In July 2026, the Reserve Bank of India proposed draft changes to Foreign Exchange Management Act rules, broadening the definition of foreign control over Indian firms. Under the proposal, an Indian entity would be deemed foreign-controlled if a foreign investor holds 10% or more voting rights, appoints a majority of directors, or influences management and policy. The RBI sought feedback by August 31, 2026. Legal experts warn the new 10% numerical threshold could expand compliance burdens for minority investors.

India's foreign investment architecture under FEMA distinguishes between foreign-controlled and domestically-controlled companies because the classification triggers different regulatory treatment — investment caps, sectoral restrictions, pricing guidelines, and reporting obligations differ significantly between the two. Currently, the determination of 'control' under FEMA is largely qualitative: whether an entity can direct management or policy decisions. The RBI's proposed 10% voting-rights threshold introduces a quantitative benchmark that doesn't exist today, creating a bright-line rule that lawyers fear will sweep in minority investors who hold merely protective rights — standard in private equity and joint venture deals — without actually controlling business decisions. This matters enormously for cross-border M&A and PE transactions structured around governance rights rather than outright ownership. India has been actively courting foreign capital through tax rationalisation and compliance simplification, so a rule that inadvertently treats passive minority shareholders as foreign controllers could produce the opposite effect — discouraging structured investment. The debate mirrors global regulatory tensions: clear bright-line rules reduce ambiguity but can over-capture. The RBI's intent appears to be closing loopholes where foreign entities wield effective control while staying just below definitional thresholds, but the calibration between a threshold alone versus threshold-plus-management-rights needs precise statutory drafting to avoid chilling legitimate minority investment.