In a significant move, the Indian Government recently issued a Press Release, followed by Press Note 2 of 2026 under the Foreign Direct Investment Policy, announcing amendments to its earlier policy, widely referred to as Press Note 3, which imposes restrictions on foreign investment from entities where beneficial owners are located in countries sharing a land border with India. The new amendments aim to streamline the process and address longstanding concerns raised by investors and stakeholders.
Press Note 3 has been a focal point of discussion among investors, as many have struggled to interpret its requirements and implications over the years. Essentially, Press Note 3, when read in conjunction with Rule 6 of the Indian Foreign Exchange Management (Non-debt Instruments) Rules 2019, necessitates government approval for investments into India by entities incorporated in countries that share a land border with India, or where the beneficial owner of such investment is either located in or is a citizen of a neighbouring country.
Investors and banks have faced persistent questions under this regime. To what extent must beneficial ownership be traced through complex, layered holding structures? What approach should institutional investors with widely dispersed ownership take? Are listed companies expected to identify ultimate individual shareholders? Is it feasible for minority investments involving limited exposure to land border countries to secure approval? These uncertainties have contributed to a sustained period of regulatory ambiguity and hesitation among international investors.
In the latest update, the Government of India has announced measures that will (i) establish a clearer benchmark for assessing beneficial ownership; and (ii) expedite approvals for investments in select strategic manufacturing sectors, fostering greater confidence among investors.
CLARIFYING BENEFICIAL OWNERSHIP
Press Note 2 now expressly anchors determination of beneficial ownership to Section 2(1)(fa) of the Prevention of Money Laundering Act, 2002 (PMLA) and Rule 9(3) under the PMLA. This familiar test is already applied by banks and investors in their compliance procedures, promoting consistency across regulatory frameworks.
According to this framework, beneficial ownership is not solely determined by identifying a natural person holding more than 10% of shares or capital, but also extends to where persons or entities have the ability to exercise control over management or key policy decisions, including through shareholding, management rights, shareholders’ agreements, voting arrangements or other means of exercising ultimate effective control. Press Note 2 also provides that this assessment may be undertaken directly or indirectly, and individually or cumulatively. If no natural person can be identified, then the senior managing official is regarded as the beneficial owner. For entities listed on a recognised stock exchange in India (or certain notified foreign exchanges) or their subsidiaries, the framework exempts the identification and verification of underlying shareholders or beneficial owners, thereby facilitating smoother compliance.
This development is noteworthy because, under the previous conservative interpretation of Press Note 3, listed multinational companies were often required to trace and identify ultimate individual owners, even when this was not necessary for listed entities. Likewise, institutional investors with highly dispersed shareholdings faced challenges in meeting disclosure expectations. The government's adoption of the PMLA definition offers a more definitive and practical reference for identifying beneficial ownership.
Press Note 2 further specifies that investments involving non-controlling beneficial ownership from land border countries, which do not meet the applicable thresholds under Rule 9(3) of the PMLA, or confer control or ultimate effective control, will be eligible for the automatic route. However, such investments must still be reported by the investee entity to the Department for Promotion of Industry and Internal Trade. The reporting requirement introduces an additional transparency layer even where prior government approval is not required.
From an overall perspective, this clarification is likely to encourage re-engagement from Asian investors who previously hesitated due to the ambiguity concerning minority interests from land border countries, thereby enhancing the investment climate in India. At the same time, the reference to “non-controlling” beneficial ownership also suggests that contractual control rights or governance rights in favour of such investors may need to be considered carefully when structuring transactions.
Moreover, for select strategic sectors, the Press Release indicates that India will introduce an expedited approval process where land border countries are involved, with a 60-day timeline for government clearances. These sectors include capital goods manufacturing, electronic capital goods, electronic components, polysilicon manufacturing, and ingot and wafer manufacturing. The Government has signalled that this list may be expanded in future with cabinet approval. However, Press Note 2 does not incorporate the time bound fast track approval for priority sectors in its text, and so today it seemingly functions as a guiding policy, rather than as binding legal provisions. Investments involving land border countries outside these sectors are expected to continue to face longer approval timelines, maintaining a differentiated approach based on sectoral priorities.
BALANCING INTERESTS
These reforms are intended not only to provide greater certainty for international investors but also to streamline procedures in sectors deemed strategically important. Notably, the Press Release underscores that majority ownership and control of the investee entity must remain with resident Indian citizens or entities for the priority sectors seeking expedited 60-day government clearances. In effect, investments benefiting from this fast-track process must involve an Indian-owned and controlled investee, ensuring that key decision-making authority remains with Indian stakeholders.
In practice, this approach encourages joint ventures and similar structures where the Indian partner maintains majority control, while foreign investors participate as minority stakeholders. This arrangement preserves Indian oversight while still facilitating much-needed foreign investment.
This policy shift is significant, as even minority investments from land border countries previously encountered substantial hurdles in securing approval. The recent announcement indicates a more receptive stance from the authorities, especially for investments in sectors that are strategically vital to India’s growth and development.
Ultimately, these clarifications are poised to deliver much-needed assurance to investors while enabling India to fast track investments in priority areas, balancing regulatory oversight with the country’s economic ambitions.
IN SUMMARY
While the approval regime remains largely unchanged, the enhanced clarity brought by these recent policy changes is expected to stimulate stronger investor engagement, especially within the strategic sectors identified as priorities. This newfound transparency and certainty are likely to encourage investors who previously hesitated due to regulatory ambiguities.
The clarification permitting investors with beneficial owners having non-controlling interests of 10% or less from land border countries to proceed via the automatic route is likely to be welcomed by the investor community. In the past, numerous investment plans were derailed or abandoned due to the lack of such provisions, making this update especially significant for facilitating smoother investment flows.
It will be interesting to monitor the influence of these changes across Singapore, Hong Kong, and the broader Asian region. Following the introduction of Press Note 3, we had observed a widespread shift in investor behaviour however this development may now spur the emergence of additional Asian investment hubs targeting India, with a view to enhancing overall investment activity and fostering deeper regional economic integration.
