The Union Cabinet recently approved significant amendments to the guidelines governing foreign direct investment from countries sharing a land border with India. Announced via the Press Information Bureau on 10 March 2026, these changes mark a welcome recalibration of the restrictions originally introduced through Press Note 3 of 2020 (PN3), addressing longstanding ambiguities that had created uncertainty for the global investor community. Coming in the broader context of easing border tensions and improving diplomatic relations between India and China, these amendments signal a clear intent to encourage FDI inflows while balancing national security considerations.
PN3 was introduced in April 2020 during the COVID-19 pandemic, requiring that any entity from a country sharing a land border with India, or where the beneficial owner of an investment is situated in or is a citizen of any such country, could invest only through the government approval route. While not specifically defined, the restrictions were intended to cover countries such as China (including Hong Kong and Macau), Pakistan, Afghanistan, Nepal, Bhutan, Bangladesh and Myanmar, with the intent of preventing opportunistic takeovers of Indian companies. While the measure served its purpose, over time, the absence of clear definitions led to ambiguity, particularly around the concept of "beneficial ownership," which became a pain point for foreign investors.
The most consequential change is the stipulation of a definition of "beneficial owner" for the purposes of PN3, a term that until now was not defined under the FDI regulatory regime. In the absence of specific guidance, practitioners and authorized dealer banks relied on settled principles of statutory interpretation to borrow the definition from other laws such as the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, the RBI's KYC Directions, and the Companies (Significant Beneficial Owners) Rules under the Companies Act, 2013, all of which converged on a 10% of shares, voting rights or profits. However, the government had taken the view that even a single share held indirectly by a land border country investor attracts PN3 approval, and various PE and VC funds were informed that even sub-10% participation from limited partners (LPs) from land border countries would require approval. This led to multiple representations before the government, seeking a defined threshold. The government has now addressed this by adopting the definition under the PMLA Rules, and investors with non-controlling beneficial ownership from land border countries of up to 10% will be permitted to invest under the automatic route, providing much-needed relief.
The absence of a defined threshold had meant that PN3 inadvertently cast a wide net, causing difficulties for blue-chip PE and VC funds in the United States and Europe that were never intended to be caught by these restrictions, on account of miniscule participation from passive limited partners from land border countries exercising no operational control. With the threshold now defined, these funds can invest under the automatic route so long as the relevant ownership remains up to 10%, which should also unlock greater FDI inflows for Indian startups and deep tech ventures. The clarification equally benefits overseas listed companies with dispersed shareholding bases, for whom it was untenable to ensure that not a single share was held by a resident or entity of a land border country.
The second key change pertains to expedited processing of PN3 approval applications in certain specified manufacturing sectors. Proposals in the manufacturing of capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer shall now be processed within 60 days, in line with the government's push for manufacturing in India, including under Atmanirbhar Bharat and Make in India initiatives. This is significant, as PN3 applications had historically taken close to a year to be decided, and a definitive 60-day timeline will enable ease of doing business and speedy closure of foreign investment transactions.
The Committee of Secretaries under the Cabinet Secretary has been empowered to revise the above list of sectors, suggesting the framework may expand over time. Several leading Indian industry players have been looking to enter into joint ventures with Chinese partners for manufacturing in India, and the government had positively considered some such applications in the past. A definitive timeline signals that the government is amenable to these proposals, where the investment benefits the Indian economy, though majority shareholding and control must remain with resident Indian citizens or Indian-owned and controlled entities. Implicitly, this also signals willingness to consider minority investments of up to 49% investment from land border country investors, at least in these specified sectors.
As of now, the Cabinet has approved these changes, and a press release has been issued. The formal press note from the Department for Promotion of Industry and Internal Trade (DPIIT) amending PN3 and the corresponding amendment notification under FEMA are still awaited. Once the precise text is available, those would need to be seen to understand the fine print and additional implications. The government is also expected to update the Standard Operating Procedure issued by DPIIT for processing FDI approval applications accordingly.
These amendments bring much-needed regulatory certainty by removing the ambiguity that had clouded the interpretation of beneficial ownership under PN3 for over five years. For the global investor community, this will ease the investment process and remove a longstanding source of confusion. For certain specific manufacturing sectors, the 60-day timeline signals the government's clear openness to facilitating investment from land border countries that support India's industrial ambitions. Taken together, these measures represent a decisive yet balanced recalibration of India's FDI framework, one that should bolster investor confidence and aid in strengthening India's position as a preferred investment destination.
About the authors: Vaibhav Kakkar is a Senior Partner and Keshav Pareek is a Principal Associate at Saraf and Partners.
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