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Economic, Commercial and Intellectual Property Laws · Foreign Direct Investments - Regulations and Policy

FEMA Non-Debt Instruments Rules and Regulations Explained

Updated 11 October 2026 · Fact-checked

The FEMA (Non-Debt Instruments) Rules, 2019 are made by the Central Government and govern foreign investment in equity-type instruments of Indian entities. RBI supports them through regulations under Section 47 of FEMA. To answer a question, identify the investor, the instrument, the investee entity, and then apply route, cap, pricing and reporting conditions.

Understand FEMA Non-Debt Instruments Rules and Regulations

FEMA divides capital account transactions into two groups. Transactions involving debt instruments and those not involving debt instruments. The split matters because different authorities make the rules for each group.

Under Section 6(2A), the Central Government, in consultation with the RBI, prescribes the permissible classes of capital account transactions not involving debt instruments, the limits of foreign exchange admissible and any conditions. Section 46(2)(ab) gives the Central Government the matching power to make rules. The FEMA (Non-Debt Instruments) Rules, 2019 are made under this power. They cover foreign investment in equity-type instruments such as equity shares, fully, compulsorily and mandatorily convertible preference shares and debentures, share warrants, units of investment vehicles, depository receipts and capital contribution in an LLP, as defined in the Rules.

For debt instruments, the RBI, in consultation with the Central Government, specifies the permissible classes, limits and conditions under Section 6(2). Section 47(2)(a) lets the RBI make regulations on this. Section 6(7) says debt instruments are those determined by the Central Government in consultation with the RBI. So an optionally convertible debenture is generally treated as a debt instrument, not an equity instrument.

Section 47(1) gives the RBI a general power to make regulations to carry out the Act and the rules. Section 47(2) lists specific matters, such as the form of declaration under Section 7(1)(a), the period and manner of repatriation under Section 8, and limits on holding foreign currency under Section 9. In practice, RBI regulations such as those on mode of payment and reporting of non-debt instruments support the Rules. Section 47(3) keeps earlier RBI regulations on capital account transactions valid until amended or rescinded by the Central Government.

In the Rules, eligible investors are generally persons resident outside India, including NRIs and OCIs, and entities incorporated outside India. Investee entities include Indian companies, LLPs, investment vehicles and others as the Rules provide. Investment is subject to the entry route (automatic or government approval), sectoral caps, pricing guidelines and reporting. Special conditions apply to investors from countries sharing a land border with India. Check the current Rules for details.

Key rules to remember

Rule-making power: non-debt capital account transactions
Section 6(2A) + Section 46(2)(ab): Central Government prescribes, in consultation with the RBI
Classes, limits and conditions for transactions not involving debt instruments. The Non-Debt Instruments Rules, 2019 come from here.
Power over debt instruments
Section 6(2) + Section 47(2)(a): RBI specifies or regulates, in consultation with the Central Government
Applies to permissible classes of capital account transactions involving debt instruments.
Meaning of debt instruments
Section 6(7): instruments determined by the Central Government in consultation with the RBI
Section 46(2)(aa) also lets the Central Government make rules on which instruments are debt instruments.
General regulation power of RBI
Section 47(1): RBI may, by notification, make regulations to carry out the Act and the rules
Section 47(2) lists examples. It is without prejudice to the general power.
Saving of earlier regulations
Section 47(3): earlier RBI regulations on capital account transactions remain valid until amended or rescinded by the Central Government
Applies to transactions whose regulation-making power now vests with the Central Government.
Equity instruments test
Equity shares + fully, compulsorily and mandatorily convertible preference shares and debentures + share warrants, as defined in the Rules
Optionally convertible or partly convertible instruments are treated as debt.
Basic prohibition
Section 3: no dealing in foreign exchange, or payment to a person resident outside India, except as the Act, rules, regulations or RBI permission allow
The Rules and regulations are the permission for foreign investment.

How to solve FEMA Non-Debt Instruments Rules and Regulations questions

Use this order for any question on the Non-Debt Instruments Rules or the RBI's regulation power.

  1. 1Identify the type of transaction. Is it a capital account transaction, and does it involve a debt instrument or not?
  2. 2Name the rule-making authority. Non-debt: Central Government under Sections 6(2A) and 46(2)(ab). Debt: RBI under Sections 6(2) and 47(2)(a).
  3. 3Classify the instrument. Check whether it is an equity instrument, such as equity shares, or a compulsorily convertible one, or a debt instrument such as an optionally convertible one.
  4. 4Identify the investor. Is the investor a person resident outside India, an NRI or OCI, or a foreign entity? Note any land-border country condition.
  5. 5Identify the investee. Is it an Indian company, LLP, investment vehicle or another permitted entity?
  6. 6Apply the entry route, sectoral cap, and pricing and reporting conditions from the Rules and RBI regulations.
  7. 7Conclude clearly. State whether the investment is permitted, under which route, and what compliance follows.

Quickest way: Four-question filter

When to use it: Use when you have limited time, for short notes or short fact-based questions.

  1. Who makes the law? Central Government rules for non-debt, RBI regulations for debt.
  2. What is the instrument? Equity or compulsorily convertible means non-debt. Optionally convertible means debt.
  3. Who is investing and in whom? Check eligibility.
  4. Which route, cap and pricing? Then add reporting. Write the answer in provision, analysis, conclusion order.

Common mistakes in FEMA Non-Debt Instruments Rules and Regulations

  • Saying the RBI makes the Non-Debt Instruments Rules.

    Students link all FEMA subordinate law to the RBI.

    Fix: Remember that the Rules are made by the Central Government. The RBI makes regulations under Section 47, and for debt instruments the RBI specifies the classes under Section 6(2).

  • Treating optionally convertible debentures as equity instruments.

    The word convertible suggests equity.

    Fix: Only fully, compulsorily and mandatorily convertible instruments count as equity. Others are debt.

  • Quoting a wrong section for RBI regulation power.

    Sections 46 and 47 look alike.

    Fix: Section 46 is the Central Government's rule-making power. Section 47 is the RBI's regulation-making power.

  • Forgetting Section 47(3).

    Students treat it as a minor clause.

    Fix: Add that earlier RBI regulations on capital account transactions continue until amended or rescinded by the Central Government.

  • Stopping at eligibility and ignoring route, cap, pricing and reporting.

    Students stop once the investor is shown to be eligible.

    Fix: Always add that eligibility is subject to sectoral caps, entry route, pricing guidelines and reporting. Check the current Rules for the exact limits.

Worked examples

Example 1

Explain who has the power to make rules and regulations on capital account transactions under FEMA, 1999, with reference to the Non-Debt Instruments Rules, 2019.

Show the solution
  1. Provision: Section 6(2A) empowers the Central Government, in consultation with the RBI, to prescribe permissible classes of capital account transactions not involving debt instruments, the limits and the conditions. Section 46(2)(ab) gives the matching rule-making power.
  2. Provision: Section 6(2) empowers the RBI, in consultation with the Central Government, to specify permissible classes of transactions involving debt instruments, the limits and the conditions. Section 47(2)(a) lets the RBI make regulations on this.
  3. Analysis: Under Section 6(7), debt instruments are those determined by the Central Government in consultation with the RBI. The Non-Debt Instruments Rules, 2019 are therefore made by the Central Government, while the RBI makes regulations under Section 47 to carry out the Act and the rules.
  4. Analysis: Under Section 47(3), earlier RBI regulations on these transactions stay valid until amended or rescinded by the Central Government.

Answer: The Central Government makes rules on non-debt capital account transactions, including the Non-Debt Instruments Rules, 2019. The RBI handles debt instruments and makes regulations under Section 47, and earlier RBI regulations continue under Section 47(3) until amended or rescinded.

Example 2

A company incorporated outside India wants to subscribe to compulsorily convertible debentures (CCDs) of an Indian private limited company in a sector open under the automatic route. Another foreign investor wants optionally convertible debentures (OCDs) of the same company. Advise which framework applies to each.

Show the solution
  1. Provision: Section 6(2A) covers transactions not involving debt instruments, which fall under the Central Government's Non-Debt Instruments Rules, 2019. Section 6(2) covers debt instruments, which the RBI regulates.
  2. Analysis of CCDs: compulsorily convertible debentures are equity instruments under the Rules. A foreign entity is an eligible investor.
  3. Analysis of CCDs: the investment is subject to the entry route, sectoral cap, pricing guidelines and reporting. If the sector is under the automatic route, no prior government approval is needed, provided the cap and conditions are met. Land-border country conditions would apply if relevant.
  4. Analysis of OCDs: optionally convertible debentures are not equity instruments. They are treated as debt instruments and fall under the debt framework, not the Non-Debt Instruments Rules.
  5. Conclusion: the two investments are governed by different frameworks.

Answer: The CCD subscription is governed by the Non-Debt Instruments Rules, 2019. It is permitted under the automatic route, subject to the cap, pricing and reporting conditions. The OCD investment is a debt instrument transaction governed by the debt framework under Section 6(2) and RBI regulations, not by the Non-Debt Instruments Rules.

Exam tips

  • Learn the Section 6(2) versus 6(2A) split, since it explains who makes which rules. Write it in one line at the start of the answer.
  • Cite Section 47 for RBI regulations and Section 46 for Central Government rules. Do not mix them up.
  • In classification questions, always test whether a convertible instrument is compulsorily convertible. That decides equity or debt.
  • Do not quote caps or percentages from memory unless you are sure. Check the current Rules and say they are subject to the sectoral cap.
  • Use the format provision, analysis, conclusion and end with a one-line conclusion.

Practice questions from Foreign Direct Investments - Regulations and Policy

FEMA Non-Debt Instruments Rules and Regulations in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

FEMA Non-Debt Instruments Rules and Regulations: frequently asked questions

What does Section 47 of FEMA say?

Section 47(1) lets the RBI, by notification, make regulations to carry out the Act and the rules. Section 47(2) lists matters such as the declaration under Section 7(1)(a), repatriation under Section 8 and limits on holding foreign currency under Section 9. Section 47(3) keeps earlier RBI regulations on capital account transactions valid until amended or rescinded by the Central Government.

Who makes the FEMA Non-Debt Instruments Rules, 2019?

The Central Government makes them. The power comes from Section 6(2A) read with Section 46(2)(ab). The RBI is consulted and issues supporting regulations under Section 47.

Which instruments count as equity instruments for foreign investment?

In general, equity shares, fully, compulsorily and mandatorily convertible preference shares and debentures, and share warrants of an Indian company. The Rules also deal with units of investment vehicles, depository receipts and LLP capital contribution. Check the current definitions in the Rules for exact wording.

Are optionally convertible debentures covered by the Non-Debt Instruments Rules?

No. They are generally treated as debt instruments. They fall under the debt framework made by the RBI and the Central Government under Section 6(2) and Section 6(7).