Much awaited Clarity on FDI Press Note 3 – Finally
Introduction
The onset of COVID-19 prompted the Department for Promotion of Industry and Internal Trade (“DPIIT”) to tighten its foreign investment framework, introducing restrictions on investments originating from land-bordering countries (“LBCs”) through Press Note 3 of 2020 (“PN3”), issued in April 2020 by amending the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). Such amendment mandated prior government approval for: (a) any investment by an entity incorporated in a LBC, or where the beneficial owner of the investment is situated in or is a citizen of LBC; and (b) any transfer of ownership of existing or future FDI resulting in beneficial ownership falling within this category.
Recently, India has revisited the framework through a press release dated March 7, 2026 (“Press Release”) and Press Note 2 dated March 15, 2026 (“PN2”). Wherein, the government has introduced changes to the regime, including threshold-based distinctions and sector-specific timelines for approval. While these changes ease some aspects of the prior approval requirement, the overall framework governing investments from LBCs continues to remain in place.
Background
In practice, PN3 applied uniformly to all investments falling within its scope, without distinguishing between controlling strategic investments and minority financial investments. Consequently, global investment funds with incidental exposure to investors from LBCs were also required to seek prior government approval. This had the effect of subjecting a broader range of investments to the approval process and added procedural considerations for capital flows. While an amendment to the NDI Rules is awaited, the Government through the Press Release has introduced two significant amendments to address the above issue, i.e., (a) a reference point for determining beneficial ownership (“BO”); and (b) a faster approval track for investments in Specified Sectors.
Analysis
1. The Beneficial Ownership Test
Press Release introduced the adoption of a better framework for determining BO in investments linked to LBCs. The Government has aligned the determination of BO with Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”), under which a beneficial owner is the natural person who ultimately owns or controls an entity. For companies, this refers to a natural person holding more than 10% ownership interest or exercising control over management/policy decisions. The BO test is to be applied at the level of investor entity. The Press Release introduces a carve-out from the government approval route for investments where LBC ownership is 10% or less and non-controlling, subject to applicable sectoral caps and entry conditions.
The Press Release also requires the Indian investee company to report LBCs BO details to DPIIT, introducing an additional reporting layer involving closer examination of ownership structures, particularly in complex or multi-layered investment vehicles. To better understand the revised framework, we examine the position through the following illustrative examples:
a. Direct investment by LBC Investor in Indian Company
Scenario: Company A, incorporated in China proposes to acquire a 5% stake in an Indian company operating in a sector permitting 100% FDI, via a Share Purchase Agreement.
Position: Under the current framework, Company A’s investment will not be allowed under automatic route, as Company A is incorporated in China, irrespective of shareholding proposed to be acquired.
Rationale: PN2 mandates prior government approval for any investment by an entity situated in LBC. The requirement for direct investor from LBC applies uniformly and is not diluted by the Press Release.
b. Controlling investment by non-LBC entity, without LBC BO
Scenario: Company A, incorporated in Mauritius, proposes to acquire a 51% stake in an Indian company operating in a sector permitting 100% FDI, pursuant to a Share Purchase Agreement. A Chinese entity holds a 5% stake in Company A and without any control under the PML Rules.
Position: The investment will be allowed under automatic route as the quantum of investment/acquisition by the investor entity in the investee entity does not affect the mode of approval.
Rationale: The Chinese shareholding in Company A is limited to 5% and is non-controlling, falling below the BO. Accordingly, Company A is not treated as an LBC BO, and the investment may proceed under the automatic route.
c. Investment by non-LBC entity, with LBC BO
Scenario: Company A, incorporated in Singapore seeks to invest in an Indian company (which operates in a Specified Sector), via a Subscription Agreement. A Chinese company holds an 8% stake and controls policy decisions pursuant to a Shareholders’ Agreement in Company A.
Position: The proposed investment cannot proceed under the automatic route and will require prior government approval.
Rationale: The investment will not be allowed under the automatic as the Chinese company’s ownership in Company A, although below 10% threshold, constitutes ‘control’ under the PML Rules. The Chinese company’s ownership shall be treated as BO and thus, the investor shall proceed under the government approval route under the PN2, with a provision for fast-track approval in sixty days.
d. Investment by non-LBC entity, without LBC BO
Scenario: Company A, incorporated in USA, proposes to acquire a 10% stake in an Indian company operating in a sector permitting 100% FDI, via a Share Subscription Agreement. A Chinese company holds a 5% stake and has no controlling interest (under PML Rules) in Company A.
Position: The investment will be allowed under automatic route as the quantum of investment/acquisition by the investor entity in the investee entity does not affect the mode of approval.
Rationale: The investor herein is not incorporated in any LBC), and the Chinese ownership in Company A is below 10% and non-controlling. Thus, investment in Company B may proceed under the automatic route.
2. Majority Shareholding and Control
For investments in electronic manufacturing sectors (“Specified Sectors”), the Press Release provides that the proposals shall be processed and decided within sixty days. These expedited approvals carry an additional condition: majority shareholding and control of the investee must vest with resident Indian citizens at all times. This provision may create a continuous post-investment compliance obligation, not merely a condition precedent. Future ESOPs, convertible instrument conversions, secondary transfers, or corporate restructurings that affect resident Indian’s shareholding/control may trigger a re-assessment resulting in a compliance burden.
Conclusion
The Press Release marks a meaningful step in India’s approach to investment from LBCs. By introducing a PMLA-based BO threshold, a carve-out for non-controlling investments under the automatic route, and a faster approval timeline for Specified Sectors, the government has sought to address concerns that have lingered since the 2020 restrictions. However, the practical effect will depend on how authorized dealer banks and regulators interpret the reporting and ownership requirements. Thus, while the framework reflects a move toward facilitating investment in priority sectors, its effectiveness will ultimately depend on the manner of implementation.