The Department of Promotion of Industry and Internal Trade (“DPIIT”) on March 15, 2026, vide Press Note No. 2 (2026 Series) (“PN2 of 2026”) notified the amendment to Paragraph 3.1.1. of the Consolidated FDI Policy Circular of 2020 dated 15.10.2020, as amended from time to time (“FDI Policy”). These latest amendments shall be effective on and from the date of notification of the same under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

The government of India had, vide Press Note 3 (2020) dated April 17, 2020 (“PN3”), amended the extant FDI Policy in relation to the investments in India from countries sharing a land border with India (“LBC”). Pursuant to the PN3, Rule 6 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, was amended and a proviso was added whereby 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, could make foreign investments in India only under the government route, i.e. prior approval of the government is required for investments by such entities, and subject to the prohibitions set out under the FDI Policy. Additionally, it was stated that any transfer of ownership of any existing or future foreign direct investment in an entity in India resulting in the beneficial ownership falling within the aforesaid jurisdiction(s) would also require government approval.

These PN3 restrictions, particularly when applied to investors from land-bordering countries (LBCs) holding only non-strategic or non-controlling interests, were seen as adversely affecting investment flows from investors, including global funds such as PE/ VC funds. Further, the lack of clarity on the scope of the ‘beneficial ownership’ as well as the shareholding criteria required to identify ‘beneficial ownership’ under the regulations posed challenges for many private equity and venture capital investors. 

Now, after almost 6 (six) years, the government has finally taken a re-look at the existing regulatory framework, which is now being revised.

1. Core restrictions on LBC investments remain unchanged but beneficial ownership test is limited to citizenship

The primary restriction on investments into India from LBCs remains the same, i.e. foreign direct investment (“FDI”) into India from entities or individuals from LBCs still triggers a government approval requirement. However, unlike under the PN3, where the beneficial ownership test was to determine whether the requirement of government approval would apply where the beneficial owner of an investment into India is situated in or is a citizen of any LBC,  the language of the revised provision clarifies that the test would now apply only if the beneficial owner of such an investment is a citizen of an LBC. This small change of moving away from the permanent residence criteria and limiting the same to citizenship of the investor entity may provide relief in certain cases involving non-resident Indians resident in such LBC jurisdictions, subject to satisfaction of the revised beneficial ownership criteria, enabling them to hold shares in Indian companies. Further, it may also allow Indian companies to grant stock options to their employees situated in such countries, provided these employees are not citizens of these LBCs.

2. Beneficial ownership definition formalised

This latest amendment also formally aligns the definition and criteria for determination of a ‘beneficial owner’ with the definition provided under the Prevention of Money-Laundering Act, 2002 (“PMLA”) and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”) framed thereunder, outlining a quantitative threshold for determining beneficial ownership. Now, to determine who is a beneficial owner, we need to look at the definition of the term under Section 2(1)(fa) of the PMLA which reads as follows:

“(fa) “beneficial owner” means an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person;”

The above is to be read with the criteria for determination of who a beneficial owner is, provided under Rule 9(3) of the PML Rules, which is as follows:

(i) where client is a company, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has a controlling ownership interest or who exercises control through other means;

[Note: For the purposes of this sub-point (i), “controlling ownership interest” means ownership of or entitlement to more than 10% of shares or capital or profits of the company, and “control” shall include the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.]

(ii) where client is a partnership firm, the beneficial owner is the natural person(s), who, whether acting along or together, or through one or more juridical person, has ownership of/entitlement to more than 10% of capital or profits of the partnership or who exercises control through other means;

[Note: For the purpose of this sub-point (ii), “control” shall include the right to control the management or policy decision.]

(iii) where the client is an unincorporated association or body of individuals, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has ownership of or entitlement to more than 15% of the property or capital or profits of such association or body of individuals;

(iv) where no natural person is identified under (i) or (ii) or (iii) above, the beneficial owner is the relevant natural person who holds the position of senior managing official;

(v) where the client is a trust, the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with 10% or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership;

(vi) where the client or the owner of the controlling interest is an entity listed on a stock exchange in India, or it is an entity resident in jurisdictions notified by the Central Government and listed on stock exchanges in such jurisdictions notified by the Central Government, or it is a subsidiary of such listed entities, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such entities.

The test of beneficial ownership shall be applied primarily at the level of the immediate non-LBC investor entity, i.e. any entity which is set up in a jurisdiction other than an LBC, while potentially requiring a look-through in case of multi-layered structures.

3. Aggregation principles to assess beneficial ownership

Investors (not being citizens or entities from an LBC) with non-controlling LBC beneficial ownership of up to 10% may, subject to satisfaction of the control test and aggregation principles, fall outside the government approval requirement but their investment shall continue to be subject to the applicable sectoral caps, entry routes, and attendant conditions. However, the beneficial ownership of an investment (i.e. beneficial ownership of the non-LBC investor entity) shall be deemed to be vested in an LBC country if either a citizen of an LBC or an entity incorporated or registered in an LBC have the ability to directly or indirectly, individually or cumulatively, independently or collectively, whether acting together or otherwise, hold rights/entitlements:

• in excess of 10% of shareholding in the non-LBC investor entity; or

• which enable such citizen or entity to exercise control over the investor entity or ultimate effective control over the investee entity.

There is still uncertainty looming over the mode and mechanics of determination of ‘ultimate effective control’, and it remains to be seen how this test would apply in case of non-LBC investors with multiple layers in their structures.

4. Reporting frameworks for automatic route investments

Even where such investments from investors having direct or indirect LBC ownership qualify under the automatic route, these shall still be subject to the reporting of relevant information/ details by the investee entity to the DPIIT.

5. Expedited clearance timelines for select focus sectors

Additionally, in a move aimed at improving ease of doing business, the Union Cabinet in its press release dated March 10, 2026, approving the foregoing amendments to the FDI Policy, also notified that proposals for LBC investment in entities engaged in specified manufacturing sectors/activities shall now be processed and decided within 60 (sixty) days. Nevertheless, the majority shareholding and control of the investee entity shall at all times have to be with resident Indian citizen(s) and/or resident Indian entity(ies) owned and controlled by resident Indian citizen(s). While 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.

This change pertaining to expedited clearance timelines, however, has not been incorporated in the PN2 of 2026 notified by the DPIIT.

These latest updates to India’s FDI regulatory framework represent a measured step towards clarifying the scope of beneficial ownership under India’s FDI regime. By aligning the test with established thresholds and introducing greater precision, it addresses some of the areas of uncertainty that has persisted since the PN3 notification. That said, it stops short of resolving all ambiguities and interpretational questions, particularly those around control and multi-layered structures, are likely to remain. As the framework evolves, its true impact will depend on how these provisions are implemented in practice and interpreted by regulators.

About the authors: Ankita Kashyap is a Partner, Vivek Narang is a Principal Associate, Siddhant Bhargava is a Senior Associate and Tanya Khandelwal is an Associate at Thinklaw advocates.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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