[Shriyansh Mishra and Runit Rathore are 4th year BA. LL.B. (Hons.) students at Hidayatullah National Law University, Raipur]
In a significant development, the Indian Government on 15 March 2026 issued Press Note 2 of 2026 (PN 2026) easing foreign direct investment (FDI) norms for countries sharing a land border (LBC) with India. The move seeks to relax the restrictions introduced through Press Note 3 of 2020 (PN 2020), which aimed to curb opportunistic takeovers of Indian entities by investors from LBCs. PN 2020 made it mandatory to obtain prior approval from the Government of India where either (i) the investing entity was situated in an LBC, or (ii) the beneficial owner of the investment was located in an LBC. This created uncertainty because it did not specify the threshold for the beneficial ownership criteria and, as a result, even if the LBC entity held a single share in the investing entity, it triggered the requirement for government approval. Further, it introduced another layer of formality that investors had to address before making an investment, thereby making the process more cumbersome.
In practice, this requirement went far beyond the intent for which it was originally introduced. Consequently, the net FDI inflow dropped from $38.59 billion in 2022-23 to $28.014 billion in 2023-24. Therefore, the Government has introduced PN 2026 to address the ambiguities created under PN 2020 and provide greater clarity to foreign investments by LBC entities.
This post discusses the amendment introduced through PN 2026 and its practical implications. It then critically examines the changes and highlights the loopholes inherent in them. Finally, it offers a way forward by suggesting solutions to address the issues discussed.
Key Amendments under PN 2026 and their Implications
In a calibrated decision, the Government approved certain relaxations for PN 2020 by introducing two major amendments in the FDI policy relating to investments from LBCs.
Introduction of a Beneficial Ownership Threshold
The Government introduced a 10 percent threshold for beneficial ownership, i.e., allowing investors or entities with non-controlling beneficial ownership that are incorporated outside LBCs to make investments through the automatic route, while keeping direct investors or entities registered in LBCs outside the net. This investment will then be subjected to the applicable sectoral caps, entry routes, and other attendant conditions. Under this framework, the beneficial ownership test is always required to be applied at the level of investor entity, while the entity in which investment is made shall remain under the majority shareholding and control of resident Indian citizens. For example, a Singapore-based fund with a seven percent Chinese beneficial ownership can invest in an Indian entity (satisfying the 10 percent criteria), but in that entity the controlling stake shall be of Indian citizens. Such investments shall also be mandatorily reported by the investee entity to the Department for Promotion of Investment and Internal Trade. Through this, the Government settled the dust regarding the definition for determining the beneficial ownership that is in line with the criteria laid down in the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PML Rules).
Under PN 2020, the absence of a clear threshold led to an expansive interpretation, whereby even minimal shareholding by an LBC-linked entity triggered the governmental approval route. The introduction of a 10 percent threshold for beneficial ownership of LBC investors provides long-awaited clarity to investors and regulators alike. Now, foreign investor entities with up to 10 percent non-controlling beneficial ownership from LBCs can invest in India without government approval, which was a time-consuming procedure to follow. The clarification is particularly significant for private equity and venture capitalist structures, where funds often have a diversified pool of partners that may include investors from LBC jurisdictions. This reduces the interpretational conflicts and enables global investors to determine with greater certainty whether their investment falls within the automatic route or requires prior government approval.
Time-Bound Approval Mechanism for Strategic Sectors
A press release (PR 2026) accompanying PN 2026 adopts a 60-day time-bound clearance of investment proposals in specific sectors like electronic components manufacturing, capital goods, polysilicon, ingot-wafer, rare earth permanent magnets, and rare earth processing to boost investment in key manufacturing sectors such as mobile phone components and rare earth magnets. This expeditious approval for the select sectors is available for both resident entities of LBC nations and non-LBC resident entities or individuals, “which do not get exempted on account of beneficial ownership”.This may encourage greater use of joint ventures and technology licensing arrangements, enabling Indian firms to access foreign technology licensing arrangements and integrate more effectively into global production networks.
Therefore, the amendments represent a strategic relaxation of the PN 2020 restrictions for the foreign investment regime governing investments from LBCs, particularly for global investment funds with diversified investor bases. From a legal and regulatory perspective, the amendments primarily seek to address interpretative uncertainties, reducing unnecessary regulatory barriers for low-risk, non-controlling investments. The reforms are expected to improve the ease of doing business in India while maintaining the national security rationale underlying the LBC investment regime.
Critical Analysis: Persisting Grey Areas
Ambiguity in the Concept of Control
On paper, PN 2026 projects confidence and promise; however, a closer inspection identifies underlying grey areas. It allows investments through automatic route for the investors with “non-controlling” LBC beneficial ownership of maximum 10 percent. Although the relaxation depends upon the term “non-controlling”, PN 2026 fails to define what the expression “control” means. This creates ambiguity and undermines the objective of the relaxation. The term “control” under explanation 2 of rule 9(3) of the PML Rules adopts a definition akin to the one provided under section 2(27) of the Companies Act, 2013. It is defined to include the “right to appoint majority of the directors or to control the management or policy decisions”. The Supreme Court in Vodafone International Holdings B.V. v. Union of Indiaheld that control should be perceived as a mixed question of law and fact. The Court also underscored that in certain scenarios controlling interest is assumed through ownership of shares which leads to control in the management of the company. Despite an LBC entity falling under the 10 percent threshold, the contractual rights might give powers pertaining to the management. Therefore, clarity is required to address and resolve this gap, as well as to reduce confusion and inconsistency.
Uncertainty in Multi-Layered Investment Structures
Another pertinent issue in the amendment concerns parent-subsidiary relationships in multinational corporate structures, which remain unclear. The PR 2026 clarifies the beneficial ownership test to be applied at the level of investor entity; however, it does not expressly address how the 10 percent thresholds operate in multi-layered group structures where investments are routed through intermediate holding companies between a foreign parent and its Indian subsidiary. There is no clarity as to whether intermediate entities within a corporate chain must independently satisfy the FDI compliance when a foreign parent invests in or restructures its Indian subsidiary.
Further, the PR 2026 continues to make no distinction between “direct” and “indirect” transfers. As a result, even indirect offshore transfers, such as changes in shareholding of a foreign parent entity may fall within the regulatory ambit if they alter beneficial ownership linked to LBCs, thereby triggering approval requirements despite no direct change in the Indian subsidiary’s shareholding. This position is conceptually analogous to the approach adopted in Tiger Global International III Holdings v. Authority for Advance Rulings, where indirect offshore transfers with no direct impact on Indian subsidiary were made liable for tax in the country, reinforcing the principle that substance prevails over form when assessing cross-border ownership changes.
No Relaxation in Director-Level Restrictions
Notably, subsequent to PN 2020, the Ministry of Corporate Affairs in 2022 amended rule 8 of the Companies (Appointment and Qualification of Directors) Rules, 2014. The amendment requires nationals of LBC to obtain security clearance from the Ministry of Home Affairs to apply for the position of director in an Indian company. However, in the current wave of reforms, no liberalisation has been offered to those applying for the directorship position in India. Hence, the Government may consider bringing a similar relaxation in respect of the director approval regime.
Limited Scope and Uncertainty of the 60-Day Approval Timeline
The time limit of 60 days for deciding the proposal of investment by LBC entity is only limited to few sectors. As asserted by the Chamber of Chinese Enterprises in India, it is only a “partial optimisation” as Chinese entities would be subject to government approvals for large-scale investments and projects in other sectors. Moreover, there is a prolonged delay in the approval of investment plans by the Government. Additionally, PR 2026 does not clarify whether the timeline is mandatory or merely intended as a guideline for administrative processing.
Way Forward
While the recent amendments signal a step in the right direction, there is a need to address the ambiguities and structural gaps in order to achieve the intent behind the introduction of PN 2026. The Government should promptly amend the relevant laws to ensure effective implementation. Earlier, in February 2025, the Government released a notification allowing 100% FDI in insurance sector, however the actual changes in the legislative framework were made only in late 2025. Such delays should be avoided in this case and the Government should amend rule 6 the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and other relevant laws to deliver the desired goal of improving the ease of doing business in India. Furthermore, the Government should clarify the scope of term “non-controlling”, aligning it with both the controlling stake threshold as well as the explanation 2 of rule 9(3) of the PML Rules.
India may consider adopting an investment screening mechanism similar to that in the European Union, wherein foreign investments are examined to prevent any threat to the national interest and public order. The United States also employs a similar model wherein the Foreign Investment Risk Review Modernization Act, 2018 was enacted to deal with the impact of national security on foreign investments. By adopting such a mechanism, the Indian Government can apply a substance-oriented approach to review investments.
– Shriyansh Mishra & Runit Rathore