24 per cent if a special resolution to that effect was passed. Now, the requirement of passing a special resolution has been removed and the aggregate limit is increased to 24% of the company’s paid-up equity capital on a fully diluted basis.

Where an investor crosses the prescribed threshold of 10%, the excess holding must be divested within the stipulated period of 5 trading days. Failing such divestment, the investment may be reclassified as Foreign Direct Investment. The amendment lays down a detailed framework for addressing the breach of the investment limits.

Land-border restrictions – The Government has extended approval requirements applicable to investors from countries sharing a land border with India to portfolio investments as well. Any portfolio investment or transfer resulting in ownership or control passing to such entities, or where the beneficial owner belongs to a bordering country, now requires prior Government approval.

Changes to transfer provisions – Rule 13 has been amended to permit transfers of equity instruments by way of sale or gift between individual persons resident outside India (including those who are not NRI or OCIs). However, the transfer remains subject to certain conditions:

• Government approval is required if the Indian company in which the investment is being made operates in a sector where foreign investment requires prior government approval.
• 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.

B. Impact of the Changes

The amendment is likely to have far-reaching implications for India’s capital markets.  First, it substantially expands the pool of foreign investors who can directly access Indian listed securities. Foreign individuals who may not wish to register as Foreign Portfolio Investors now have a simpler route to participate in India’s growth story.  The reform may improve market liquidity and broaden the investor base, particularly for mid-cap and emerging listed companies that seek greater foreign participation. By introducing automatic reclassification mechanisms when investment thresholds are crossed, the amendment provides greater regulatory certainty and reduces ambiguity regarding the distinction between portfolio investment and strategic investment.  Further, the extension of land-border-country restrictions demonstrates that market liberalisation is being accompanied by enhanced national security safeguards. The Government has attempted to strike a balance between attracting foreign capital and ensuring appropriate scrutiny of sensitive investments.  Finally, the amendment aligns with India’s long-term objective of making its capital markets more globally integrated and accessible while maintaining transparency and regulatory oversight.

C. Conclusion

The FEM (Non-Debt Instruments) (Third Amendment) Rules, 2026 represent one of the most significant liberalisations of India’s portfolio investment regime in recent years. By extending investment access beyond the traditional NRI and OCI investor base, the Government has opened the door to a wider global investor community. At the same time, investment caps, FDI reclassification provisions and strengthened approval requirements ensure that the liberalisation does not compromise regulatory discipline or national security concerns. The amendment therefore reflects an approach that seeks to enhance capital inflows, deepen Indian capital markets and improve ease of investment while preserving necessary safeguards for the economy.