Reporting Relief: What Press Note 2 Of 2026 Means For Investment Funds

Executive Summary

India's Press Note No. 2 of 2026 ("Press Note 2") refines the current foreign direct investment ("FDI") regime applicable to investors connected with countries sharing a land border with India by introducing clarity on the definition for beneficial ownership and more importantly, by distinguishing between cases that require prior Government approval and cases that may proceed subject to reporting only. To clarify, the amendment continues with the framework introduced under Press Note 3 of 2020 ("PN3"), but brings in clarification that is particularly relevant for global private equity, venture capital and offshore fund structures with LPs from different countries.

Key Takeaways:

• The expression "beneficial owner" is now linked to the PMLA and Rule 9(3) of the PML Rules, and introduces a threshold-and-control-based analysis than a simplistic "land-border connection" test.
• The offshore fund structures with passive, non-controlling exposure may not require Government approval. However, reporting will still be required.
• Any subsequent upstream transfer resulting in beneficial ownership of any person or entity of a neighbouring country will require prior Government approval.

Existing Legal Position

PN3 was introduced in April 2020 to prevent opportunistic acquisitions of Indian companies during the economic disruption caused by the COVID-19 pandemic. It amended paragraph 3.1.1 of the Consolidated FDI Policy to provide that an entity of a country sharing a land border with India, or an investment where the beneficial owner was situated in, or was a citizen of, such country, could invest in India only under the Government Route. The same principle also applied to any transfer of ownership of existing or future FDI in an Indian entity if such transfer resulted, directly or indirectly, in beneficial ownership falling within the land-border restriction.

In practice, PN3 created a broad screening net. The restriction was not confined to direct investments from neighbouring jurisdictions, but also affected indirect structures such as offshore pooling vehicles, PE/VC funds and intermediate holding entities where some degree of economic participation or beneficial interest could be traced to a land-border jurisdiction. Because the FDI policy did not itself define "beneficial owner", the result was significant interpretational uncertainty, and many transactions were approached conservatively on the assumption that approval would be required.

Revised Legal Position

Press Note 2 retains the core rule that investments from entities or citizens of countries sharing a land border with India, or investments whose beneficial owner falls within that nexus, remain subject to the Government Route. However, it now introduces an express definition of "beneficial owner" by linking the concept to Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 ("PMLA") and the criteria prescribed under Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 ("PML Rules"). This, effectively, replaces the open-ended concept with a clear definition.

The Press Note 2 also clarifies that beneficial ownership will be treated as vested in a land-bordering country where citizens or entities of such country have the ability, directly or indirectly, individually or cumulatively, independently or collectively, whether acting together or otherwise, to:

1. hold rights or entitlements above the applicable Rule 9(3) threshold in the offshore investor entity;
2. exercise control over that investor entity; or
3. exercise ultimate effective control over the Indian investee entity in any manner.

The analysis therefore now turns on threshold, control and ultimate influence, rather than on a broad associative link.

A comparison of the earlier formulation under PN3 and the revised language under Press Note 2 indicates a subtle but important shift in drafting, particularly in relation to the scope of persons covered.

Under PN3, the restriction applied where the beneficial owner of an investment was "situated in or is a citizen of" a land-border country, which was generally interpreted in line with FEMA principles to cover residency-based linkages (i.e., persons resident in such jurisdictions) as well as citizenship.

In contrast, Press Note 2 appears to narrow and, at the same time, sharpen the test by expressly referring to:

• "entity or a citizen of a country which shares land border with India", and
• beneficial owner being a "citizen of any such country",

while dropping the earlier reference to persons "situated in" such countries.

However, this remains an evolving position, and the final contours, particularly on whether citizenship alone (without residency nexus) is sufficient to trigger restrictions, will depend on the implementing FEMA amendments and regulatory guidance.

Reporting of Passive Investments

A significant feature of Press Note 2 is the creation of a separate reporting category. The Press Note provides that investments into India from an investor entity having any direct or indirect ownership by a citizen or entity of a country sharing a land border with India, but not requiring prior approval under the substantive restriction, shall instead be subject to reporting. Earlier, any upstream land-border nexus would typically be viewed conservatively thereby, triggering Government Route. However, the Press Note now recognises a distinction between material or control-linked exposure, which remains in the approval bucket, and remote or passive non-controlling exposure, which only requires reporting but not prior Government approval.

This allows overseas entities with up to 10% non-controlling land-border exposure to invest under the automatic route, subject to applicable conditions and reporting.

Some Illustrations From Funds Perspective

A Singapore-domiciled venture capital fund proposing to invest in an Indian technology company, where one limited partner is a Chinese institutional investor with an 8% passive economic interest, but no board nomination rights, no veto rights, no control over the general partner and no side letter conferring governance influence. Basis our reading of the Press Note 2, such a structure is more likely to fall within the reporting bucket than the prior approval bucket, because the land-border nexus exists but the stake may remain below the relevant beneficial ownership threshold and is not accompanied by control rights.

A Mauritius SPV proposes to invest into an Indian business and a Chinese investor holds 12% rights or entitlement in the SPV, or enjoys contractual rights amounting to control over the SPV's investment decisions. The upstream arrangement will result in indirect ultimate effective control over the Indian investee. In such a case, the beneficial ownership test under Press Note 2 is likely to be triggered, and the inbound investment would continue to require prior Government approval.

If an Indian company has already received FDI from a non-land-border jurisdiction, but a later secondary sale, fund restructuring, internal reorganisation or upstream transfer results in beneficial ownership shifting into a restricted land-border nexus, Press Note 2 expressly provides that such subsequent change in beneficial ownership will require prior Government approval. This is extremely relevant for continuation funds, LP transfers, co-invest transfers and exit restructurings.

Practical Implications for Investment Funds

For investment funds, the immediate implication is that India-facing structuring and diligence will have to analyse factors such as beneficial ownership, control and ultimate effective control, rather than simplistic "land-border connection". The revised framework would allow the funds to distinguish between passive upstream exposure that may only require reporting and material or control-linked exposure that continues to require prior approval.

In practical terms, fund sponsors will need to examine at least four issues closely:

1. The quantum of rights or entitlement held by land-border investors in the offshore investor entity must be measured against the Rule 9(3) framework referenced in the Press Note.
2. Whether any investor has negative control, governance vetoes, board influence or similar rights that may elevate a passive economic stake into a control analysis.
3. Review of Side letters, advisory arrangements and co-investment rights to determine whether they could be read as conferring ultimate effective control.
4. Even where approval is not triggered, the relevant reporting requirements will need to be observed, once the FEMA implementation and operational mechanics are notified.

The amendment also has implications beyond the initial entry point. Funds will need to monitor upstream transfers, LP secondary sales, GP restructurings, continuation fund rollovers and internal reorganisations that may alter the beneficial ownership profile after closing. Since Press Note 2 specifically states that a later transfer resulting in beneficial ownership falling within the restriction requires prior Government approval, the compliance analysis cannot end once the first inbound investment has been completed.

Conclusion

Press Note 2 itself states that the revised policy position will take effect from the date of the relevant FEMA notification. Accordingly, while the policy direction is now clear, we will have to wait for the implementing FEMA amendments, reporting format and portal-level mechanics.

Press Note 2 of 2026 provides some relaxation for offshore funds and diversified global investment vehicles with only passive or immaterial land-border exposure. For investment funds, the key distinction going forward will be between material beneficial ownership or control, which remains in the approval bucket, and residual non-controlling exposure, which may move into the reporting bucket.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.