In 2020 through Press Note No. 3 (2020 Series) (“PN 3”), in order to curb “opportunistic takeovers/acquisitions of Indian companies” due to the COVID-19 pandemic, the Indian Government required an entity of a country which shared land border with India (“LBC”) or where the beneficial owner (“BO”) of the investment in India was situated in an LBC or a citizen of an LBC, to invest through the Government route only.

Applicability of PN 3 restrictions to LBC investors having only minority, non-strategic, non-controlling interests has been adversely affecting investment flows from investors including global funds such as private equity funds from Hong Kong and many representations have been made to the Government to relax the stringent condition of requiring prior government approval for such investments. Not only was the approval process tedious, it also substantially slowed down the investments from these jurisdictions.

The aforesaid position now stands relaxed and clarified vide the Press Note No. 2 (2026 Series) (“PN 2”) with the following key changes:

1. ‘Beneficial Owner’ Definition

PN 2 now specifies that BO shall have the definition as prescribed under the Prevention of Money Laundering Act, 2002 (“PMLA”)¹ and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PMLR”) (collectively “PML Regime”). In the case of a company, a BO is the natural person, who alone or together, or indirectly, has a controlling ownership interest² or exercises control³.

BO was not defined under PN 3 which led to varied application by the industry and regulators borrowing the concepts from the PML Regime (as described above) and the Companies Act, 2013 (vis-à-vis the expanded criteria prescribed for identification of a significant beneficial owner). This often led to inconsistent outcomes particularly when it came to complex multi-layered investment structures involving offshore funds, where tracing ultimate beneficial ownership was not always a straightforward analysis.

In view of the new amendments, BO of the investment will be deemed to vest in an LBC if the citizen of an LBC, and/or entity registered in an LBC, can directly or indirectly, individually or cumulatively, independently or collectively, whether acting together or otherwise, hold rights/entitlements:

• in excess of the applicable thresholds prescribed under Rule 9(3) of the PMLR over an investor entity which is registered in a country other than an LBC; or
• which enable such citizen and/or entity to exercise control over the investor entity referred above; or
• which enable such citizen and/or entity to exercise ultimate effective control over the investee entity in any manner.

Owing to the clarification, the assessment of BO is not just limited to shareholding percentage held in an investing company, but reference will also be made to cumulative exercise of control through the board of directors, or over the management or policy decisions and the exercise of ultimate effective control over the investee company. The incorporation of the PML Regime thresholds introduces a quantitative baseline, however it does not eliminate interpretational complexity since there still exists a dual test wherein both controlling ownership interest (which is straight-forward) and control (which is a subjective assessment) need to be assessed.

Further, PN 2 clarifies that “the expression ‘beneficial owner’ of an investment into India shall mean the beneficial owner(s) of the investor entity incorporated or registered in a country other than an LBC.” Therefore, if an entity is incorporated/registered in an LBC or an LBC citizen intends to directly acquire nominal stake in an eligible Indian entity, such an investment continues to require prior government approval. This is because the relaxation introduced under PN 2 is limited to cases where the investment is routed through a non-LBC entity and the LBC nexus is created only at the level of beneficial ownership, subject to the prescribed thresholds.

2. Relaxations

With clarification of the definition of BO (as above), investors with non-controlling beneficial ownership of up to 10% or control from LBCs will now be able to invest through the automatic route.

However, while the relaxation for non-controlling investments up to 10% is a welcome development, it still does not act as a blanket exemption. For instance, even if an investor does not hold controlling ownership interest (as defined in PML Regime) but exercises ‘control’ in the form of affirmative rights, board representation, influence over managerial decisions etc. it would still have to come through the government route.

Furthermore, the PN 3 restrictions vis-à-vis BOs were triggered in cases where the BO was “situated in or is a citizen” of an LBC. Now, the restriction is triggered only in case the BO is a citizen of an LBC. The intention of the Government is to exclude individuals who may not be citizens of an LBC, but are only residents, from the ambit of restrictions.

PN 2 still retains the core principles and restrictions of PN 3 and subject to the above exception, investments by entities/citizens of LBCs continue to require prior government approval even in cases where a subsequent change in ownership occurs and the transfer of ownership, whether directly or indirectly, results in beneficial ownership shifting to a person or entity from an LBC. Restrictions on investments from Pakistan also continue to apply.

3. Additional Compliance

Where investments do not have any direct or indirect ownership thresholds by a citizen/entity in an LBC and do not require prior government approval, such investments are subject to a reporting requirement as per the standard operating procedure laid down by the DPIIT⁴. The introduction of a reporting requirement for such LBC investments, even where government approval is not required, indicates the intent of the Government to maintain checks and balances as opposed to a complete deregulation.

Sector Specific Expedited Clearance

In its Press Release dated March 10, 2026, the Cabinet also stated that LBC investments for specified sectors of manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer would be processed and decided within 60 days. The aforesaid list may be revised by the Cabinet.

The majority shareholding and control of the investee entity in these sectors would continue to remain with resident Indian citizens and/or resident Indian entities owned and controlled by resident Indian citizens.

The above statements have however not been included in PN 2 and therefore appears to be only recommendatory.

LC Comments

PN 2 eases the FDI regime and codifies the BO concept while preserving the core principles embodied in PN 3. The Government expects PN 2 to provide clarity and ease of doing business in India, facilitate foreign investment, provide impetus to manufacturing sector and make India an attractive investment destination.

The revised position as per PN 2 shall be effective on the issuance of the Amendment Rules to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

Endnotes:

^[1] “beneficial owner” means an individual who ultimately owns or controls an entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person.

² “Controlling ownership interest” means ownership of or entitlement to more than 10% of shares or capital or profits of the company.

³ “Control” shall include the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

⁴ Department for Promotion of Industry and Internal Trade.