Union Budget 2026–27: Key Implications for M&A Deal Structuring Across FEMA, Buybacks, IFSC and Emerging Sectors

The Union Budget 2026–27, which received Presidential assent and became the Finance Act 2026 on 30 March 2026, introduced a series of targeted changes with significant downstream consequences for deal structuring, regulatory approvals, due diligence frameworks and transactional documentation. Unlike broad-based economic announcements, these shifts operate at the level of term sheets, condition-precedent checklists and indemnity schedules — precisely the domain that M&A practitioners must navigate with care.

This analysis examines five principal areas where the Budget's provisions create real-world complexity, identifies drafting gaps that remain unresolved, and flags where secondary commentary may have outpaced the actual statutory text.

1. FEMA Amendments: Liberalisation Headlines, Control-Tightening in the Rules

Portfolio Investment Scheme Limit Enhancement

The Budget speech announced an increase in the individual limit for persons resident outside India (PROIs) under the Portfolio Investment Scheme — from 5% to 10% of a listed company's paid-up equity capital. The aggregate limit for all such individual investors was simultaneously raised from 10% to 24%. These headline numbers, however, represent only part of the regulatory picture.

The Ministry of Finance operationalised the individual-limit change through the FEMA (Non-debt Instruments) Third Amendment Rules, notified on 12 June 2026. Deal practitioners must focus not on the expanded headroom but on what happens when that headroom is approached or crossed.

The 10% Re-characterisation Threshold

Where an individual PROI's aggregate holding in a listed company exceeds 10%, the investment ceases to qualify as portfolio investment under Schedule III of the NDI Rules and must instead satisfy FDI requirements. For strategic buyers, family offices or sovereign-linked investors building a toehold position in a listed target, this threshold must be monitored from the very first acquisition tranche — not merely at the point of a later block purchase.

Importantly, the amendment does provide for cure periods, and temporary breaches occurring within the prescribed divestment or reclassification window are not automatically treated as contraventions. However, practitioners should resist treating this cure window as a planning mechanism or an implicit licence to breach. It is a remedial provision, not a structuring tool.

Land-Border Beneficial Ownership Controls

A more nuanced — and currently contested — interpretation concerns how the May and June 2026 amendments interact with the Press Note 3 (2020) land-border investment approval regime. One practitioner analysis reads these amendments together as embedding the Press Note 3 framework directly into the Rules, such that government approval is triggered not only at the point of initial entry but also upon downstream or indirect changes in beneficial ownership — including where control of a listed company shifts to a land-border beneficial owner as assessed against PMLA control thresholds. Rules 12 and 13 are said to introduce an additional approval gate in such scenarios.

It must be noted that this is not the only reading in circulation. Other commentary characterises the 2026 amendments as a relaxation of restrictions on land-border investment rather than a tightening. These characterisations are in direct conflict. Until the notified text has been carefully reviewed, practitioners should not rely on any secondary summary — including this one — as a substitute for reading the Rules themselves.

The Consolidated Draft Framework

On 21 July 2026, the Reserve Bank of India released draft FEMA (Foreign Investment) Rules, 2026, proposing to replace the existing NDI Rules with a consolidated framework. The draft was open for public comment until 31 August 2026. Notably, the draft does not address two issues that sit at the heart of most structured private equity transactions: (i) valuation methodology for convertible equity instruments, and (ii) permissibility of assured returns to non-resident investors. Until these gaps are resolved in the final Rules, structured cross-border deals will continue to operate in a zone of interpretive uncertainty.

Doctrinal Anchor

In Vijay Karia v. Prysmian Cavi e Sistemi Srl (2020) 11 SCC 1, the Supreme Court held that a contravention of FEMA is compoundable and, without more, does not offend the fundamental policy of Indian law. A breach may therefore expose parties to compounding proceedings and transactional delays without necessarily resulting in the unwinding of the transfer itself.

This principle has direct implications for how approval risk should be allocated in transaction documents. Rather than relying on a generic compliance warranty, deal documentation should include a well-calibrated long-stop date, specific price-adjustment or walk-away rights tied to regulatory approval timelines, and a targeted indemnity for FEMA compounding exposure.