Summary: Press Note 2 of 2026 issued by the Department for Promotion of Industry and Internal Trade updates India’s foreign direct investment framework relating to countries sharing a land border with India. The framework continues the Government approval requirement for specified investments involving entities, citizens or beneficial owners connected with land-border countries, while providing greater clarity on beneficial ownership. PN2 links the meaning and determination of beneficial ownership to the Prevention of Money Laundering Act, 2002 and Rule 9(3) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. The article explains the three-pronged framework involving prescribed ownership rights or entitlements, control over the investor entity and ultimate effective control over the investee entity. It also discusses Government approval for transfers that result in restricted beneficial ownership and reporting obligations for certain investments involving direct or indirect ownership from land-border countries. While PN2 is presented as providing greater certainty than Press Note 3 of 2020, the article identifies continuing questions concerning complex multi-layered investment structures and the meaning of “ultimate effective control”. It further considers implications for PE and VC firms, shareholder agreements, side letters, co-investment arrangements and transaction structuring, and concludes that consistent implementation by government agencies and the RBI will be important to the effectiveness of the revised framework.
India’s Updated FDI Rules for Neighbouring Land Border Nations
Introduction
On 15 March 2026, the Department for Promotion of Industry and Internal Trade (“DPIIT”) issued Press Note 2 of 2026 (“PN2”)[1]. No.2 of the Consolidated FDI Policy of India (PN 2) covers the provisions related to foreign direct investments from land border countries such as China, Pakistan, Nepal, Bhutan, Bangladesh, Myanmar and Afghanistan. The rationale for PN 2 is twofold: first, it defines and supplements the obligation to establish a beneficial owner related to any foreign investment in India, and second, it continues to follow sensible national security needs. PN 2 seeks to accomplish these two goals, while offering more detail on certain of the general limitations detailed in the original 2020 rule. These new additions provide additional clarity for legitimate investors by clarifying the application of the FDI Policy.
Keywords: Foreign Direct Investment (FDI), Press Note 2 of 2026, Beneficial Ownership, Land Border Nations, Prevention of Money Laundering Act (PMLA), Government Route Approval, The Old Regime, Press Note 3 of 2020 and Its Challenges.
The policy referred to as Press Note 3 (PN3)[2] established under Government of India guidelines, was enacted in April 2020 (during the COVID-19 pandemic) to prevent foreign takeovers of weakened Indian companies by opportunistic foreign investors. Under PN3, investments from entities or citizens of countries with a land border with India (and all investments committed by beneficial owners from those countries) must be made through the Government of India. This means that all investment proposals from entities or citizens of countries sharing a land border with India require prior approval of the Government of India. In addition, the same rules apply for indirect investments through other countries.
Although PN3 prevented other countries from obtaining control of distressed Indian companies due to the country’s economic challenges, it also created many difficulties. The lack of clear definitions and thresholds for beneficial ownership made it necessary for the absence of a clear beneficial ownership threshold created uncertainty regarding when Government approval would be required processes at the government level delayed or denied the implementation of many investment proposals. Some market participants have stated that the broad scope of PN3 and the approval criteria create a high level of uncertainty for transactions and extensive delays in completing trade and investment transactions. However, it is challenging to assess the exact impact that PN3 has had on total FDI.
The New Regime, Key Clarifications in PN2
The Consolidated FDI Policy was previously amended by Press Note 3 of 2020, and Paragraph 3.1.1 continues to allow FDI in India in other sectors, but no investments will be made in the prohibited sectors, which will now be incorporated into PN2 of 2026. However, if the foreign entity/citizen is a resident of a land border country and/ or maintains the status of “beneficial owner” from a land border country, they will continue to be subject to Government approval in accordance with the “Government Route”.
Foreign Direct Investment through an entity incorporated under the laws of Pakistan shall only be allowed in sectors NOT independently prohibited for Receiving States, Pakistan; that is, in sectors other than Defence, Space, Atomic Energy and also other Foreign Investment which is completely prohibited.
Moreover, any transfer of ownership of current or future Foreign Direct Investments (FDIs) which lead, through direct or indirect means, to a party that has been appointed as the ultimate beneficial owner being classified as falling within the above-stated land-border country restrictions, will require prior approval from the Government.
PN2’s significant enhancement relates to clearly defining the beneficial owner legally. In the context of the policy, beneficial owner means the beneficial owner or owners of an investor entity that has been incorporated/registered in a country which is not a bordering country. This follows the Prevention of Money Laundering Act 2002 (amended) (see Section 2(1) (fa)) and is defined using the criteria outlined in Rule 9(3) of the Prevention of Money Laundering (Maintenance of Records) Rule 2005 (amended).
A new three-pronged framework established under PN2 defines the criteria to determine if there is beneficial ownership attributed to a contiguous foreign nation (if it shares a land border with India) through a citizen or entity of the foreign nation owning an interest in an investor entity. Foreign citizens/entities have beneficial ownership through the following criteria:
(i) the foreign citizen(s) or entity(ies) hold rights/entitlements in excess of the prescribed limits as set forth in Rule 9(3) of the PMLA (Maintenance of Records) Rules of 2005; (ii) the foreign citizen(s) or entity(ies) have the ability to exercise control over the described investor entity; and (iii) the foreign citizen(s) or entity(ies) have the ability to exercise ultimate effective control over the investee entity.
Due to the new framework for both the Foreign Direct Investment (FDI) and Anti-Money Laundering (AML) regulations, it will be easier than ever to understand exactly what it means to receive government approval for an investment into India that produces foreign direct investment into India.
This new framework will also make it easier for foreign direct investors located outside of India who have a direct interest in an Indian company to comply with their reporting obligations. After an investor makes their final investment decision (FID) into an Indian company, they may need to continue to report on that company for as long as they have direct or indirect ownership (as an example, an investment from the USA through an Indonesian company). This reporting will follow the Standard Operating Procedure established by the DPIIT and will complement the normal reporting requirements, as well as any necessary sectoral caps, entry routes, and other terms and conditions of FDI policy. The effective date of these changes will be as per the date of any relevant notification published pursuant to the Foreign Exchange Management Act (FEMA).
Remaining Gaps and Areas of Uncertainty
Even though PN2 clarifies some points, it does not resolve many issues that affect both investors and companies alike.
First, the definition of the beneficial owner is clearer under PN2 than previously; however, there are still several areas of potential uncertainty about the practical implications of the application of the concept of beneficial ownership with respect to complex, multi-layered ownership structures. In an international investment fund with multiple holding company layers, it is not clear whether compliance requirements need to be met by each level of ownership or not. This creates uncertainty about the overall viability of a complex transaction.
Second, under PN2, “ultimate effective control” allows for an examination of the transaction’s substance beyond the percentage of ownership in companies. However, there is no definition of the term in the press note or the PMLA, which means that different interpretations could lead to difficulties in approval by regulators, banks and companies when making decisions regarding the ability to proceed with the transaction. This could create significant issues regarding how quickly to deliver deals and when to do so.
Third, In addition, compliance with laws governing governance and authorisation of directors must be done under the terms that existed prior to publication of PN2, and therefore, will still require additional approval to appoint directors to the company’s board.
Market Implications
PE and VC Firms can perceive PN2’s paragraph 2 as a tool to systematically analyse control/ownership based on the PMLA testing framework, as opposed to previously having vague guidance. The benefits of such compliance can vary between transactions, based on the structure of those transactions.
The aim of the adjustments is to increase certainty of the transactions and decrease ambiguity, but the level of FDI would depend on the manner in which the policy is implemented and interpreted.
This policy provides a balance for India to protect its strategic interests while facilitating growth through FDI. Foreign investment should contribute towards supply chain consolidation, unless made from land-border countries where government approval is mandatory.
Shareholder agreements, side letters and co-investing arrangements should be reviewed for compliance by attorneys and investors. The analysis of ownership rights and influence in relation to jurisdictional boundaries will now be conducted based on substantive reviews rather than procedural reviews. Documentation and structuring of transactions will thus require greater diligence.
Conclusion
The FDI Policy has been changed by PN2 in a practical way. Even though the Policy still has restrictions, PN2 provides clarity on ownership and control tests by including provisions from the PMLA. It still requires some clarification of “ultimate effective control”. The most important factor in measuring success is how consistently the changes will be implemented and interpreted between various government agencies and the RBI. If implemented properly, these changes should encourage foreign direct investment, technology transfers and enhanced economic cooperation. In addition to providing border protection for Indian citizens, the new framework provides a more consistent and convenient manner for complying with the Indian FDI Policy. Overall, the result will lead to a more predictable investment environment and maintain national interests.
