RBI Proposes Broader Definition of Foreign Control for Indian Companies

India's foreign investment rulebook is up for a significant rewrite. The Reserve Bank of India put out draft rules on July 21, 2026 that could change how regulators decide whether a company operating in India is actually under foreign control, a question that has long been settled mostly on qualitative grounds, with no hard numbers attached.

The proposals sit within the draft Foreign Exchange Management (Foreign Investment) Rules, 2026. The stated aim is to make India's foreign investment framework simpler and more navigable for businesses. But a single new criterion buried inside the draft has set off alarm bells in legal circles.

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What the Proposals Say

To understand why this matters, it helps to know where things stood before. Under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, the NDI Rules, as practitioners call them; an Indian entity was treated as being under foreign control when an overseas investor could appoint a majority of its directors or had the ability to steer the company's management and policy. Control, in other words, was something you assessed by looking at actual influence. There was no percentage, no cutoff, no number.

The draft introduces a new quantitative test under which a foreign investor holding 10% or more voting rights may be treated as exercising control. However, the precise interaction between this threshold and the existing qualitative tests remains unclear, leading to concerns among legal experts.

As per the RBI, the intent behind the overhaul is to build a more investor-friendly framework. Feedback on the draft has been invited until August 31, 2026.

Why the Change Is Being Made

This didn't come out of nowhere. The Union Budget 2026-27 included a commitment to modernise India's foreign investment regulations, and the draft rules are the central bank's response to that directive. Beyond the control definition, the proposals also try to draw cleaner lines between the RBI and the Department for Promotion of Industry and Internal Trade (DPIIT). The idea is that the RBI handles the operational side of the Foreign Exchange Management Act (FEMA), 1999, the procedural mechanics while DPIIT retains responsibility for policy interpretation, including sector-specific foreign investment caps and conditions.

The draft also widens the pool of entities that overseas investors can put money into. SEBI-regulated structures: Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and Alternative Investment Funds (AIFs), would be brought explicitly within the framework as eligible investee entities, something the current rules do not address cleanly.

The Broader Investment Picture

None of this exists in a vacuum. India has been actively working to attract more foreign capital through tax incentives, compliance simplification, and the Income-tax (Amendment) Ordinance, 2026, announced alongside the RBI's June 2026 MPC decisions, which removed withholding tax and capital gains tax on eligible foreign investments in Government Securities.

Capital outflows have remained a persistent feature of 2026 even as inflows improved in certain categories. Rules that unintentionally raise the compliance burden on minority investors or inject ambiguity into deal structures that were previously settled could dent confidence at a time when India is working hard to improve its standing as an investment destination.

Conclusion

The broader intent behind the RBI's draft is clear enough: consolidate the rules, separate policy from operations, bring newer investment vehicles formally within the framework, and make the whole thing easier to use. Those are reasonable goals, and the structural changes to how the RBI and DPIIT divide responsibilities are likely to be welcomed.

The 10% threshold is a different matter. Whether the final rules clarify that the voting stake must coexist with genuine management influence or whether the number alone does the work will determine how significant the compliance impact turns out to be. The feedback window closes August 31, 2026. How the RBI responds to industry concerns before then will be as important to watch as the rules themselves.