The government is examining a broad rationalisation of foreign direct investment (FDI) rules, covering listed and unlisted companies, company-level foreign holding caps, downstream investment norms, and pricing guidelines for cross-border share transfers.
The proposed overhaul is part of a comprehensive review of the Foreign Exchange Management Non-debt Instruments Rules, 2019 (NDI Rules), to take into account changes in investor profiles, deal structures, and capital markets. The changes are also expected to ease foreign investments and capital inflows into the country while keeping regulatory oversight intact and more pragmatic.
“These are only a few of the representations that the government has received. Consultations will be done, and all issues will be reviewed to bring more clarity and ease of doing business for investors,” a senior official said.
\Unified 10% Benchmark
At present, the FDI classification differs for listed and unlisted firms. In unlisted companies, any foreign investment — even 1% — is treated as FDI. In listed companies, any holding below 10% by an individual investor is classified as foreign portfolio investment (FPI), while 10% or more are treated as FDI. Once classified as FDI after crossing the 10% threshold, an investment typically continues to be treated as FDI even if it later falls below that level.
However, it is felt that the distinction can influence deal structuring. Investors may deliberately stay below 10% in listed firms and invest through secondary market purchases as FPIs rather than through private placements that would trigger FDI classification.
“A uniform, threshold-based regime applicable to both listed and unlisted companies would be more consistent with international practice and economic logic,” said M. S. Sahoo, founder of Dr Sahoo Regulatory Chambers and former whole-time member of Sebi. He added that such a system could be complemented by control-based tests in closely held firms to address cases where influence exceeds shareholding. “Such a framework would enhance clarity, reduce regulatory arbitrage, and better align classification with economic reality,” he said.
Mayank Arora, Director-Policy at Nangia Global, noted that the 10% benchmark already has regulatory acceptance. “The 10% threshold to classify an investment as strategic in nature has regulatory backing from Sebi as well, which restricts FPI investment in any one listed entity to below 10%,” he said. He added that policymakers may also consider whether classification should depend more on investment intent than pure percentage thresholds.
A uniform definition could also simplify compliance by reducing reclassification triggers, disputes, and reporting burdens, while aligning India with global standards that typically define FDI using a single ownership threshold.
Strategic Autonomy
Another proposal under consideration is allowing companies to set internal foreign investment ceilings within sectoral caps. Currently, foreign investment limits are tied strictly to sectoral ceilings notified by the government. However, companies have sought flexibility to impose lower caps for strategic or regulatory reasons. They want the ability to notify the RBI of company-specific limits, set different caps for investor classes, and revise limits through board or shareholder resolutions with filings.
Promoters often prefer to retain Indian ownership or control, avoid classification as foreign-owned or controlled companies, and preserve eligibility for government contracts or incentives. Crossing certain thresholds — such as majority foreign ownership — can trigger additional compliance or restrict downstream investments. In sectors such as defence, telecom, or fintech, firms may voluntarily cap foreign holdings because of licensing, data, or security considerations.
Officials also indicated that provisions governing downstream investments need clarification. Complex multi-layered deal structures have exposed interpretational gaps in ownership versus control tests, treatment of hybrid instruments, calculation of indirect foreign investment, LLP structures, compliance timing, and reporting responsibility. These uncertainties can delay transactions, raise structuring costs, and produce inconsistent interpretations across banks and regulators.
Pricing norms for cross-border share transfers are another area flagged by investors. Current rules require transfers from residents to non-residents to be at or above fair market value, and transfers in the reverse direction to be at or below fair value. In practice, disputes arise over valuation dates, methodologies, and assumptions. Listed firms follow Sebi pricing formulas, while unlisted firms rely on certified valuations, often leading to divergent outcomes. Banks frequently scrutinize valuation reports and may reject outdated assessments, causing delays.