RBI plans wider test for foreign control of firms, Pg17

Key Highlights:

• The Reserve Bank of India (RBI) proposed changes to foreign exchange management rules on Tuesday, July 21, 2026.
• The draft rules aim to broaden the conditions for determining foreign control of Indian firms and create a more user-friendly framework for foreign investment.
• Under the proposed framework, an Indian entity would be deemed foreign-controlled if a foreign investor holds 10% or more of voting rights, can appoint a majority of directors, or can influence management and policy decisions.
• The RBI has invited feedback on these draft rules by August 31.
• Lawyers have expressed concern that the new 10% numerical threshold could significantly expand the definition of foreign control and increase compliance requirements for investors.

Detailed Insights:

• The proposed changes are part of the draft Foreign Exchange Management (Foreign Investment) Rules, 2026, intended to replace the existing Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
• This review was initiated following an announcement in the Union Budget 2026-27 to modernize India's foreign investment framework.
• The current definition of "control" under the NDI Rules, 2019 primarily focuses on the right to appoint a majority of directors or control management/policy decisions, without a specific voting rights threshold.
• The RBI's move is part of India's broader strategy to attract foreign investment through measures like tax cuts and reduced compliance costs.
• The draft rules also aim to clearly separate the government's Foreign Direct Investment (FDI) policy from the operational provisions of the Foreign Exchange Management Act (FEMA).
• Under the new structure, the RBI will manage operational aspects, while the Department for Promotion of Industry and Internal Trade (DPIIT) will handle policy interpretation.
• The scope of eligible investee entities has also been broadened to include SEBI-regulated investment vehicles such as Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and Alternative Investment Funds (AIFs).

Key Concepts Involved:

• Foreign Exchange Management Act (FEMA), 1999: The primary legislation regulating cross-border trade, investments, and currency transactions in India.
• Foreign Direct Investment (FDI): Investment by a non-resident into equity instruments of an unlisted Indian entity or 10% or more of a listed Indian company's equity capital.
• Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules): The current regulatory framework governing foreign investment into India, which the new rules aim to supersede.
• Control (in corporate law): The power to appoint a majority of directors or to influence management or policy decisions of a company.