Rule 2 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.
Rule 2 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 says who can receive foreign investment and who is an investor of a particular class: an "Indian company" and "Indian entity", "control", a "startup company", an "investment vehicle", an "NRI", an "OCI", a "resident Indian citizen", and what "Government approval" means. This article explains those clauses with the amendments of 2019 to 2026.
It is based on the Rules as 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. Amendments made after that date should be checked in the Gazette. There is no official consolidated text; every clause was read from the 2019 notification with the amendments applied. For a foreign investor entering through a new Indian company, see our Indian subsidiary service.
"Indian company" now means a company as defined in the Companies Act, 2013 or a body corporate established under a Central or State Act that is incorporated in India, but not a society, trust or entity excluded as an eligible investee under the FDI Policy (S.O. 1802(E), 12 April 2022). "Control" follows the Companies Act, and for an LLP means the right to appoint a majority of the designated partners with control over all policies (S.O. 3492(E), 16 August 2024). A "startup company" is a private company identified as a startup under G.S.R. 127(E) of 19 February 2019. Mutual funds were removed from "investment vehicle" on 5 December 2019.
Indian company, Indian entity and subsidiary: rules 2(y), 2(aa), 2(ana), 2(af)
As notified, rule 2(y) said only: "Indian company" means a company incorporated in India. S.O. 1802(E), the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022 (12 April 2022), substituted the clause. It now reads: a company as defined in the Companies Act, 2013 or a body corporate established or constituted by or under any Central or State Act, which is incorporated in India. Three Notes follow:
- Reference to "company", "investee company", "transferee company" or "transferor company" in the Rules also includes a body corporate established or constituted by or under any Central or State Act.
- If any of those terms is qualified by a reference to a company incorporated under the Companies Act, 2013, the term means a company incorporated under that Act but not a body corporate.
- "Indian company" does not include a society, trust or any entity which is excluded as an eligible investee entity under the FDI Policy.
The FDI Policy is issued by the Department for Promotion of Industry and Internal Trade; its content is not in the texts consulted and is not stated here. The Reserve Bank's Master Direction - Foreign Investment in India, updated up to June 15, 2026, gives the same definition and the same note in paragraphs 2.3.
"Indian entity" (rule 2(aa)) is an Indian company or an LLP. "LLP" (rule 2(af)) is a limited liability partnership formed and registered under the Limited Liability Partnership Act, 2008 (the Rules print "(6 of 2009)" after the Act's name). "Subsidiary" (rule 2(ana)), inserted by S.O. 1802(E), has the meaning given in the Companies Act, 2013, as amended from time to time.
Control: rule 2(da)
Rule 2(da) was inserted after clause (d) by S.O. 3492(E), the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (16 August 2024). "Control" has the same meaning as in the Companies Act, 2013 and, for an LLP, means the right to appoint a majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of the LLP. The Master Direction repeats this at paragraph 2.4. "Control" matters for downstream investment and for the ownership tests explained in our articles on rule 23 and the Explanation to rule 23; clause (d) of that Explanation, which once defined control, was omitted by the same notification.
Startup company: rule 2(an)
As notified, a "startup company" was a private company incorporated under the Companies Act, 2013 and identified under G.S.R. 180(E) dated 17 February 2016 of the Department of Industrial Policy and Promotion. S.O. 3492(E) substituted the clause. A startup company is now a private company incorporated under the Companies Act, 2013 and identified as "startup" under the notification of the Government of India number G.S.R. 127(E), dated 19 February 2019, issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, as amended from time to time. Whether a company is identified is a matter for that notification; it is not in the texts consulted. The term matters for the convertible note in rule 2(e), explained in our article on equity instruments, convertible notes and units, and for rule 18. For compliance beyond the Rules, see our guide to FEMA compliance for startups receiving FDI.
Investment vehicle, investing company and group company
Investment vehicle (rule 2(ae)). An entity registered and regulated under regulations framed by the Securities and Exchange Board of India or any other authority designated for the purpose, and it includes, as notified: Real Estate Investment Trusts governed by the SEBI (REITs) Regulations, 2014; Infrastructure Investment Trusts governed by the SEBI (InvITs) Regulations, 2014; Alternative Investment Funds governed by the SEBI (AIFs) Regulations, 2012; and (iv) mutual funds which invest more than fifty per cent in equity. S.O. 4355(E) (5 December 2019) omitted item (iv), so mutual funds are no longer in the list. The Master Direction lists only REITs, InvITs and AIFs (paragraph 2.19), and adds in paragraph 2.19.1 its own statement that a venture capital fund registered under the older SEBI venture capital regulations is not an investment vehicle for these purposes. Rule 2(ar) defines a "venture capital fund" separately, as a fund established as a trust, a company or a body corporate and registered under the SEBI (Alternative Investment Funds) Regulations, 2012.
Investing company (rule 2(ab)). An Indian company holding only investments in other Indian company or companies directly or indirectly, other than for trading of such holdings or securities. Foreign investment in such companies is dealt with in our article on Schedule I paragraph 3.
Group company (rule 2(w)). Enterprises which can exercise twenty-six per cent or more of voting rights in, or appoint more than fifty per cent of the Board of, another enterprise. Manufacture (rule 2(ah)) means a change in a non-living physical object that creates a new and distinct object with a different name, character and use, or a different chemical composition or integral structure.
NRI, OCI and resident Indian citizen: rules 2(aj), 2(ak), 2(al), 2(n)
- NRI (2(aj)): an individual resident outside India who is a citizen of India.
- OCI (2(ak)): an individual resident outside India registered as an Overseas Citizen of India Cardholder under section 7A of the Citizenship Act, 1955.
- Resident Indian citizen (2(al)): an individual who is a person resident in India and a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955.
- FVCI (2(n)): a Foreign Venture Capital Investor incorporated and established outside India and registered with SEBI under the SEBI (Foreign Venture Capital Investors) Regulations, 2000, which are quoted as printed; the reader should check the current SEBI instrument.
These definitions repeat in the Master Direction at paragraphs 2.23 to 2.25. Individuals resident outside India are now also covered by wider wording in Chapter V; see our article on rules 12 and 13.
Government approval: rule 2(v)
Rule 2(v) defines "government approval" as the approval from the erstwhile Secretariat for Industrial Assistance, Department of Industrial Policy and Promotion, Government of India and/or the erstwhile Foreign Investment Promotion Board and/or any ministry or department of the Government of India, as the case may be. S.O. 2174(E), the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2026 (1 May 2026, published 2 May 2026), changes "government approval" to "Government approval" with a capital G. The notification describes this as being in "rule 2, in clause (6)", although the definition is clause (v) of rule 2; this is a printing slip, and the amendment is applied to clause (v) because that is where the words stand. The text does not describe an application procedure, portal or time line, and none is stated here. How the route works is explained in our article on the automatic route and the Government route.
Rule 2(2) completes the rule: words and expressions used but not defined in the Rules have the meanings assigned in the Act, rules and regulations.
A worked example
Lakshya Components Private Limited, incorporated under the Companies Act, 2013, wants foreign money from Nordvik Holdings. As a company under that Act it is an Indian company. A trust set up by the same promoters is not: Note 3 excludes a society, trust or entity excluded as an eligible investee under the FDI Policy. If Lakshya is identified as a startup under G.S.R. 127(E), it can issue convertible notes within the ten-year window of rule 2(e), subject to rule 18.
Need help with setting up an Indian company for foreign investors?
If a foreign investor is entering through a new Indian company, the entity type, the investor's category and the shareholding all affect the compliance. Our Indian subsidiary service sets these up with the Rules in view.
Key takeaways
- "Indian company" includes a statutory body corporate incorporated in India, but excludes societies, trusts and entities excluded under the FDI Policy (12 April 2022).
- "Control" for an LLP means the right to appoint a majority of the designated partners with control over all policies (16 August 2024).
- A startup company is identified under G.S.R. 127(E) of 19 February 2019, not the 2016 notification.
- Mutual funds are no longer investment vehicles under rule 2(ae) (5 December 2019).
- "Government approval" has a capital G since the 2026 amendment, which cites "clause (6)" for clause (v).
Read next
- Rule 2 of the FEM (Non-debt Instruments) Rules, 2019: FDI, foreign portfolio investment and the sectoral cap
- Rule 6 of the FEM (Non-debt Instruments) Rules, 2019: who may invest and the land-border countries
- How to set up a foreign subsidiary in India
- Rules 1 to 5 of the FEM (Non-debt Instruments) Rules, 2019
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.