Decoding India’s New FDI norms for “Beneficial Ownership”

The Pre-Amendment Landscape: A Regulatory “Grey Area”

Before this recent amendment, Consolidated FDI Policy Circular of 2020 dated 15.10.2020 in para 3.1.1 mandated the “Government Route” (prior approval) for any foreign direct investment from an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country. However, the previous policy did not clearly explain what ‘Beneficial Ownership’ meant.

The Previous Provision:

“An entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.”

Without a clear percentage or a definition of ‘control,’ investors were left in a state of legal uncertainty. It was unclear if a minor 2% shareholding in a investor entity by citizen of a country sharing land border with India or entity(ies) incorporated or registered in a country sharing land border with India triggered the Government Route.

Example (The Grey Area):

Consider a investor company in Singapore where a citizen of a land-bordering country held 5% stake. Because “Beneficial Ownership” was not defined in the FDI policy, it was unclear if this 5% triggered a mandatory government filing, often led to a cautious approach that delayed the inflow of capital for months.

Amendment to FDI policy:

Press note 2 (2026 series) reviewed FDI Policy on Investments from Countries Sharing Land Border with India. Accordingly, Para 3.1.1 of the FDI Policy is amended by linking the definition of a ‘Beneficial Owner’ to Rule 9(3) of the Prevention of Money Laundering Rules. This applies specifically to investor entities incorporated in countries that do not share a land border with India (e.g., USA, Mauritius, or UAE).

The Government approval is now triggered if a citizen or entity (ies) of a land-bordering country meets these specific thresholds in the investor entity individually or cumulatively, independently or collectively, whether acting together or otherwise:

 Beyond Ownership: The “Control” Factor

The amendment emphasizes that ownership percentages are not the only trigger. Even if the ownership is below 10%, the Government Route is mandatory if the entity in land-border sharing countries/citizen of such countries has the ability to:

• Exercise control over the investor entity.
• Exercise ultimate effective control over the Indian investee entity in any manner.

Example:

A Company based in the USA invests in an Indian startup. A citizen of Pakistan holds an 11% stake in this US Company. Under the new rules, this exceeds the 10% threshold. Therefore, even though the company is incorporated in USA, the investment must go through the Government Route. If the stake was only 9% (and no “control” existed), it could proceed via the Automatic Route, subject to applicable sectoral caps, entry routes, attendant conditions and specific reporting to the DPIIT.

Conclusion

The update to FDI policy helps strike a balance between national security and making it easier to do business in India. By using the clear thresholds from the Prevention of Money Laundering Rules, FDI policy provide a clarity for international investors. While India remains open to foreign investment, the government’s focus is on the ultimate identity of the person providing the investment.