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An NRI, OCI or other eligible foreign investor can invest in an Indian company, including an unlisted private limited company. But the applicable rules are not identical for every investor.
An NRI investing personally on a non-repatriation basis may qualify for a different FEMA treatment from an overseas company acquiring shares on a repatriation basis. The Indian company’s business activity, investor ownership and control, type of shares, payment route and intended treatment of sale proceeds all matter.
Under India’s foreign investment framework, the ordinary process is to establish investor eligibility, identify the permitted investment route, check the sector and instrument, complete the share issue or transfer through an authorised payment method, and comply with the relevant company-law and FEMA reporting requirements.
The critical distinction is that receiving investment money, validly acquiring shares, paying Indian tax and being entitled to repatriate the proceeds are separate questions.
Legal framework: October 2026. This article addresses the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and the applicable RBI payment and reporting regulations. Indian income-tax references distinguish periods governed by the Income-tax Act, 1961, from those governed by the Income-tax Act, 2025, effective generally from 1 April 2026.
Who can invest in an Indian company?
An Indian company may receive permissible investment from NRIs, OCIs, other foreign individuals and overseas entities.
The first question is how the investor is classified under FEMA.
NRI and OCI are different legal categories
Under the Non-Debt Instruments Rules:
- A Non-Resident Indian (NRI) is an individual resident outside India who is a citizen of India.
- An Overseas Citizen of India (OCI) is an individual resident outside India registered as an OCI cardholder.
An Indian-origin person living abroad is not automatically an NRI under FEMA. A foreign citizen may qualify for OCI status, but the relevant registration and eligibility requirements must be satisfied.
The distinction matters because certain investment facilities are specifically available to NRIs and OCIs.
The individual’s Indian income-tax residential status must also be considered separately. Being non-resident for income-tax purposes does not automatically determine the applicable FEMA investment route.
Can a foreign citizen without OCI status invest?
Yes, where the relevant foreign investment framework permits the transaction.
The investor’s nationality, country-related restrictions, the Indian company’s activity, the instrument being acquired and the applicable entry route must be examined.
A June 2026 amendment also widened Schedule III of the NDI Rules to permit eligible individual persons resident outside India, including NRIs and OCIs, to acquire specified equity instruments of listed Indian companies on a repatriation basis, subject to the prescribed limits and conditions.
That listed-company investment facility is distinct from an acquisition of shares in an unlisted private company.
What if an overseas company is investing?
An overseas company may invest in an eligible Indian company, subject to the foreign investment framework.
However, incorporation in Dubai, Singapore or Luxembourg does not itself determine the applicable Indian regulatory treatment.
The ownership and control of the overseas entity may be relevant, particularly where land-border-country restrictions or other investor-specific conditions apply.
Certain overseas entities owned and controlled by NRIs or OCIs may qualify for special non-repatriation treatment. The applicable legal conditions must be satisfied. Merely having an NRI shareholder is insufficient.
Beneficial ownership under the Companies Act is a separate question.
Where the registered shareholder and the person holding the beneficial interest differ, section 89 of the Companies Act, 2013 may require declarations and related records. Where the significant beneficial ownership provisions apply, section 90 and the applicable rules create separate obligations.
These company-law requirements must not be confused with the beneficial-ownership and control tests under FEMA.
The name appearing on a bank remittance may establish who sent the money. It does not necessarily identify every person whose ownership or control must be examined.
Is every NRI investment treated as FDI?
No.
The NDI Rules distinguish qualifying NRI/OCI investments on a non-repatriation basis from foreign investment made under the ordinary repatriable framework.
Investment under Schedule I
Schedule I governs the purchase or sale of equity instruments of an Indian company by eligible persons resident outside India.
The investment must satisfy the applicable sectoral cap, entry route, instrument, pricing and other conditions.
Foreign direct investment generally includes investment through equity instruments by a person resident outside India in an unlisted Indian company. Investment in a listed Indian company may involve a different classification depending on the statutory conditions.
An investor acquiring a small percentage of an unlisted company’s shares should not presume that the investment falls under the ordinary portfolio investment framework merely because the holding is below 10%.
Qualifying NRI/OCI investment under Schedule IV
Schedule IV permits specified investments by eligible NRIs and OCIs on a non-repatriation basis.
Subject to its conditions, such investment is deemed domestic investment at par with investment by residents.
This treatment can apply to eligible investment in equity instruments of Indian companies, including unlisted companies.
The Schedule also provides for certain investments through qualifying overseas entities owned and controlled by NRIs or OCIs.
However, Schedule IV has exclusions. These include specified investments in Nidhi companies and businesses falling within restricted agricultural, plantation, real-estate, farmhouse and transferable-development-rights categories.
Its investment permission is not an exemption from company law, income-tax provisions or other regulatory requirements.
Repatriation basis and non-repatriation basis compared
| Question | Schedule I investment | Qualifying Schedule IV investment |
|---|---|---|
| Principal framework | Foreign investment on the applicable repatriation basis | Special NRI/OCI non-repatriation route |
| Eligible investors | Eligible persons resident outside India | NRIs, OCIs and specified qualifying entities |
| Regulatory classification | Foreign investment, subject to applicable rules | Deemed domestic under specified conditions |
| Investment restrictions | Sector, entry route, instrument, pricing and other relevant conditions | Schedule IV conditions and exclusions, plus other applicable law |
| Funding | Permitted inward remittance or specified repatriable accounts and methods | Permitted inward remittance or NRE, FCNR(B) or NRO funds |
| Sale proceeds | Generally eligible for repatriation under the applicable provisions, net of taxes | Specific restrictions on invested capital and appreciation |
| Reporting | Applicable foreign investment reporting | Determined by the transaction and deemed-domestic classification |
The original bank account does not determine the legal nature of the investment.
For example, investment funded from an NRE account does not automatically acquire repatriation rights where the underlying investment was made under Schedule IV on a non-repatriation basis.
Which Indian companies can receive foreign investment?
India’s foreign investment framework distinguishes permitted activities, sectors requiring approval or compliance with special conditions, and prohibited activities.
Automatic route
Under the automatic route, an eligible foreign investment does not require prior government approval under the FDI entry framework.
But the automatic route is not an exemption from FEMA compliance.
The company must still comply with the relevant sectoral cap, investment conditions, company law, payment requirements and reporting rules.
An Indian company’s incorporation as a private limited company does not, by itself, establish that the automatic route applies.
Government approval route
Certain foreign investments require prior Central Government approval.
The applicable requirements depend on the sector, investor and nature of the proposed transaction.
The DPIIT Standard Operating Procedure dated 4 May 2026 specifies procedures for processing approval proposals through the relevant online portal.
An approval under the foreign investment framework does not eliminate separate company-law, payment or reporting requirements.
Prohibited and restricted activities
FDI is prohibited in specified activities, including lottery businesses, gambling and betting, chit-fund businesses, Nidhi companies, trading in transferable development rights, specified real estate business and certain tobacco manufacturing activities.
The applicable definitions and exceptions must be examined.
For example, the restriction on real estate business should not be interpreted as a blanket prohibition on every permitted construction or development activity.
Similarly, a historical permission concerning NRI participation in an authorised chit fund should not be confused with permission to acquire equity shares in a company conducting a chit-fund business.
The company’s actual activity, not merely its broad description in an investment proposal, must be considered.
What changed for investments connected with land-border countries in 2026?
India revised the relevant policy through DPIIT Press Note 2 of 2026, followed by amendments to the NDI Rules.
The rules examine not only the country where the investor is incorporated but also specified beneficial-ownership and control conditions.
For an investor entity incorporated outside a country sharing a land border with India, the relevant test includes the beneficial-ownership criteria under the Prevention of Money-laundering framework.
The revised policy also examines whether a citizen or entity connected with a land-border country possesses rights enabling:
- Ownership or entitlements exceeding the applicable beneficial-ownership threshold in the investor entity.
- Control over that investor entity.
- Ultimate effective control over the Indian investee.
The prescribed tests can involve direct, indirect, individual, cumulative or collective rights and arrangements.
Accordingly, shareholding percentage alone does not necessarily establish whether prior government approval is required.
There is also a separate reporting requirement for specified investments involving direct or indirect land-border-country ownership where prior approval is not required.
Under Annexure VII of the DPIIT SOP dated 4 May 2026, the relevant reporting is required before inward remittance of foreign capital or, where no such inward remittance occurs, before execution of the relevant transaction.
The reporting entity is generally the Indian investee or the resident Indian transferor or transferee, as applicable.
These reporting requirements operate in addition to the relevant sectoral and FEMA requirements.
A foreign company incorporated in a country that does not share a land border with India should therefore not assume that its incorporation location alone settles the approval question.
How can an investor acquire shares in an Indian company?
Two common methods are subscribing to newly issued shares and purchasing shares from an existing shareholder.
The investor may end up holding the same number of shares under either method, but the legal transaction and procedural obligations are different.
Subscription to new shares
An Indian company may issue new equity shares to an eligible non-resident investor in accordance with applicable FEMA and company-law requirements.
The relevant Companies Act provisions may include section 42 for private placement and section 62 for further issue of share capital, depending on the transaction.
The company must complete the prescribed corporate approvals and allotment process, maintain its statutory records and file the applicable return of allotment.
Form PAS-3 is the relevant MCA return-of-allotment form.
The general filing period is 30 days from allotment, while allotment under the private-placement framework is subject to a 15-day filing period.
Those company-law timelines must be distinguished from FEMA’s share-issue and reporting requirements.
Purchase from an existing shareholder
An investor may instead acquire shares from a shareholder who already owns them.
In that case, the consideration ordinarily moves to the selling shareholder, rather than being received by the company against a new allotment.
The transaction may require examination of the transferor’s and transferee’s residential status, investment classification, pricing rules, company documents, transfer conditions and relevant reporting.
Buying existing shares should not be treated as administratively identical to subscribing for newly issued shares.
Does the share valuation matter?
Yes.
Rule 21 of the NDI Rules contains the FEMA pricing framework.
Where the pricing guidelines apply to an unlisted Indian company’s shares, valuation must follow the prescribed methodology and professional certification requirements.
The direction of the transaction matters because the pricing conditions for issuance or transfer to a non-resident are not necessarily identical to those for a transfer from a non-resident to a resident.
The NDI pricing guidelines contain a different treatment for qualifying investments made on a non-repatriation basis.
However, an exemption from a particular FEMA pricing requirement is not an exemption from all company-law or income-tax valuation requirements.
How should the investment money reach India?
The permitted payment method depends on the investment route.
The RBI’s Mode of Payment and Reporting of Non-Debt Instruments Regulations, 2019 prescribe different methods for different investment schedules.
For Schedule I, permitted consideration may include inward remittance through banking channels or payment from specified repatriable accounts. Certain noncash consideration or equity swap arrangements are also recognised, subject to the applicable conditions.
For qualifying Schedule IV investments, payment may be made through permitted inward remittance or from eligible NRE, FCNR(B) or NRO account funds.
The ability of a bank to process a payment should not be mistaken for confirmation that every FEMA condition has been satisfied.
Example: an NRI in Dubai investing ₹20 lakh
Assume an Indian citizen residing in Dubai qualifies as an NRI under FEMA.
The person proposes to acquire newly issued shares worth ₹20 lakh in an unlisted Indian company carrying on an otherwise permitted business. Assume no additional country-related ownership restriction applies.
The person wishes to use funds in an NRE account.
If the investment qualifies under Schedule IV, that account may be an eligible funding source.
But the use of NRE funds does not automatically make the investment capital and capital appreciation repatriable under Schedule I.
If the investment is proposed on a repatriable basis, the relevant sectoral, pricing, instrument, payment and reporting requirements must instead be established under the applicable route.
The investment amount is the same. The proposed investor is the same. The funding account may be the same.
The regulatory treatment can nevertheless differ because the legal investment route differs.
This illustration is hypothetical and does not determine the eligibility of any actual investment.
What records should support the transaction?
The relevant evidence categories generally include investor identity and residence, OCI records where applicable, the ownership and control structure of an investing entity, the Indian company’s business activity, the investment agreement, applicable valuation, company approvals, payment evidence and allotment or transfer documentation.
Additional documents may be required by the authorised dealer, the company or the relevant regulatory authority.
The documents should support the actual legal character of the investment and the movement of money.
What happens after the investment money is received?
Receipt of money does not complete the investment process.
The company must issue or transfer the relevant securities, comply with company-law obligations and satisfy the applicable foreign investment reporting requirements.
The share-issue deadline under FEMA
For an ordinary Schedule I issue, the RBI regulations generally require the equity instruments to be issued within 60 days from receipt of consideration.
If the instruments are not issued within that period, the regulations generally require refund within the following 15 days.
The applicable terms and exceptions, including those relevant to partly paid instruments, must be considered.
FC-GPR for a qualifying FDI issue
Where an Indian company issues equity instruments to a person resident outside India and the issue is reckoned as FDI, Form FC-GPR is ordinarily required within 30 days from the date of issue.
A qualifying Schedule IV investment deemed domestic should not automatically be classified as an FC-GPR transaction merely because the investor resides outside India.
The classification of the issue controls the reporting requirement.
FC-TRS for specified transfers
Form FC-TRS applies to specified transfers of equity instruments under the RBI regulations.
The general filing period is 60 days from transfer or receipt or remittance of funds, whichever is earlier.
The reporting regulations also identify the responsible filer and contain transaction-specific exclusions.
For example, specified sales between a resident and a person resident outside India holding shares on a non-repatriation basis are excluded from FC-TRS reporting under the relevant provision.
Not every transaction involving an NRI requires FC-TRS.
Is an FLA return required every year?
The RBI’s annual Foreign Liabilities and Assets (FLA) return is not merely a report of fresh investment received in that financial year.
Where an Indian entity has relevant outstanding inward or outward foreign investment at the reporting year-end, an annual FLA return may continue to be required even without a fresh investment during that year.
The prescribed annual filing date is 15 July for entities covered by the reporting framework.
If no relevant foreign investment remains outstanding at the applicable year-end, the filing obligation may differ.
Shares issued solely on a qualifying non-repatriation basis are not automatically counted as foreign investment for this purpose.
The correct assessment is therefore based on the company’s relevant investment position and reporting classification.
What if the Indian company subsequently invests in another Indian entity?
A separate downstream investment question arises when an Indian entity makes a further investment into another Indian company or LLP.
Where the subsequent investment qualifies as indirect foreign investment under the applicable ownership and control rules, the downstream investment framework must be examined.
Rule 22 of the NDI Rules and the RBI reporting regulations are relevant.
For transactions treated as indirect foreign investment, the regulations prescribe notification to the relevant DPIIT authority within 30 days of downstream investment, even where the underlying instruments have not yet been allotted.
Form DI reporting to RBI may also apply within 30 days of allotment, as prescribed.
These are distinct obligations.
A company receiving foreign investment and that company’s subsequent investment in another Indian entity are not necessarily the same regulatory event.
MCA filings remain separate
Form PAS-3 and other applicable company-law filings do not replace FC-GPR, FC-TRS or other FEMA reporting.
Similarly, completing a FEMA filing does not discharge independent obligations under the Companies Act.
Where both apply, the relevant procedures must be completed separately.
How are dividends, capital gains and repatriation treated?
The investor must distinguish the Indian tax treatment of the investment from FEMA rules governing the transfer of funds.
Dividends
Dividends paid by an Indian company to a non-resident investor may be taxable in India.
The treatment depends on the applicable domestic law, investor classification, any available special regime and the relevant treaty, where applicable.
India’s withholding requirements must also be examined separately.
Capital gains on sale
Sale of shares may result in capital gains taxable in India.
The applicable treatment depends on the nature of the shares, holding period, investor category, transaction date, relevant computation rules and any applicable treaty provision.
For the Income-tax Act, 2025, sections 212 to 217 contain special provisions concerning specified investment income and gains of eligible non-resident Indians.
Under section 214, the specified statutory rates include 20% for qualifying investment income and 12.5% for qualifying long-term capital gains on specified assets, subject to the complete eligibility, computation and other applicable tax provisions.
These rates must not be applied indiscriminately to every foreign investor or every transaction involving an Indian company’s shares.
For example, an overseas company owned by an NRI does not automatically qualify for the special individual NRI regime.
Transactions relating to earlier periods must be assessed under the relevant provisions of the Income-tax Act, 1961.
Does a DTAA eliminate Indian tax?
Not automatically.
A Double Taxation Avoidance Agreement may affect the taxation of dividends, capital gains and other income, depending on the treaty and the relevant facts.
The investor’s treaty residence, the relevant income article, documentation and eligibility requirements must be determined.
Treaty relief does not automatically eliminate domestic withholding or filing requirements.
The country through which funds are remitted is not necessarily the investor’s country of treaty residence.
Can the investment proceeds be remitted abroad?
The answer depends on the original investment classification and the relevant FEMA provisions.
Under Schedule I, eligible sale proceeds may generally be remitted abroad or credited to a permitted repatriable account, net of taxes and subject to applicable conditions.
For qualifying Schedule IV investments, the RBI regulations expressly restrict repatriation of the invested capital and capital appreciation. The sale proceeds, net of applicable taxes, are credited to the NRO account.
The treatment of dividends and other current income must be distinguished from the treatment of invested capital and appreciation.
The general USD 1 million annual remittance-of-assets facility for eligible NRIs and other covered persons should not be assumed to override the specific Schedule IV restriction merely because the sale proceeds have been credited to an NRO account.
Equally, the legal scope of any separately available remittance facility must be examined under the applicable provisions rather than dismissed without analysis.
Tax paid in India does not itself prove that money is freely repatriable under FEMA.
The legal character and source of the proceeds, the investor’s status, the applicable account route and the specific remittance permission must be considered.
What should an investor establish before proceeding?
The main questions are:
- Investor: Is the investment proposed by an NRI, OCI, other foreign individual or overseas entity? Who owns and controls the investor?
- Investment route: Does the transaction qualify under Schedule IV, or is it made under an applicable repatriable foreign investment framework?
- Business activity: Is the Indian company’s sector eligible, and are any approval requirements or restrictions applicable?
- Shares: Is the investor acquiring newly issued shares or existing shares? Are the instrument, ownership rights and pricing compliant?
- Payment: Is the proposed payment method permitted, and do the banking and supporting records establish the transaction?
- Compliance: Which company-law, FEMA, DPIIT and other regulatory filings apply? Are beneficial ownership or downstream investment requirements relevant?
- Future proceeds: What are the Indian income-tax, withholding, treaty and FEMA consequences of dividends, sale and remittance?
These questions require separate answers before they can form one transaction conclusion.
The Compliance Highway Rule™, developed by CA Sagar Soman and discussed in his book What NRIs Are Not Told About India, illustrates this separation of regulatory questions as an educational principle. It is not a substitute for the governing legal provisions.
For an Indian company investment, the appropriate starting point is therefore not simply whether an overseas investor is willing to send money.
It is whether the proposed investor, company, instrument, transaction and payment method fit a legally permitted investment route, and what rights and obligations follow from that route.
Primary Indian regulatory references
- RBI: Master Direction on Foreign Investment in India.
- RBI: Mode of Payment and Reporting of Non-Debt Instruments Regulations, 2019.
- DPIIT: Press Note 2, 2026.
- DPIIT: Standard Operating Procedure for Processing FDI Proposals, 4 May 2026.
- MCA: PAS-3 instruction kit.
- Income-tax Act, 2025, as amended by Finance Act, 2026.
Foreign-law boundary: This article addresses India’s regulatory and tax framework. An investor’s obligations under the tax, securities, corporate or reporting laws of another country must be examined separately by a suitably qualified professional in that jurisdiction.
Educational scope: This article explains general legal and regulatory principles. It is not an opinion on the eligibility, tax liability or compliance position of any specific investment.
Sources and review
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