Amendments In FDI Policy In Relation To Investments From Countries Sharing Land Border With India

BACKGROUND

1.1 PressNote2dated17.4.2020:

• In order to curb opportunistic takeovers / acquisitions of Indian companies due tothe COVID-19 pandemic, the Government of India had amended the FDI Policy vide Press Note3(2020)dated17.04.2020(‘PN3’).
• Pursuant to PN3, the following investments in India required prior approval of the Government of India:
  1. Investment by an entity of a country, which shares land border with India (‘LBC’); or
  2. Where the beneficial owner of an investment into India is situated in or is acitizen of any such country,
• However,PN3gaverisetosignificant interpretational challenges. In particular, it did not define the concept of ‘beneficial ownership’ nor prescribe any threshold. Consequently, even relatively small minority interests held by shareholders in LBC jurisdictions could potentially trigger the Government approval requirement.
• This created practical difficulties, especially for financial investors, as investment structures could inadvertently fall within the ambit of PN3 merely duetothepresenceofinvestorsorshareholdersfromLBC jurisdictions.
• In the absence of any clarity with respect to the concept of ‘beneficial ownership’, certain market participants adopted the view that PN3 may apply only to investments exceeding 10%, by drawing an analogy to thresholds prescribed underthePreventionof Money Laundering Rules,2005.
• However, there was no explicit recognition of such a threshold under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”).
• In the absence of any formal guidance, many foreign investors opted to file approval applications with the Government as a matter of abundant caution, which in  turn, adversely impacted deal timelines and overall deal certainty.

1.2 PressReleasedated10.3.2026:

• Considering the ambiguity in PN3, the Government of India issued a press release (‘Press Release’) on 10.3.2026 notifying Cabinet approval regarding changes in the extant guidelines on investments from countries sharing land borderwithIndia whichprimarilyincludedthefollowing:
  1. Incorporation of the definition and criteria for determination of ‘Beneficial Ownership’
  2. Expeditedclearanceof investmentsin specific sectors

1.3 PressNote2dated15.3.2026:

• Consequently, the Department for Promotion of Industry and Internal Trade (‘DPIIT’) issued Press Note No. 2 (2026 Series) (‘PN2 of 2026’) on 15.3.2026 amending the Consolidated FDI Policy Circular of 2020 dated 15.10.2020 (‘FDI Policy’) in relation to cross-border investments originating from or involving beneficial owner from countries sharing land border with India.

The key changes introduced through PN2 of 2026 are summarized below.

KEY AMENDMENTS

2.1 Incorporation of thecriteriafor determination of ‘Beneficial Owner’

• It has now been clarified that the expression ‘beneficial owner’ of an investment into India shall mean the beneficial owner of the investor entity incorporated or registered in a country other than a country which shares a landborder with India.
• Itisfurtherclarified that:
  • The term ‘beneficial owner’ shall have the same meaning as defined under Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 and
  • Such beneficial ownership shall be determined in accordance with the criteria prescribed under Rule 9(3) of the Prevention of Money-laundering (Maintenanceof Records)Rules,2005(“PMLARules”).
• Beneficial Ownership of the investment into India shall be considered to be vested in a country sharing land border with India if
  • citizen(s)of acountrysharinglandborderwithIndia,or
  • entity(ies) incorporated or registered in a country sharing land border with India

has the ability to, directly or indirectly, individually or cumulatively, independently or collectively, whether acting together or otherwise, hold any rights or entitlements -

1. in excess of the thresholds prescribed under the PMLA Rules (discussed below) in theforeigninvestor;OR
2. which enable such citizen and / or entity to exercise control over the foreign investor;OR
3. which enable such citizen and / or entity to exercise ultimate effective control overthe Indian investeeentityin anymanner.

• Withrespecttothresholds, while thePMLARules providedetailedguidance for different types of entities (e.g., companies, partnership firms, etc.), they generally prescribe a beneficial  owner ship threshold of more than 10%.
• Accordingly, investors from LBC having non-controlling beneficial ownership up to 10% shall be permitted under the automatic route. The said beneficial ownership test shall be appliedatthe levelofthe foreigninvestor.
  
  (For the purposes of the above, the term “foreign investor” refers to an entity incorporated or registered in a country other than a country sharing a land borderwithIndia.)

2.2 ReportingObligation:

• It is provided that investment made in India by foreign investors, with any direct or indirect ownership of a citizen or entity from LBC, which does not require prior Government approval, shall be subject to reporting requirement in theformataspertheStandardOperatingProcedurelaiddownbyDPIIT.
• While PN2 of 2026 does not prescribe the format and process for such reporting, it is expected that the same to be prescribed by the DPIIT in due course.

2.3 Expeditedclearanceof investmentsin specificsectors:

• It is provided in the Press Release dated 10.3.2026 that proposals for LBC investments in specified sectors / activities of manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer, shall be processedanddecidedwithin60days.
• Inthese cases, the majority shareholding and control of the Indian Investee company should remain with resident Indian citizens and / or resident Indian entities ownedandcontrolledby residentIndian citizensatalltimes.
• Theabovementioned timeline for investments specific sectors is provided in the Press Release dated 10.3.2026, but the same has not been included in PN2 of 2026. It is expected that this may be prescribed by the DPIIT in due course.

AURTUS COMMENTS

• The introduction of a defined 10% threshold is a long-awaited and welcome clarification for financial investors having investors from LBC.
• Therevisedguidelines areanticipated to enhance clarity and improve the ease of doing business in India, enabling investments that can drive higher FDI inflows, facilitate access to advanced technologies, promote domestic value creation, support the growth of Indian enterprises, and strengthen integration with globalsupplychains.
• These measures are expected to bolster India’s position as a competitive and attractive hub for investmentandmanufacturing.
• However, multi-layered investment structures may still require additional clarity. The Press Release does not clarify treatment of indirect ownership via intermediateholding companiesin LBC jurisdictions.
• The revised framework provided vide the Press Release and PN2 of 2026 is expected to be followed by corresponding amendments to NDIRules.
• While the PN2 of 2026 provides necessary guidance regarding the beneficial ownership of investors from LBC jurisdictions who intend to invest in India through intermediary entities in non-LBC jurisdictions, direct investments by entities situated in, or citizens of LBC jurisdictions would continue to require prior Government approval, irrespective of the ownership percentage.

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