Schedule II explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
After the limits in items (i) to (iv), Schedule II to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 sets the pricing floors for a foreign portfolio investor (FPI) buying shares in a public offer or a private placement, allows short selling and securities lending and borrowing within conditions set elsewhere, and lists the fund units an FPI may buy. This article covers items (v) to (vii) of paragraph 1(a), paragraph 1(b) and paragraph 2.
This article states the position as per the Rules notified on 17 October 2019 (S.O. 3732(E)) as amended by the notifications named in this article; the latest amendment consulted is S.O. 4870(E) dated 2 September 2026. None of the nineteen amending notifications changes items (v) to (vii), paragraph 1(b) or paragraph 2 of Schedule II; they stand as notified on 17 October 2019. Amendments after 2 September 2026 should be checked in the Gazette. The individual and aggregate limits that these items refer to are explained in our article on Schedule II, paragraph 1(a)(i) to (iv). For a review of an FPI subscription or a fund structure, see our FEMA advisory service.
An FPI may buy equity instruments of an Indian company through a public offer or private placement, within the individual and aggregate limits. In a public offer the price must not be less than the price paid by residents. In a private placement the price must not be less than the SEBI-guideline price or the fair price under an internationally accepted pricing methodology, certified as the text requires. Short selling, lending and borrowing are allowed on conditions set by the Reserve Bank and SEBI. An FPI may also buy units of certain funds, REITs and InvITs on repatriation basis.
Item (v): public offer and private placement
Item (v) says an FPI may purchase equity instruments of an Indian company through public offer or private placement, subject to the individual and aggregate limits specified under the Schedule. A proviso fixes the price in two cases:
| Route | Price test as printed |
|---|---|
| Public offer (clause (A)) | The price of the shares to be issued is not less than the price at which shares are issued to residents |
| Private placement (clause (B)) | The price is not less than (a) the price arrived at in terms of guidelines issued by the Securities and Exchange Board of India, or (b) the fair price worked out as per any internationally accepted pricing methodology for valuation of shares on arm's length basis, duly certified by a Merchant Banker or Chartered Accountant or a practicing Cost Accountant, as applicable, registered with the Securities and Exchange Board of India |
The text does not name a valuation method, a certificate validity period or a SEBI formula, and none is given here. The general pricing rule for shares issued to non-residents is in rule 21; see our article on pricing of shares issued to non-residents.
The Master Direction - Foreign Investment in India, updated up to June 15, 2026, repeats the two tests in paragraph 1.6 of its Annex 2, but describes the certifier as a "SEBI registered Merchant Banker or Chartered Accountant, as applicable" and does not mention the Cost Accountant. The Rules print "Merchant Banker or Chartered Accountant or a practicing Cost Accountant, as applicable"; the Gazette wording is followed here, and the reader should confirm the position against the official text.
Item (vi): short selling, lending and borrowing
Item (vi) says an FPI may undertake short selling as well as lending and borrowing of securities, subject to such conditions as may be stipulated by the Reserve Bank and the Securities and Exchange Board of India from time to time. The Rules themselves set no condition. The Master Direction states, as its own conditions and not as part of the Rules (paragraph 1.7 of Annex 2):
- short selling of equity shares is permitted for companies where there is at least 2% headroom available for total foreign investment and/or the aggregate FPI limit, or which are not in the caution list or ban list published by the Reserve Bank or any restrictive list published by an authority it or SEBI designates;
- borrowing of equity shares is only for delivery into a short sale;
- margin or collateral is maintained as applicable in the cash and F&O segments, and no interest is paid to the FPI on it;
- designated custodian banks report short selling and lending and borrowing separately, with a remark, in their daily reporting.
Item (vii): limits, margins and collateral
Item (vii) makes every investment under the Schedule subject to the limits and margin requirements specified by the Reserve Bank or SEBI and to the stipulations on collateral securities specified by the Reserve Bank from time to time. The Master Direction compresses this into paragraph 1.8: investments are subject to the limits and margin requirements prescribed by the Reserve Bank or SEBI.
Paragraph 1(b): securities other than equity instruments
Paragraph 1(b) covers purchase or sale of securities other than equity instruments:
- Item (i): an FPI may purchase units of domestic mutual funds, or of a Category III Alternative Investment Fund, or of an offshore fund for which no objection is issued in accordance with the SEBI (Mutual Fund) Regulations, 1996, which in turn invest more than 50 percent in equity instruments. The purchase is on repatriation basis, subject to the terms and conditions specified by SEBI and the Reserve Bank.
- Item (ii): an FPI may purchase units of REITs and InvITs on repatriation basis, subject to the terms and conditions specified by SEBI.
The text of item (i) names the SEBI (Mutual Fund) Regulations, 1996 as printed; check the current SEBI instrument before relying on the reference. The Master Direction's Annex 2 does not reproduce paragraph 1(b); it is in the Rules only. Our guide to investment vehicles such as AIFs, REITs and InvITs covers how those vehicles are defined for foreign investment.
Paragraph 2: mode of payment and proceeds
Paragraph 2 says the mode of payment and other attendant conditions for remittance of sale or maturity proceeds shall be specified by the Reserve Bank. The Rules therefore print none. The Reserve Bank has specified them in the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, whose Schedule II row is named here and explained in our article on payment and refund under regulations 1 to 3. The Master Direction restates the position in paragraphs 2 and 3 of Annex 2:
- the consideration for equity instruments is received from abroad through banking channels by inward remittance, or out of funds held in a foreign currency account and/or a Special Non-Resident Rupee (SNRR) account maintained under the Foreign Exchange Management (Deposit) Regulations, 2016;
- the foreign currency account can be used only and exclusively for transactions under the Annex;
- the sale proceeds, net of taxes, can be remitted outside India or credited to the FPI's foreign currency account or SNRR account.
"Net of taxes" is the Master Direction's phrase; for tax treatment, see our income-tax guides. The Master Direction also records, in its paragraph 4, that investments made by deemed FPIs before registration as FPIs are valid and counted in the aggregate limits; the Rules do not print this.
A worked example
Holloway Global Fund, an FPI, takes part in a private placement by Marlow Textiles Limited, an Indian company, and subscribes within the individual and aggregate limits. The placement price is below the price arrived at under the SEBI guidelines, and no certified fair-price report exists. On the text of clause (B), the price does not meet either test, so the subscription is outside Schedule II. If Marlow instead issues shares in a public offer at the same price it charges residents, clause (A) is met. All names are invented.
Need help with FPI subscriptions?
Pricing and certification gaps are the usual reason a private placement to an FPI is questioned later. Our FEMA advisory team can check the pricing evidence and the limit position before the shares are allotted.
Key takeaways
- FPI purchase in a public offer: price not less than the price to residents.
- FPI purchase in a private placement: price not less than the SEBI-guideline price or the certified fair price.
- Short selling, lending and borrowing are subject to Reserve Bank and SEBI conditions; the Rules fix none.
- Fund units and REIT and InvIT units may be bought on repatriation basis on SEBI and Reserve Bank terms.
- Mode of payment and sale proceeds are left to the Reserve Bank (paragraph 2).
Read next
- Schedule II: individual and aggregate limits
- FPI investment and transfer: rules 10 and 11
- Investment vehicles: AIF, REIT and InvIT, Schedule VIII
- FPI registration process and SEBI categories
Disclaimer: Based on the Gazette text of the instrument this article names, as notified and as amended by the notifications named in the article (for the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 the latest amendment consulted is S.O. 4870(E) dated 2 September 2026), as consulted on 2 October 2026. There is no official consolidated text; the provisions were read with each amendment applied. Sectoral caps, entry routes, conditions, forms and time limits change by notification, press note and circular; later changes should be checked on the Gazette, DPIIT and Reserve Bank sites. This article is general information, not legal advice; check the official text before acting.