C&M E-ALERT: CABINET APPROVES AMENDMENTS TO FDI POLICY - INVESTMENTS FROM LAND BORDERING COUNTRIES (PRESS NOTE 3 of 2020)

BACKGROUND

Introduced during the COVID-19 pandemic to curb opportunistic takeovers of Indian companies, Press Note 3 of 2020 ("PN3") mandated prior approval from the government for all foreign direct investment, whether direct or indirect, where the investor or its beneficial owner is situated in or is a citizen of a country sharing a land border with India ("LBC")[1]. While the restrictions under PN3 were largely aimed at investments from China, in reality, these restrictions began to create significant roadblocks for Indian companies that were operating in sectors such as manufacturing and technology from procuring advanced technologies from Chinese companies in return for, inter alia, an equity participation.

AMENDMENT TO PN3

After six years and much anticipation over the last two years an expectation of easing of PN3 restrictions, the Union Cabinet on 10 March 2026 approved the much-anticipated easing of restrictions governing investments from LBCs (“Amendment”), and providing significant clarity to the framework established under PN3:

1. Definition and Criteria for "Beneficial Owner" determination

   • The amendment introduces a definition and criteria for determining the “Beneficial Owner” by drawing from the framework under the Prevention of Money Laundering Rules, 2005.

   • The beneficial ownership test is to be applied at the level of the investor entity. Investments where non-controlling beneficial ownership from LBCs does not exceed 10% will be permitted under the automatic route. Although permitted under the automatic route, such investments will have to be reported to the Department for Promotion of Industry and Internal Trade.

   • The extant policy under PN3 did not prescribe a clear threshold or definition of beneficial ownership. In practice, this created uncertainty because stakeholders often relied on different thresholds under Indian regulations, leading to inconsistent interpretations when assessing indirect investments from LBCs.

2. Expedited Clearance for Investments in Specified Sectors

   • Proposals for LBC investments in specified sectors such as manufacturing in capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer^[2]shall now be processed within 60 days.

   • In these cases, the majority shareholding and control of the investee entity must remain with resident Indian citizen(s) and/or resident Indian entities owned and controlled by resident Indian citizen(s), at all times.

WHAT THIS MEANS

The relaxation and clarifications introduced under the Amendment are expected to provide much-needed impetus to developing and non-sensitive sectors that have otherwise faced significant hurdles, particularly in situations where key Chinese technology was to be introduced into India alongside a minority equity stake.

This move is likely to significantly strengthen the Indo-Chinese technology and manufacturing corridor, benefiting Indian businesses and consumers alike, while also supporting the Government’s “Make in India” initiative and promoting greater ease of doing business in India.

While the detailed provisions of the Amendment are awaited in the form of a formal notification to PN3, stakeholders and businesses operating in sectors benefiting from the relaxation should begin assessing their holding structures and potential partnership opportunities with entities from LBC countries in order to take advantage of the Amendment.

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[1] LBCs include China (including Hong Kong), Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan

[2] The list of specified sectors may undergo revision, as mentioned in the Amendment.

The official Government press release can be accessed here: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2237806&reg=3&lang=2”

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