Introduction
The Government of India has formally amended its foreign direct investment policy governing investments from countries sharing a land border with India (“LBCs”) through Press Note 2 (2026 Series) (PN2), dated March 15, 2026, notified by the Department for Promotion of Industry and Internal Trade (“DPIIT”). This follows the Union Cabinet’s approval of the revised framework on March 10, 2026.
The amendments to Para 3.1.1 of the Consolidated FDI Policy Circular of 2020 address two long-standing structural problems: (a) the absence of a codified definition of ‘beneficial owner’ (“BO”) for the purposes of the LBC approval requirement; and (b) the absence of a defined timeline for processing government approval applications. PN2 seeks to address both — and in doing so, introduces a new reporting layer for certain automatic-route investments that will require careful attention.
Background: The PN3 Problem
Press Note 3 (2020 Series) (“PN3”), introduced on April 17, 2020, was originally designed to prevent opportunistic takeovers of Indian companies during the COVID-19 pandemic. It mandated government approval for any investment where the investing entity was incorporated in an LBC, or where the BO of the investment was situated in or was a citizen of an LBC. Corresponding amendments were made to Rule 6 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”).
What PN3 did not do, however, was define ‘beneficial owner’. This omission had significant practical consequences:
- Authorised dealer banks (“AD Banks”) developed inconsistent internal practices for tracing BO through layered holding structures.
- Global PE/VC funds with dispersed investor bases — including those with only marginal LBC exposure — frequently found their investments routed into the government approval queue.
- Even multinational companies listed on recognised exchanges abroad were sometimes asked to identify ultimate natural person shareholders, a standard that no other compliance regime imposes on listed entities.
- The approval process itself had no prescribed timeline, leaving applications in regulatory limbo — in some cases for years — without clear acceptance or rejection.
PN2 now formally addresses both gaps. The key changes are analysed below.
Key Change 1: A Codified Definition of Beneficial Owner
Para 3.1.1(c) of the amended FDI Policy introduces, for the first time, a formal definition of BO for the purposes of PN3. The amendment cross-refers to the definition of ‘beneficial owner’ under Section 2(1)(fa) of the Prevention of Money-Laundering Act, 2002 (“PMLA”) and the criteria stipulated under Rule 9(3) of the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”).
Under the PMLA framework, BO in relation to a company is the natural person who holds more than 10% of shares or capital, or exercises control over management or policy decisions — including through shareholding, management rights, or voting/shareholder agreements. Critically, where no such natural person can be identified, the senior managing official is treated as the BO. Further, entities listed on a recognised stock exchange in India or certain notified foreign exchanges, or their subsidiaries, are not required to identify or verify underlying shareholders as BOs.
Para 3.1.1(c) provides that the BO determination is to be applied at the level of the investor entity, not looked through to the ultimate natural person in every case. It then elaborates three triggers for LBC BO attribution:
- Threshold-based: LBC citizens/entities hold rights in excess of applicable PML Rules thresholds over the investor entity (i.e., more than 10% of shares or capital, or equivalent).
- Control-based: LBC citizens/entities have the ability to exercise control over the investor entity.
- Ultimate effective control: LBC citizens/entities can exercise ultimate effective control over the investee entity in any manner.
The third trigger deserves particular attention. While the first two operate at the level of the investor entity (consistent with the PMLA look-through stopping at that level), the third extends the analysis to the Indian investee entity. This creates a broader scope than the standard PMLA test and may require analysis beyond the immediate investor structure.
Key Change 2: Automatic Route for Non-Controlling LBC Investments
A significant commercial relaxation is introduced: investors with non-controlling LBC BO of up to 10% in the investor entity will be permitted under the automatic route, subject to applicable sectoral caps, entry routes, and attendant conditions. This addresses a long-standing concern among global PE/VC funds and other institutional investors who carried passive LBC exposure well below control thresholds, yet were systematically redirected to the government approval route.
However, Para 3.1.1(d) introduces an important qualification: investments benefiting from this automatic route access will be subject to reporting requirements in a format to be prescribed under a Standard Operating Procedure (“SOP”) to be laid down by DPIIT. These reporting obligations are stated to be in addition to compliance with sectoral caps, entry routes, and other attendant conditions — and in addition to existing AD Bank declarations.
The SOP has not yet been issued, and its scope will determine the practical compliance burden. If granular BO tracing is expected in every case — even where investments qualify for automatic route — the benefit of the relaxation may be diluted.
Key Change 3: A 60-Day Processing Timeline for Priority Sectors
Government approval applications for LBC investments in the following specified sectors must now be processed and decided within 60 days:
- Manufacturing of capital goods
- Electronic capital goods
- Electronic components
- Polysilicon manufacturing
- Ingot and wafer manufacturing
These sectors align with India’s semiconductor and electronics manufacturing policy agenda. The Cabinet approval also noted that the Committee of Secretaries under the Cabinet Secretary may expand the list of specified sectors in the future, providing administrative flexibility without requiring fresh Cabinet-level approval for each expansion.
For investments in these sectors, PN2 stipulates that majority shareholding and control of the investee entity must remain with resident Indian citizens and/or resident Indian entities owned and controlled by resident Indian citizens, at all times. This points toward joint venture structures where an Indian partner holds majority control and the LBC-linked foreign investor holds a minority stake — a configuration that has historically been the most common context for such approvals.
Effective Date: FEMA Notification Pending
A critical point: Para 2 of PN2 states expressly that the above decisions will take effect from the date of the FEMA notification, i.e., upon formal amendment of the NDI Rules. Until that notification is issued by the Ministry of Finance and the Reserve Bank of India, PN2 operates as a policy signal rather than an operative legal instrument. Transactions currently in structuring should not assume that the new framework is effective for compliance purposes.
Way Forward
PN2 represents a meaningful recalibration of the PN3 framework — more so in practical terms than in formal legal scope. The core approval requirement remains intact: investments with LBC BO above 10%, or involving control by LBC citizens or entities, continue to require government approval. What has changed is the operational architecture around that requirement.
The PMLA cross-reference is the most important structural development. It brings a well-understood, bank-familiar standard to bear on the BO determination and should, in principle, put an end to the inconsistent and often overly conservative practices that have characterised AD Bank review of LBC investments. Listed entities and their subsidiaries, in particular, should benefit from the explicit carve-out available under the PMLA framework.
At the same time, three areas of uncertainty remain and will warrant close attention once implementing instruments are issued:
- The ‘ultimate effective control’ trigger (Para 3.1.1(c)(iii)): This extends the BO analysis to control over the Indian investee entity and goes beyond what the PMLA framework requires. Its interaction with standard contractual protections — board nomination rights, veto rights, information rights — in minority investment structures will need to be assessed carefully on a transaction-by-transaction basis.
- The DPIIT SOP on reporting: Until the SOP is issued, the scope of reporting obligations for automatic-route investments with sub-10% LBC BO is unclear. If the SOP is drafted conservatively, it could require granular BO tracing for every investment — effectively creating a compliance exercise comparable to the approval process itself, even for investments that now formally qualify for the automatic route.
- Pending FEMA notification: The changes are not yet legally operative. Investors in active structuring should track the NDI Rules amendment closely.
For investors with existing LBC exposure, this is a good moment to review ownership structures in light of the 10% non-controlling threshold and the ‘ultimate effective control’ test. For those considering investments in the priority manufacturing sectors, the 60-day timeline — when it becomes operative — should meaningfully reduce deal execution risk that has historically been one of the principal deterrents to investing through LBC-linked fund structures.
This update is based on Press Note 2 (2026 Series) dated March 15, 2026 and the Cabinet decision dated March 10, 2026. This Corporate & M&A update is intended for general guidance only and does not constitute legal advice. For more information, please reach out to Shubham Sharma at 2636@cnlu.ac.in.
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