C&M E-ALERT: PRESS NOTE 2 OF 2026 RELEASED – RELAXATION FOR INVESTMENTS FROM LAND BORDERING COUNTRIES

BACKGROUND

Press Note 3 (2020) ("PN3") was issued by the Department for Promotion of Industry and Internal Trade ("DPIIT") in April 2020, primarily to curb opportunistic takeovers and acquisitions of Indian companies during the COVID-19 pandemic. PN3 amended Para 3.1.1 of the Consolidated FDI Policy Circular of 2020 ("FDI Policy") to require all investments from countries sharing a land border with India ("LBCs")[1] to be made only under the Government route, i.e., with prior approval of the Government of India. Any transfer of ownership of existing or future foreign direct investment ("FDI") in an Indian entity resulting in beneficial ownership falling within an LBC similarly required Government approval.

While PN3 served its intended purpose, its provisions required tweaking to address practical concerns that had arisen in their application. On 10 March 2026, the Union Cabinet approved the changes to the restrictions governing investments from LBCs (“Press Release”)[2] and now the DPIIT has issued Press Note No. 2 (2026 Series) ("PN2"), formally amending Para 3.1.1 of the FDI Policy to address certain concerns stemming from PN3.

AMENDMENTS INTRODUCED BY PRESS NOTE 2

1. Definition of “Beneficial Owner”

• Position under PN3: PN3 did not define "Beneficial Owner", leaving investors without a clear and objective parameter to assess their structures.

• New Position under PN2 (2026): PN2 introduces a new Para 3.1.1(c), defining "Beneficial Owner" of an investment into India as the beneficial owner(s) of the investor entity incorporated or registered outside a land bordering country, having the same meaning as assigned under Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 and determined as per the criteria under Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 ("PML Rules").

PN2 further sets out a three-limb test under which beneficial ownership shall be construed as vested in an LBC. This arises where citizens or entities of an LBC have the ability to, directly or indirectly, individually or cumulatively, independently or collectively, hold rights or entitlements:

• in excess of the applicable thresholds prescribed under Rule 9(3) of the PML Rules over the investor entity[3] which is incorporated or registered in a country other than a country sharing land border with India; or

• which enable such citizen(s) and/or entity(ies) to exercise control over the investor entity referred above; or

• which enable such citizen(s) and/or entity(ies) to exercise ultimate effective control over the investee entity in any manner.

C&M View

The introduction of a clear threshold for determining beneficial ownership is perhaps the most significant change. One of the key challenges faced by global PE/VC funds and other investors under PN3 was assessing whether their investments were subject to the investment restrictions, considering PN3 did not prescribe any definitive threshold for determining when an investor would be regarded as being from an LBC and thereby subject to the Government approval route.

This amendment may raise some concerns for existing investors who made investments in India following the introduction of PN3 without obtaining prior Government approval, on the assumption that the investment restriction applied only where the ownership interest of investors from LBCs in the investee entity exceeded 10% (relying on the PML Rules). In practice, it was not uncommon for investors to rely on such an interpretation where the LBC shareholding was below this threshold.

With PN2 now expressly linking the determination of “beneficial ownership” to the thresholds under Rule 9(3) of the PML Rules, the Government has provided long-awaited clarity on the manner in which beneficial ownership should be assessed for investments involving entities from countries sharing a land border with India. While market participants had, in practice, often relied on the PML Rules thresholds even prior to this amendment, PN2 now formally incorporates this standard into the FDI Policy.

An illustrative explanation of the beneficial ownership principles laid down in PN2 is as follows:

Scenario 1

• Singapore HoldCo → invests in Indian company

• Shareholding of Singapore HoldCo:

  • US investor - 60%

  • Singapore citizen - 31%

  • Chinese investor - 9%

•  Chinese investor does not have control over the Singapore HoldCo

Result:

• In the above case, the Chinese investor does not cross beneficial ownership threshold and control threshold.

• Therefore, the investment by Singapore HoldCo may not trigger Government approval.

Scenario 2 -

• Chinese Investor → 9% stake in Cayman fund without control

• Cayman fund → 100% stake in Singapore SPV

• Singapore SPV → invests in India

If:

• Chinese investor does not have ability to exercise control over the fund; and

• Chinese investor’s ownership interest remains below 10%

Result:

• Investment may not be regarded as having beneficial ownership from LBC.

Stakeholders should note that the ‘control’ test continues to apply. As also highlighted in PN2, even where the ownership interest of an LBC investor is below 10%, prior Government approval may still be required if the investor is able to exercise control through rights such as the appointment of directors, veto rights, or other governance rights. Accordingly, investment structures should ensure that the LBC investor does not have board representation, veto rights, or any other direct or indirect control rights.

2. Applicability of Restrictions on LBC Investments

• Position under PN3: PN3 provided that an entity of an LBC, 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.

• New Position under PN2 (2026): PN2 amends this provision to apply where the beneficial owner "is a citizen of" any such country, deliberately omitting the words "situated in". This is a substantive and meaningful narrowing of scope.

C&M View

Under PN3, the requirement to obtain prior Government approval applied not only to citizens of LBCs, but also to persons who were merely resident in such countries. Consequently, individuals who were not citizens of an LBC but happened to reside or be domiciled there were also brought within the scope of the Government route requirement.

PN2 significantly narrows the scope of this restriction by limiting the requirement to citizens of LBCs. This revision represents a notable relaxation in the restrictions, as it removes the approval requirement for a class of investors whose connection with an LBC may be incidental or temporary.

3. New Reporting Obligations for Investments under Automatic Route

PN2 introduces a new Para 3.1.1(d), providing that investments into India from an investor entity having any direct or indirect ownership by a citizen or entity of an LBC, and not requiring prior Government approval, shall be subject to a reporting requirement in the format prescribed under a Standard Operating Procedure ("SOP") to be laid down by DPIIT. This reporting obligation is in addition to compliance with applicable sectoral caps, entry routes, and attendant conditions.

C&M View

This is an important new compliance requirement under the foreign investment framework. Even where an investment is permitted under the automatic route and is not subject to prior Government approval, investors would still be required to comply with the reporting and procedural requirements that may be prescribed. Accordingly, investors should ensure that such reporting obligations, once notified, are complied with in a timely manner.

GOING FORWARD

As noted in the Press Release approving the amendments to the FDI Policy, the Government indicated that investments by LBC entities in specified sectors such as capital goods, electronic capital goods, electric components, polysilicon, and ingot-wafer, would be eligible for an expedited approval process, with such proposals to be processed within 60 days. It is expected that the Government will issue further details as part of the revised SOP to be released by the DPIIT.

Stakeholders should note that the changes brought by PN2 will take effect only from the date on which the corresponding amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 is notified.

OUR ANALYSIS

While the changes introduced by PN2 are significant and favourable for investors, many stakeholders had also anticipated amendments providing for a higher threshold up to 49% for investments permitted under the automatic route in sectors such as referenced in the Press Release, which are critical for Indian markets and consumers, especially where joint ventures and technology collaborations are required with higher equity participation from foreign investors.

The relaxations are also expected to boost the start-up ecosystem in India with minority investments without control from LBCs as permitted under the PN2.

Overall, PN2 represents a meaningful step towards rationalising the regulatory framework governing investments from LBCs, addressing several long-standing concerns that had arisen from the applicability of PN3. The amendments mentioned in the PN2 will provide the much-needed fillip to FDI inflows and technical advancements from LBCs into India.

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

[2] Link to our earlier update on the Press Release: https://www.chandhiok.com/post/c-m-e-alert-cabinet-approves-amendments-to-fdi-policy-investments-from-land-bordering-countries

[3] “Controlling ownership interest” means ownership of or entitlement to more than ten per cent of shares or capital or profits of the company

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