Non-Debt Instruments (NDI) Rules (FEMA, 2019)

By Priya Sharma | Updated March 2026

What Are the Non-Debt Instruments (NDI) Rules?

The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules") are the principal regulations governing all non-debt foreign investment into India. Notified by the Central Government on October 17, 2019 under Section 46 of the Foreign Exchange Management Act, 1999 (FEMA), the NDI Rules replaced and superseded two earlier regulations: FEMA 20(R) — the Foreign Exchange Management (Transfer and Issue of Security by a Person Resident outside India) Regulations, 2017 — and FEMA 21R covering acquisition and transfer of immovable property by non-residents.

For any foreign company, investor, or fund looking to deploy capital into India through equity, the NDI Rules are the single most important regulatory framework. They define which instruments qualify as "non-debt," which sectors are open to foreign direct investment (FDI), the entry routes (automatic vs. government approval), pricing floors, and the mandatory reporting forms that must be filed with the RBI. Violating these rules triggers penalties under Section 13 of FEMA — up to three times the amount involved in the contravention or INR 2 lakh where the amount is not quantifiable, plus INR 5,000 per day for continuing violations.

The NDI Rules are administered by the Reserve Bank of India (RBI), which issues Master Directions, circulars, and clarifications for their implementation. The most recent Master Direction on Foreign Investment in India was updated on January 20, 2025, incorporating amendments through the Fourth Amendment Rules of August 2024 and subsequent changes.

Legal Basis

• Section 6(2) and Section 46 of FEMA, 1999 — Empower the Central Government to make rules regulating capital account transactions, including foreign investment in Indian companies and LLPs.
• Notification dated October 17, 2019 — The NDI Rules were notified in supersession of FEMA 20(R)/2017 and FEMA 21R/2018. This consolidated foreign equity investment rules under a single framework for the first time.
• Rule 2(f) — Definition of "equity instruments" — Means equity shares, fully and compulsorily convertible preference shares (CCPS), fully and compulsorily convertible debentures (CCDs), and share warrants issued by an Indian company.
• Rule 2(k) — Definition of "non-debt instruments" — Broader than equity instruments. Includes all equity instruments, capital participation in LLPs, units of AIFs/REITs/InvITs, depository receipts, and acquisition of immovable property.
• FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 — The companion RBI regulation that prescribes payment modes and reporting forms (FC-GPR, FC-TRS, etc.).
• Consolidated FDI Policy, 2020 — Issued by DPIIT, this policy document is read in conjunction with the NDI Rules. Where there is a conflict, the NDI Rules prevail as they have statutory force.

Structure of the NDI Rules: Schedules Explained

The NDI Rules are organized into 26 core rules and 8 schedules. Each schedule governs a distinct category of foreign investor and investment type. Understanding which schedule applies to your transaction is the first step in any FDI compliance exercise.

Instruments Covered Under the NDI Rules

A critical distinction the NDI Rules introduced is the binary classification: every instrument used for foreign investment is either a "non-debt instrument" or a "debt instrument" (governed separately by FEMA (Debt Instruments) Regulations, 2019). If your instrument does not fall within the NDI definition, it is automatically classified as debt — with entirely different rules, caps, and RBI reporting.

Equity Instruments (Rule 2(f))

These are the core instruments through which FDI flows into Indian companies:

Non-Equity Non-Debt Instruments

Beyond equity instruments in companies, the NDI Rules also cover:

• Capital contribution in LLPs (Schedule VI) — Foreign investment in LLPs is permitted only in sectors where 100% FDI is allowed under the automatic route with no FDI-linked performance conditions. The foreign investor contributes to the capital of the LLP, and the LLP files Form LLP(I) with the RBI.
• Units of AIFs, REITs, and InvITs (Schedule VIII) — Foreign investors can subscribe to units of SEBI-registered investment vehicles. Category III AIFs face FPI-level restrictions.
• Depository receipts — Issued against underlying equity instruments of Indian companies.
• Immovable property — Acquisition by NRIs/OCIs/foreign nationals under specific conditions.

Pricing Norms and Valuation Requirements

The NDI Rules impose strict pricing floors for inbound FDI to prevent round-tripping and capital flight. The core principle: a foreign investor cannot acquire equity instruments in an Indian company at a price below fair market value (FMV).

Valuation Rules by Company Type

• Listed companies: Price determined by SEBI guidelines (typically the average of weekly high/low for the preceding 2 or 26 weeks on the recognized stock exchange, whichever is higher).
• Unlisted companies: FMV certified by a SEBI-registered Category I Merchant Banker or a Chartered Accountant using internationally accepted pricing methodologies — DCF (Discounted Cash Flow) is most common. The valuation report must not be older than 90 days from the date of allotment.

Key Pricing Conditions

• Issuance to foreign investors: Price must be at or above FMV (floor price). No ceiling.
• Transfer from resident to non-resident: Price must be at or above FMV.
• Transfer from non-resident to resident: Price must be at or below FMV (ceiling price). This asymmetry protects against overpricing on exit.
• Optionality clause: Equity instruments may contain put/call options, but the lock-in period must be at least 1 year (or sector-specific lock-in, whichever is higher), and there can be no guaranteed exit price.

Reporting Requirements Under the NDI Rules

Every FDI transaction triggers mandatory reporting to the RBI through the FIRMS (Foreign Investment Reporting and Management System) portal using the Single Master Form (SMF). Missing a deadline invites compounding proceedings.

Sectoral Caps and Entry Routes

Schedule I of the NDI Rules contains the master list of sectors, their FDI caps, and the applicable entry route. The two entry routes are:

• Automatic Route: No prior government approval required. The Indian company or LLP simply issues instruments, complies with pricing norms, and files the reporting form. Most sectors fall under this route.
• Government Approval Route: Prior approval from the concerned Ministry/Department is required, processed through the Foreign Investment Facilitation Portal (FIFP). Sectors like defence (above 74%), media/broadcasting, multi-brand retail, and mining require this route.

Following the Fourth Amendment Rules of August 2024, the aggregate cap for FPI investment was aligned to the applicable sectoral cap, removing the earlier sub-limit of 49%. Indian companies can still voluntarily restrict the FPI aggregate limit to 24%, 49%, or 74% through a board and shareholder resolution.

Press Note 3 (2020) Restrictions

Investors from countries sharing a land border with India (China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, Afghanistan) must mandatorily use the Government Approval Route regardless of sector. This restriction, introduced via Press Note 3 dated April 17, 2020, also applies to beneficial owners from these countries — even if the investing entity is incorporated in Singapore or Mauritius.

How the NDI Rules Affect Foreign Investors in India

The NDI Rules are the operating manual for every foreign equity investment in India. Here is what foreign investors must understand:

• No partly convertible instruments: Preference shares or debentures that are optionally or partly convertible are classified as debt, not equity. This means they fall under ECB regulations with end-use restrictions and all-in-cost ceilings. Many foreign investors accustomed to SAFE notes or participating preferred structures must restructure their instruments to comply.
• Pricing floor, not ceiling: Unlike many jurisdictions, India imposes a minimum price on FDI. You cannot invest at a discount to FMV — but you can invest at any premium. This protects India's foreign exchange reserves but can create issues when a company's DCF valuation is significantly higher than its book NAV.
• Downstream investment rules (Rule 23): If your Indian subsidiary makes a further investment into another Indian company, that investment may be treated as indirect foreign investment and subject to sectoral caps and entry route conditions. The definition of "control" was standardized in the 2024 amendment to include persons acting individually or in concert, directly or indirectly.
• Valuation report shelf life: A valuation report older than 90 days from the date of allotment is rejected by AD banks. Timing the valuation exercise is critical — especially in multi-tranche deals.

Key Amendments to the NDI Rules (2019-2025)

Common Mistakes

• Issuing optionally convertible instruments and treating them as FDI. Only fully and compulsorily convertible instruments qualify as equity under the NDI Rules. Optionally convertible preference shares (OCPS) or partly convertible debentures are classified as debt instruments and governed by ECB regulations — with different caps, end-use restrictions, and reporting forms. This misclassification has led to FEMA show-cause notices and compounding penalties.
• Filing FC-GPR after the 30-day deadline and assuming a late filing fee will fix it. There is no "late filing fee" under FEMA. Delayed FC-GPR filing is a contravention that requires formal compounding with the RBI. For delays under 3 years, the compounding amount is capped at INR 2,00,000 per contravention (post-2025 amendment). For delays exceeding 3 years, the compounding application must be filed directly with the RBI's Central Office, and the penalty can be substantially higher.
• Ignoring downstream investment reporting for Indian holding structures. If a foreign-owned Indian subsidiary invests in another Indian company, that downstream investment must be reported on Form DI within 30 days, and the ultimate investee company's FDI sectoral cap and entry route must be satisfied. Many foreign groups set up multi-layer structures without realizing each downstream step triggers separate compliance.
• Using the wrong valuation methodology for LLP capital contributions. LLP capital does not have "shares" to value. The contribution must be made at a value not less than the fair price of the capital contribution as agreed between the partners, and the transaction must be reported on Form LLP(I). Using equity-style DCF valuation for an LLP without adjusting for the partnership structure leads to AD bank queries and filing rejections.
• Assuming Press Note 3 only applies to Chinese investors. The land border restriction applies to all countries sharing a land border with India — including Bangladesh, Myanmar, Nepal, Bhutan, Afghanistan, and Pakistan. More critically, it applies to beneficial owners from these countries. A Singapore-incorporated fund with a Chinese LP holding 25%+ beneficial interest triggers the government approval requirement.

Practical Example

AlphaWave Technologies GmbH, a German software company, decides to set up a wholly owned subsidiary in India to build a development centre. Here is how the NDI Rules govern the process:

Step 1: Entry Route Check (Schedule I). IT/software is permitted 100% FDI under the automatic route. No government approval needed.

Step 2: Instrument Selection. AlphaWave decides to invest EUR 500,000 (approximately INR 4.6 crore at EUR 1 = INR 92) through equity shares. The Indian subsidiary, AlphaWave India Pvt Ltd, is incorporated with an authorized capital of INR 5 crore.

Step 3: Pricing and Valuation. Since AlphaWave India is a newly incorporated company with no operations, the FMV is essentially the face value (INR 10 per share). AlphaWave subscribes to 46,00,000 equity shares at INR 10 each = INR 4.6 crore. A valuation certificate from a Chartered Accountant confirms FMV of INR 10.

Step 4: Remittance and KYC. AlphaWave remits EUR 500,000 through normal banking channels. The Authorized Dealer (AD) bank issues a Foreign Inward Remittance Certificate (FIRC) within 3 business days.

Step 5: Allotment and FC-GPR Filing. AlphaWave India allots shares within 60 days of receiving the remittance and files Form FC-GPR on the FIRMS portal within 30 days of allotment. Supporting documents: board resolution, FIRC, KYC of AlphaWave GmbH (passport copies of directors, certificate of incorporation, proof of address), valuation certificate, and PAN of AlphaWave India.

Step 6: Annual FLA Return. By July 15 of the following year, AlphaWave India files the Annual Return on Foreign Liabilities and Assets (FLA) with the RBI, reporting the EUR 500,000 foreign equity liability.

What if AlphaWave missed the FC-GPR deadline? If AlphaWave India filed FC-GPR 45 days after allotment (15 days late), this is a FEMA contravention. The company must file a compounding application with the RBI's Regional Office, paying a compounding fee starting at INR 50,000 plus a variable amount based on the delay period and the investment amount. For INR 4.6 crore invested with a 15-day delay, the total compounding amount would typically be INR 50,000 to INR 1,00,000 — a manageable but entirely avoidable cost.

Key Takeaways

• The NDI Rules (2019) are the single governing framework for all non-debt foreign investment in India, replacing the earlier FEMA 20(R) regulations
• Eight schedules cover every investor category: FDI (Schedule I), FPI (Schedule II), NRI/OCI (Schedules III-IV), LLPs (Schedule VI), FVCIs (Schedule VII), and investment vehicles (Schedule VIII)
• Only fully and compulsorily convertible instruments qualify as equity — optionally or partly convertible instruments are classified as debt under separate regulations
• Pricing is asymmetric: foreign investors must pay at or above FMV when acquiring, but receive at or below FMV when selling to residents
• Seven reporting forms must be filed through the FIRMS portal within strict deadlines (30-60 days), with compounding penalties for non-compliance
• The August 2024 Fourth Amendment simplified cross-border share swaps, aligned OCI treatment with NRIs, standardized the definition of control, and removed the 49% FPI sub-limit

Navigating the NDI Rules for your India investment? Beacon Filing provides end-to-end FEMA and RBI compliance services, from entry route advisory and valuation coordination to FC-GPR filing and compounding applications.