Border Games: India Recalibrates Its FDI Framework

On March 10, 2026, the Union Cabinet, through a Press Release, approved an amendment to the foreign direct investment (the "FDI") policy concerning investments from countries sharing land borders with India (Land Bordering Countries or "LBCs").

The Union Cabinet sought to clarify key aspects of the Press Note 3 framework, including the approach to determining beneficial ownership and the introduction of a time-bound approval process (for a select few sectors, as of now). These clarifications are aimed at addressing practical uncertainties affecting global investment structures while preserving the national security safeguards underpinning the regime.

Pursuant to this, the Department for Promotion of Industry and Internal Trade (the "DPIIT") has now notified Press Note No. 2 (2026 Series) ("PN2") on March 15, 2026, amending the Consolidated FDI Policy, 2020 dated 15.10.2020 (the "FDI Policy").

WHAT WAS AND WHAT HAS CHANGED?

Background: Press Note 3 (2020)

Press Note 3 (of 2020) ("PN3") was introduced on April 17, 2020, during the COVID-19 pandemic to curb opportunistic acquisitions of Indian companies. Foreign direct investments from entities in LBCs, or from entities whose beneficial owners were situated in or were citizens of LBCs, required prior government approval.

Ambiguity: "Beneficial Ownership" was undefined

A significant challenge under PN3 was the absence of a defined threshold or criteria for determining 'beneficial ownership'. In the absence of such clarity or reference to any statute, market participants and stakeholders relied on the interpretation of the term 'Significant Beneficial Owner' as set out under the Companies Act, 2013 (the "Act") and the term 'Beneficial Owner' as defined in Prevention of Money Laundering Act, 2002 (the "PMLA") read with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (the "PML Rules"). The objective of identifying beneficial owners under both the Act and PMLA was broadly aligned; however, there existed a divergence with respect to how beneficial ownership was defined under each of these legislations. With respect to companies, the Act prescribed an ownership threshold of 10% (ten percent) whereas the PMLA prescribed a higher threshold of 25% (twenty five percent) to identify beneficial owners.

This divergence was subsequently addressed through an amendment to the PMLA dated March 07, 2023, pursuant to which the definition of 'beneficial owner' was revised to reduce the threshold for controlling ownership in case of a company, from 25% to 10%. A corresponding change was also introduced in the KYC norms through an amendment dated April 28, 2023, issued by the Reserve Bank of India.

The March 2026 Amendments: Two Key Changes

The Union Cabinet approved two pivotal amendments to the PN3 restriction, and the PN2 incorporates one of them into the FDI Policy. These are elaborated below.

1. Clarification with respect to beneficial ownership: level of application and thresholds

The March 2026 amendments formally adopt the definition and criteria for determining a "beneficial owner" as provided under the PMLA – this is the first time that this concept has been formally recognised under the FDI framework.

It is further clarified that the test of beneficial ownership shall be applied at the level of the investor entity which is not incorporated or registered in an LBC.

PN2 clarifies that the beneficial ownership of an investment will be considered to be from an LBC, if citizens or entities from the relevant LBC have the ability to directly or indirectly, individually or cumulatively, individually or collectively, acting together or otherwise, hold rights/entitlements:

1. in excess of the applicable thresholds under Rule 9(3) of the PML Rules; or
2. which enable such persons to exercise control over the investor entity; or
3. which enable such persons to exercise ultimate effective control over the investee entity in any manner.

Lastly, it is also clarified that investments by an investor having any direct or indirect ownership from citizens or entities from LBCs and not requiring prior government approval under the revised FDI framework, are subject to reporting requirements as per the 'Standard Operating Procedure' laid down by the DPIIT, and that these conditions are over and above the applicable sectoral caps, entry routes, and attendant conditions for FDI.

2. Expedited Clearance for LBC Investments in Specified Sectors

As per the Union Cabinet's approval, the LBC investment proposals for investment in entities engaged in specified manufacturing sectors/activities shall be processed and decided within 60 (sixty) days. The list of such sectors/activities may be revised from time to time. The sectors/activities currently specified are:

• Capital goods;
• Electronic capital goods;
• Electronic components;
• Polysilicon and ingot-wafer manufacturing.

The March 2026 amendments have also clarified that to be eligible for the aforementioned expedited clearance process, the relevant investee entities must be Indian owned and controlled, at all times. However, PN2 has not incorporated these amendments to the FDI Policy.

CONCLUSION

It is now clear that the PMLA criteria will have to be applied to any foreign investor undertaking FDI in India, irrespective of the percentage of its shareholding in the investee entity.

While clarifying that the PMLA test is to be applied to determine the beneficial owner of the investor, the amendment separately introduces 3 (three) additional limiting conditions with respect to such beneficial ownership. Any foreign investor with beneficial owners from LBCs on their shareholding table may still invest through the automatic FDI route, provided that (a) such beneficial ownership does not exceed the applicable ownership thresholds prescribed under Rule 9(3) of the PML Rules; (b) such beneficial ownership is not accompanied by the ability to exercise control over the investor through any other means, and (c) such beneficial ownership is not accompanied by the ability to exercise ultimate effective control over the investee entity in India in any manner.

With the introduction of the criteria (c) mentioned in the paragraph above, further clarity is required with respect to scenarios involving foreign investors with multi-layered ownership structures. It remains unclear how the test of ultimate effective control will be applied, and whether the chain must be traced to identify the natural persons who are beneficial owners of the foreign investor.

The Union Cabinet's intent to introduce expedited approval mechanisms for manufacturing in specified sectors aligns with the Government's policy initiatives such as "Make in India" and "Atmanirbhar Bharat". In particular, the identification of polysilicon and ingot-wafer manufacturing is a clear step towards India's targeted policy effort to strengthen domestic semiconductor capabilities under the India Semiconductor Mission 2.0. At the same time, while the framework seeks to facilitate foreign capital inflows, the requirement of the investee entity not being foreign owned or foreign controlled represents a fine-tuned policy approach, which allows access to foreign capital while ensuring domestic ownership and control is maintained at all times in strategically sensitive sectors.

From a policy standpoint, the March 2026 amendments reflect maturity in India's regulatory approach, transitioning from broad-based restrictions introduced during the pandemic to a more nuanced framework that distinguishes between strategic concerns and commercial investments. The press release and the PN2 indicates that the changes will take effect only upon notification under the Foreign Exchange Management Act, 1999 (the "FEMA"). Therefore, stakeholders should closely monitor the forthcoming FEMA notifications and evaluate their investor structures to assess eligibility under the new framework, including with respect to sector specific expedited processing framework.

Please find attached a copy of the Press Note, here.

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