India’s Press Note 3 Framework Revisited: Investments From Land Bordering Countries

Introduction

Managing foreign investment has always been a balancing act for India, as it seeks to encourage capital inflows on the one hand while protecting national interest on the other. Foreign investment into India is governed by the Foreign Direct Investment (“FDI”) framework, which primarily includes the Consolidated FDI Policy and the Foreign Exchange Management Act, 1999 read with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

On 10 March 2026, the Government of India issued a Press Release (“Press Release”) stating that the Union Cabinet has approved amendments to the FDI framework with respect to investments from countries sharing land border with India (“LBCs”). The proposed amendments aim to unlock greater FDI inflows from global funds as well as address certain ambiguities that arose from the rules laid down by Press Note No. 3 (2020 Series) dated 17 April 2020 (“PN3”). In pursuance of this, the Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry has issued Press Note No. 2 (2026 Series) dated 15 March 2026 (“Press Note 2”) amending Para 3.1.1 of the Consolidated FDI Policy which deals with investments from LBCs. It must be noted that the changes brought about by Press Note 2 shall take effect once a formal notification under the Foreign Exchange Management Act, 1999 amending the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 comes into force.

The Uncertainties under the PN3 Regime

PN3 was introduced during the COVID-19 pandemic and was applied to direct or indirect investments from countries sharing land border with India such as China, Pakistan, Afghanistan, Bangladesh, Nepal, Bhutan and Myanmar. Briefly, the PN3 mandated that any direct or indirect investment into India where the money could be traced back to one of the LBCs required prior government approval. While the intent behind PN3 was to curb opportunistic takeovers/acquisitions of Indian companies due to the pandemic, it led to certain issues in practice.

One of the primary issues that arose was the conundrum around the ambit of “beneficial ownership”. PN3 provided that an entity of a country, which shares land border with India 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. While the PN3 rule triggered when the beneficial ownership vested in an LBC jurisdiction investor, the law never explained any minimum threshold or any parameter to identify the same. Accordingly, in practice, divergent approaches emerged in the market wherein some investors relied on the definitions available under other legislations and some investors applied a more conservative approach where even minor holdings which could be traced back to LBCs were often interpreted to trigger the requirement of government approval. The lack of definitional clarity effectively pushed a large volume of transactions into the government approval route, when many of which may not have warranted it, creating bottlenecks that slowed investment inflows from LBCs.

This regulatory gap created tangible difficulties across the investment community. Global private equity funds as well as entities with only non-strategic and non-controlling LBC-linked interests found themselves potentially caught within PN3’s reach, often without any substantial nexus to an LBC jurisdiction.

Key Changes under the March 2026 Amendments

The revised framework under Press Note 2 introduces certain key changes as described below:

1. Definitional Clarity on Beneficial Ownership

Press Note 2 has now expressly laid down that the expression “beneficial owner” shall have the same meaning as ascribed to it under section 2(1)(fa) of the Prevention of Money-Laundering Act, 2002 (“PMLA”) and shall be determined as per the criteria stipulated under Rule 9(3) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”). It is pertinent to note that in terms of the PML Rules, a beneficial owner broadly means a natural person who, whether acting alone or in concert, has a controlling ownership interest (i.e. more than 10% of shares or capital or profits) or who exercises control through other means (such as right to appoint majority of the directors or to control the management or policy decisions including by virtue of shareholding or management rights or shareholders agreements or voting agreements).

With respect to the above alignment with the PML Rules, Press Note 2 clarifies that the beneficial ownership of an investment will be construed to be vested in an LBC if citizens and/or entities from an LBC have the ability to directly or indirectly, hold rights/entitlements:

• in excess of the applicable thresholds prescribed under Rule 9(3) of the PML Rules over an investor entity which is incorporated or registered in a country other than an LBC; 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.

Consequently, investors with non-controlling LBC beneficial ownership of up to 10% will not require prior government approval mandated by PN3 earlier. Such investments can proceed through the automatic route as per the applicable sectoral caps, entry routes and attendant conditions. It is notable to reiterate here that as per Press Note 2, the “control” test remains a critical trigger for government approval requirement. In effect, regardless of an LBC investor’s ownership interest being under the 10% threshold (as per PML Rules), such investor’s ability to exercise control through other means (such as right to appoint majority of the directors or to control the management or policy decisions) may still necessitate the requirement of prior government approval.

2. New Reporting Requirement

As per Press Note 2, any investment into India from an investor entity having direct or indirect ownership by a citizen or an entity from an LBC and not requiring government approval under the revised framework must comply with a new reporting requirement in the format prescribed under the Standard Operating Procedure laid down by the DPIIT. It is pertinent to mention here that this reporting requirement is in addition to compliance with the applicable sectoral cap, entry route and attendant conditions.

Other Considerations

The Press Release which preceded Press Note 2 proposed another change pertaining to approval timelines. The Press Release proposed a 60-day deadline for processing LBC investment approval applications in certain specific sectors i.e. manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer. These were not arbitrary choices as they sit at the heart of India’s domestic manufacturing agenda and its effort to build resilient supply chains, particularly in the semiconductor and clean energy space. One may expect that the Government may come out with further guidelines in this regard in the near future.

A separate and equally significant layer of compliance arises under the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022, which mandates that any individual who is a citizen of an LBC must obtain prior security clearance from the Ministry of Home Affairs before being appointed as a director of an Indian company. Notably, Press Note 2 leaves this requirement wholly untouched. The practical consequence is that an investment may satisfy the revised thresholds and qualify for the automatic route, yet the same investor may still be required to navigate the security clearance process if it seeks board representation through a citizen of an LBC.

Conclusion

The proposed amendments to PN3 are a positive and long-overdue step and stakeholders must keep an eye on the forthcoming FEMA notifications for implementation of these amendments. Introducing the threshold-based clarity by alignment with the PML Rules gives investors and businesses the certainty they have been asking for since 2020, and should make a significant difference to how cross-border deals involving global funds are structured. Prior to this amendment, there was no codified threshold and deals that should have been straightforward were often delayed simply because no one could say with confidence whether a particular structure would trigger PN3 scrutiny or not. The benchmark provided now puts that ambiguity to rest and also brings the rule into alignment with the threshold already recognized under India's Anti-Money Laundering framework, which is a welcome step towards regulatory consistency across different regimes.

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