Beyond Press Note 3: Analysing Press Note 2 (2026) and the new FDI framework for land-bordering countries

In 2026, the Union Cabinet of the government of India introduced changes to Press Note 3 (2020 Series) (“Press Note 3”), pursuant to which the Department for Promotion of Industry and Internal Trade (“DPIIT”) released the Press Note 2 (2026 Series) (“Press Note 2”), marking a significant change in the regulatory framework governing Foreign Direct Investment (“FDI”) from countries sharing land borders with India. This amendment revisits Paragraph 3.1.1 of the Consolidated FDI Policy, 2020, which had been earlier modified through Press Note 3 during the COVID-19 pandemic.

The Press Note 2 notification must be understood in the context of India’s broader investment policy trajectory. While the Press Note 3 framework was largely protective, aimed at preventing opportunistic acquisitions, the Press Note 2 framework introduces a balanced regulatory approach.

The Press Note 2 does not completely negate the protective architecture of Press Note 3. Instead, it systematises it, addressing long-standing ambiguities relating to beneficial ownership. The Press Note 2 notification is a shift where legitimate investments are facilitated through transparency and reporting, while sensitive investments continue to be subject to rigorous scrutiny.

The evolution of India’s FDI framework can be understood through a comparison of the pre-2020 regime and the changes introduced in 2020. Before 2020, India followed a liberal and investor-friendly approach under the Consolidated FDI Policy 2017, which permitted most foreign investments subject to limited sectoral restrictions. The framework relied on a jurisdiction-based restriction, with minimal scrutiny of the ultimate ownership or control of investing entities.

This approach underwent a significant shift in 2020 with the introduction of Press Note 3, which marked a move towards a more cautious and security-oriented regime. This policy expanded the scope of regulation to include not only direct investments but also those involving beneficial ownership from neighbouring countries. This transition from a formalistic to a substance-based framework reflects a clear change in India’s FDI policy from prioritizing capital inflows to incorporating considerations of economic security and strategic control.

Pre-2020 regime

Prior to 2020, India’s FDI regime was guided by the principle of facilitating foreign capital inflows while maintaining sector-specific safeguards.

Under Paragraph 3.1.1 of the Consolidated FDI Policy 2017:

• Any non-resident entity was permitted to invest in India, except in sectors explicitly prohibited.

• Only investors from Bangladesh and Pakistan were subject to the Government approval route.

• Even in the case of Pakistan, restrictions were limited to sensitive sectors such as defence, atomic energy, and space.

• Investors from Nepal and Bhutan, including NRIs resident in those countries, were permitted to invest on a repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.

Press Note 3

With the introduction of Press Note 3 (2020), the government significantly tightened the regulatory framework:

• All investments from entities in countries sharing land borders with India were brought under the Government approval route.

• The restriction extended beyond direct investors to include beneficial ownership, thereby capturing indirect investments routed through third countries.

• The policy also introduced a trigger for subsequent transfers, requiring approval if a transaction resulted in beneficial ownership falling within the restricted category.

This marked a transition from a jurisdiction-based test to a substance-based test. However, while the intent was clear, the implementation raised several issues. The regime became over-inclusive, impacting bona fide transactions involving global institutional investors along with high-risk investments.

The implementation of Press Note 3 revealed several challenges. As the policy began to operate across a wide range of cross-border transactions, gaps in clarity and proportionality became evident.

Lack of clarity on beneficial ownership

The term “beneficial ownership” was undefined under the Press Note 3 framework. This created uncertainty, particularly in scenarios such as multi-layered holding structures, investment funds with diversified limited partners, and cases involving minority shareholding without control rights. In the absence of uniform guidance, different regulatory authorities adopted varying thresholds and interpretations, leading to inconsistency and reduced predictability for investors.

Impact on global investment structures

The framework also posed challenges for global private equity and venture capital funds, which typically have diverse and multinational investor bases. Under the Press Note 3, even minimal or indirect exposure to investors from restricted jurisdictions could trigger the Government approval requirement. This created practical difficulties for funds operating through international financial hubs and, in some cases, discouraged investment into India altogether.

Procedural bottlenecks

Although the approval mechanism was designed to be structured, it proved to be time-consuming and administratively burdensome. The involvement of multiple ministries in the review process, combined with the absence of clear thresholds for triggering approval, contributed to delays. Additionally, extensive documentation requirements further complicated the process.

The Press Note 2 notification is a corrective step aimed at addressing these deficiencies by introducing greater clarity, proportionality, and alignment with international best practices, while continuing to safeguard national interests.

Press Note 2 seeks to address earlier ambiguities, improve regulatory clarity, and introduce a more nuanced system of oversight. The notification attempts to balance national security concerns with the need to facilitate legitimate cross-border investments.

Continued government route for restricted investments

The Press Note 2 framework retains the fundamental requirement that investments linked to countries sharing a land border with India must be routed through the government approval mechanism. This applies not only where the investor is directly based in such a country but also where the beneficial owner of the investment originates from these jurisdictions. By continuing this requirement, the policy ensures that national security considerations remain a central pillar of FDI regulation.

Statutory definition of beneficial ownership

One of the most notable developments is the formal linkage of the term “beneficial owner” to existing statutory frameworks, namely the Prevention of Money Laundering Act, 2002 and Rule 9(3) of the Prevention of Money Laundering Rules, 2005. This alignment introduces clearly defined thresholds for ownership and control, establishes a uniform standard across regulatory regimes, and reduces interpretational uncertainty.

Introduction of reporting-based oversight

A key innovation in the Press Note 2 framework has introduced a reporting-based compliance mechanism. Investments involving some degree of ownership from restricted countries, but falling below the thresholds that trigger mandatory approval, are now required to be reported. This represents a shift from a blanket approval regime to a more calibrated, tiered approach that combines approval requirements for high-risk cases with disclosure obligations for lower-risk investments.

The DPIIT had issued a Standard Operating Procedure (“SOP”) in 2023 to establish a structured, transparent, and time-bound mechanism for processing FDI proposals requiring government approval under the Consolidated FDI Policy and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. The 2023 SOP streamlined the approval process through the National Single Window System (“NSWS”) portal by prescribing indicative timelines for inter-ministerial consultations and formalising security clearance procedures for applications under Press Note 3.

Building upon this framework, DPIIT has now issued a revised SOP dated 4 May 2026 pursuant to Press Note 2 and the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026. While the overall procedural structure remains broadly aligned with the 2023 SOP, the 2026 SOP introduces several significant enhancements. These include the implementation of a completely paperless approval mechanism through the NSWS portal, greater clarity on approval timelines, and the introduction of a separate Annexure VII prescribing an expedited approval timeline of 60 days for specified sectors. This accelerated timeline overrides the standard approval period of 12 weeks.

The specified sectors covered under 2026 SOP, eligible for expediated approval timeline of 60 days include (a) capital goods manufacturing (b) electronic capital good and electronic component manufacturing (c) polysilicon and ingot wafers (d) advanced battery components (e) rare earth permanent magnets, and (f) rare earth processing. Further, the sub-sectors for each sector is detailed in the 2026 SOP. This reflects a calibrated policy approach aimed at furthering the ease of doing business objectives aligned with India’s broader industrial and manufacturing objectives.

Overall, the 2026 SOP marks a significant evolution of India’s FDI approval framework. By emphasising digitisation, procedural clarity, and adherence to timelines, the revised framework seeks to further improve the ease of doing business in India.

The evolution of India’s FDI policy in relation to land-bordering countries reflects a progressive refinement of regulatory philosophy. The 2017 regime prioritised openness and ease of investment; the Press Note 3 regime prioritised national security through stringent controls; the Press Note 2 regime strikes a balance between security and investment facilitation and this was done by introducing a clear statutory basis for beneficial ownership.  Overall, the Press Note 2 framework enhances legal certainty and investor confidence.

About the authors: Pradnesh Warke is a Partner and Pragya Rani is an Associate at Luthra and Luthra Law Offices India.

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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