Overhaul Of India’s Land-Border FDI Rules: Legal Certainty, Control Tests And The New Compliance Landscape

1. Background and Regulatory Context

For several years, investors, Indian companies and legal advisors dealing with inbound investments into India have faced considerable uncertainty under Press Note 3 of 2020. In practice, even transactions involving passive and non-controlling participation of investors often became subject to lengthy Government approval processes because there was no clear legal standard for determining “beneficial ownership”. Issued by the Department for Promotion of Industry and Internal Trade (“DPIIT”) in April 2020, Press Note 3 required prior Government approval for investments coming from countries sharing a land border with India, as well as investments where the beneficial owner was connected to such jurisdictions.

While the intent behind the policy was understandable, the framework created practical difficulties because it did not prescribe any ownership threshold, control test or clear methodology for assessing beneficial ownership. As a result, investors, banks and advisors often adopted highly cautious positions, leading to delays in venture capital, private equity and strategic investment transactions.

Recognising these concerns, the Government has now introduced a revised framework through Press Note No. 2 of 2026 and the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026, notified on 1 May 2026. The amendments do not remove India’s investment screening regime, instead, they seek to make the framework more structured and commercially workable. By introducing clearer thresholds, separate approval and reporting mechanisms, and a greater focus on actual control and governance rights rather than mere economic participation.

2. Why the Earlier Framework Created Significant Commercial Uncertainty?

Before examining the changes introduced under the revised regime, it is important to understand the practical difficulties created by the earlier framework under Press Note 3.

The central issue was the absence of a clearly defined ownership threshold for determining “beneficial ownership”. Unlike other Indian regulatory frameworks, which use a 10% threshold as the starting point for beneficial ownership analysis, Press Note 3 provided no comparable guidance. In the absence of a prescribed standard, authorised dealer banks, investors and legal advisors understandably adopted highly cautious positions. In practice, this meant that even remote or indirect exposure connected to a land-bordering jurisdiction was often treated as a potential regulatory trigger.

The commercial impact of this uncertainty was substantial. Global venture capital and private equity funds with limited upstream participation from investors frequently found Indian transactions delayed or subjected to prolonged approval processes. India’s startup ecosystem was particularly affected. Funding rounds were often restructured, deferred or delayed not because there were genuine concerns regarding control or strategic influence, but because the framework did not provide sufficient clarity regarding where the legal threshold actually lay.

Government approvals, where required, commonly took six to eight months and in several cases, considerably longer. For startups and growth-stage companies operating within tight fundraising timelines, such delays often created serious commercial difficulties and, in some cases, jeopardised transactions altogether.

The broader economic data also reflected the limitations of the earlier approach. By December 2025, China accounted for only approximately 0.32% of India’s cumulative foreign direct investment inflows since April 2000, amounting to roughly USD 2.51 billion and ranking 23rd among India’s investor jurisdictions. At the same time, India’s trade deficit with China continued to widen significantly. During the financial year 2024-25, Indian imports from China rose to approximately USD 113.45 billion, while exports to China declined to approximately USD 14.25 billion, resulting in a trade deficit of nearly USD 99.2 billion.

In effect, the restrictions did not reduce India’s economic dependence on China. Instead, they largely shifted commercial engagement away from equity participation and toward trade, which ran contrary to India’s broader manufacturing and supply-chain integration objectives.

This concern had already been acknowledged in India’s Economic Survey 2023-24, which recognised the potential role of Chinese investment in supporting domestic manufacturing capacity and integrating India into global supply chains. However, despite growing economic pressure, political and regulatory resistance to easing the framework remained strong through 2024 and 2025.

At the same time, competitive pressure from ASEAN economies became increasingly visible. Countries such as Vietnam, Thailand and Malaysia continued to strengthen their positions as major manufacturing and supply-chain hubs, particularly in sectors such as electronics, semiconductors, batteries and electric vehicles. Vietnam alone recorded electronics exports of approximately USD 165 billion in 2023, accounting for a significant portion of its overall exports.

These jurisdictions were able to attract the manufacturing investment and technology integration that India’s land-border investment restrictions had effectively kept at a distance. Against this backdrop, the changes introduced under Press Note 2 of 2026 reflect not merely a regulatory clarification, but a broader recognition that prolonged uncertainty under the earlier framework was beginning to affect India’s competitiveness as an investment destination. Expert assessments suggesting that the revised framework could modestly increase Chinese participation in India’s overall FDI inflows further indicate that the Government’s policy approach has gradually shifted toward a more commercially calibrated model.

3. What the 2026 Framework Changes?

3.1. Beneficial Ownership Finally Has Regulatory Clarity

One of the most significant changes introduced through Press Note 2 is that the concept of “beneficial ownership” finally has a clearly identifiable legal framework. The revised regime aligns the determination of beneficial ownership with the Prevention of Money Laundering Act, 2002 (“PMLA”) framework, particularly Rule 9(3) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”).

Under the revised approach, beneficial ownership is assessed at the level of the immediate investor entity making the investment into India, rather than requiring an indefinite tracing exercise through multiple layers of offshore holding structures. In practical terms, the focus is now on the investing vehicle incorporated or registered outside the land-bordering country (“LBC”), instead of attempting to identify every upstream individual or entity sitting at the highest level of the ownership chain. This change is commercially and legally significant for two reasons: -

1. First, the framework now introduces a defined 10% ownership threshold as the starting point for beneficial ownership analysis, bringing much-needed regulatory certainty to an area that previously operated without any clear benchmark.
2. Second, the amendments provide investors, banks and legal advisors with a far more workable compliance framework by establishing a reasonably identifiable point at which the ownership analysis can conclude. This removes much of the uncertainty that previously arose from open-ended beneficial ownership tracing exercises across complex global fund and holding structures.

3.2. The Automatic Route for Sub-10% Non-Controlling Investments

One of the most commercially significant outcomes of the revised framework is that foreign entities with limited and non-controlling participation from LBC investors may now access the automatic route for investments into India.

Following the alignment with the PML Rules framework, foreign companies in which investors from LBC jurisdictions hold up to 10% on a purely non-controlling basis are, in principle, no longer required to obtain prior Government approval for investments into sectors where foreign direct investment is otherwise permitted under the automatic route.

For the global investment community, particularly venture capital and private equity funds, this represents a meaningful regulatory relaxation. In practical terms, diversified offshore funds with limited upstream participation from Chinese or Hong Kong investors may now deploy capital into Indian companies without automatically triggering the Government approval process, provided those investors do not possess governance or contractual rights capable of amounting to “control”.

This qualification is important because the revised framework does not evaluate ownership in isolation. Even where participation remains below the 10% threshold, the presence of governance rights, veto powers, board representation rights or other forms of strategic influence may still revive the approval requirement. The revised framework therefore distinguishes between passive economic participation and substantive governance influence. This is a significant departure from the earlier regime, under which even remote and commercially insignificant upstream exposure often resulted in regulatory uncertainty.

It is also worth noting that several market participants had expected or advocated for a higher threshold, particularly in sectors involving manufacturing partnerships, technology collaboration and long-term strategic investment structures where meaningful equity participation is commercially common. However, the Government has presently chosen to anchor the framework around the 10% threshold under the PML Rules.

From a practical perspective, investors and transaction counsel will therefore need to structure transactions keeping within the regulatory comfort level reflected in the revised framework, rather than the broader relaxation that some sections of the market had anticipated.

3.3. Control, Not Mere Ownership, Is Now the Key Regulatory Test

Perhaps the most significant conceptual shift introduced under the revised framework is that the regulatory analysis is no longer centred solely on ownership percentages. Even where an investor from a LBC holds less than 10% in the investing entity, prior Government approval may still be required if such investor is capable of exercising control over the investing entity or ultimate effective control over the Indian investee company.

Importantly, the concept of “control” has not been framed narrowly. The revised framework is broad enough to capture a range of governance and contractual rights that may allow an investor to exercise substantive influence over strategic decision-making. This could include board appointment rights, veto rights over material matters, reserved matter protections, voting arrangements, management participation rights, observer rights, side letters, co-investment arrangements or any other mechanism through which influence may be exercised, whether directly or indirectly.

From a transaction structuring perspective, this is likely to become one of the most important aspects of the revised regime. Rights that were traditionally viewed as standard minority investor protections in private equity and venture capital transactions may now require significantly closer scrutiny where investors connected to LBC jurisdictions are involved.

For instance, a sub-10% investor holding affirmative voting rights on strategic matters, enhanced information access rights or board observer rights may still face regulatory concerns if those rights, viewed collectively, are interpreted as conferring effective influence or control. Consequently, the revised framework requires businesses and transaction counsel to evaluate governance structures with far greater care than before. The regulatory analysis can no longer stop at the cap table; it must now extend to the underlying investment documentation and the practical allocation of influence within the transaction structure.

3.4. An Important Drafting Change: The Removal of the Phrase “Situated In”

Another noteworthy change introduced through Press Note 2 is the removal of the phrase “situated in” from the earlier framework.

Under Press Note 3, the approval requirement applied where the beneficial owner was “situated in or is a citizen of” a land-bordering country. Press Note 2 narrows this formulation by applying the restriction only where the beneficial owner “is a citizen of” such jurisdiction.

At first glance, this may appear to be a minor drafting revision. However, the change could have meaningful legal implications. The revised wording potentially narrows the category of individuals whose connection to an LBC triggers regulatory scrutiny by shifting the focus from residence or physical location to citizenship.

Whether this ultimately results in a materially different compliance position will depend on future regulatory guidance and the manner in which the framework is interpreted alongside FEMA’s own residency concepts. Nevertheless, the change is likely to be closely monitored by investors and advisors, particularly in structures involving globally mobile individuals, offshore residency arrangements or multinational ownership chains.

3.5. A Dual Compliance Framework: Approval and Reporting

One of the more practical improvements introduced under the revised framework is the creation of two distinct compliance pathways:-

1. involving prior Government approval
2. involving post-investment reporting.

Prior Government approval continues to remain mandatory in specific situations, including where the investing entity itself is incorporated in an LBC, where the investor is a citizen of an LBC, where beneficial ownership from an LBC exceeds the prescribed threshold, or where an LBC investor exercises control despite holding 10% or less participation.

However, where participation from an LBC investor remains below 10% and is purely passive in nature, the investment may proceed under the automatic route without prior approval. Such investments will nevertheless continue to attract reporting obligations in the form and manner prescribed by the RBI.

This is also an important procedural shift because Press Note 2 had initially envisaged DPIIT-led reporting through a standard operating procedure framework. The Amendment Rules have now moved the reporting mechanism under the RBI framework, thereby integrating the process into India’s established foreign investment reporting infrastructure.

The revised framework also carves out specific exemptions. Listed entities on recognised Indian stock exchanges, certain notified international exchanges and their subsidiaries are exempt from beneficial ownership identification requirements. Similarly, multilateral institutions and funds of which India is a member, including institutions such as the World Bank Group, the Asian Development Bank and the International Finance Corporation, are expressly excluded from being treated as entities of any particular country for the purposes of the framework.

3.6. The Compliance Obligation Continues Even After Closing

An important aspect of the revised framework is that the compliance analysis does not end once the original investment is completed.

The Amendment Rules clarify that where a subsequent transfer, whether direct or indirect, existing or future, results in beneficial ownership from an LBC crossing the prescribed threshold, prior Government approval may again become necessary, even if the original investment had validly qualified under the automatic route.

This makes post-closing monitoring particularly important for private equity funds, venture capital structures and multinational investment vehicles. Events such as limited partner secondary transfers, continuation vehicle transactions, internal group reorganisations or upstream ownership changes may potentially alter the beneficial ownership profile of an Indian portfolio company and trigger fresh regulatory obligations. As a result, fund managers and compliance teams will increasingly need to build ongoing ownership monitoring mechanisms into their operational and governance frameworks.

3.7. A Separate Clarification Relevant to the Energy Sector

Apart from the land-border investment framework, the Amendment Rules also introduce an additional clarification that is particularly relevant for the energy and oil and gas sectors.

The revised rules now expressly clarify that the issue or transfer of “participating interest or rights” in Indian oil fields by Indian companies to non-residents will constitute foreign investment and accordingly fall within the compliance framework under Schedule I of the NDI Rules.

Although this clarification is unrelated to the land-border investment restrictions, it is likely to have important practical implications for upstream oil and gas transactions involving foreign participants, particularly from a FEMA structuring and compliance perspective.

4. The Proposed 60-Day Fast-Track Mechanism

One of the more notable announcements accompanying the 2026 amendments was the Government’s proposal to introduce an expedited approval mechanism for investments from LBCs in certain priority manufacturing sectors. Through its press release dated 10 March 2026, the Union Cabinet indicated that such investments may be processed within a proposed timeline of sixty days in sectors including capital goods, electronic capital goods, electronic components, polysilicon manufacturing, and ingot and wafer manufacturing.

From a policy perspective, this announcement is significant because it signals the Government’s intent to facilitate investments in sectors considered strategically important for India’s manufacturing and supply-chain ambitions.

However, it is equally important to recognise the present legal position. The proposed sixty-day timeline does not presently form part of Press Note 2 of 2026 or the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026. At this stage, it remains a statement of policy intent rather than a legally enforceable statutory timeline.

Accordingly, while the announcement provides a positive indication regarding the Government’s regulatory direction, investors and transaction counsel should continue to account for the possibility of delays depending upon the complexity of the transaction, sectoral sensitivities, the nature of the ownership structure and the administrative capacity of the relevant authorities.

Another important aspect of the proposed fast-track mechanism is the structural condition attached to it. The framework contemplates that majority ownership and control of the Indian investee entity must continue to remain with resident Indian citizens or Indian entities owned and controlled by resident Indian citizens.

In practical terms, this indicates that the fast-track pathway is primarily intended for joint venture structures where Indian stakeholders retain majority governance and operational control. Transactions involving foreign-controlled structures, even in strategically important sectors, are unlikely to qualify for the expedited mechanism merely because they fall within a priority industry category.

The Government has also indicated that the list of eligible sectors may be expanded in the future through further Cabinet approvals. Until then, investments outside the presently identified sectors will continue to follow the ordinary approval framework without any specific fast-track commitment.

5. Director Security Clearance Requirements Continue to Apply

While the 2026 amendments substantially revise the foreign investment approval framework, one important compliance requirement remains entirely unchanged and continues to operate independently of the revised FDI regime.

Under the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022, any individual who is a citizen of a land-bordering country is required to obtain prior security clearance from the Ministry of Home Affairs before being appointed as a director of an Indian company.

This requirement has not been modified or relaxed by Press Note 2 of 2026 or the Amendment Rules. From a practical standpoint, this creates an additional compliance layer that businesses and investors must continue to account for, particularly in transactions involving board nomination or governance rights.

Accordingly, a transaction may fully satisfy the revised beneficial ownership thresholds, qualify under the automatic route and comply with the broader FEMA framework, yet still require a separate governmental clearance process if the investor seeks to appoint a director holding citizenship of a land-bordering jurisdiction. This distinction is important because the director security clearance process operates independently of the FDI approval mechanism and may involve separate timelines, procedural requirements and regulatory scrutiny.

As a result, investors and transaction counsel should evaluate both regulatory tracks simultaneously at the structuring stage itself rather than treating director approvals as a secondary post-closing compliance exercise.

6. Key Timelines and Compliance Considerations Under the Revised Framework

The 2026 amendments introduce a more structured compliance framework for investments involving land-bordering jurisdictions. For investors, Indian companies and transaction counsel managing ongoing or proposed investments, it is important to closely track the key regulatory dates, approval triggers and continuing compliance obligations arising under the revised regime. The table below summarises the principal timelines and compliance considerations relevant under the amended framework.

7. The Insurance Sector Reforms: A Parallel but Equally Significant Liberalisation

Alongside the amendments to the land-border investment framework, the Government has also introduced a major liberalisation of India’s insurance sector through the Foreign Exchange Management (Non-Debt Instruments) (Second Amendment) Rules, 2026, notified on 2 May 2026. While legally separate from Press Note 2 of 2026, the reform is equally significant from a foreign investment perspective. The amendments now permit up to 100% foreign direct investment under the automatic route in Indian insurance companies and insurance intermediaries, including insurance brokers, third-party administrators, corporate agents and surveyors.

The move had already been indicated as part of the Government’s broader economic and investment reform agenda during the Union Budget 2026. The notification of the Second Amendment Rules under FEMA now gives the revised framework full regulatory effect from a foreign investment and exchange control perspective.

From a practical standpoint, the reform is expected to significantly increase the attractiveness of India’s insurance market for global insurers and financial institutions seeking greater operational flexibility and ownership control within Indian insurance businesses. The key conditions and regulatory parameters applicable to the revised insurance FDI framework are summarised below.

India’s decision to permit 100% foreign direct investment in the insurance sector places it alongside several jurisdictions that have progressively liberalised insurance ownership norms to attract long-term foreign capital and technical expertise.

From a commercial perspective, the reform is likely to have significant implications for India’s insurance market. The possibility of full ownership may make the sector substantially more attractive for global insurers that previously operated through joint venture structures with limited operational flexibility. Over time, this could intensify competition for established domestic insurance players and reshape the structure of the industry.

The broader market opportunity also remains significant. India continues to have a large underinsured population, rising insurance penetration potential and a rapidly expanding middle-income consumer base. Industry projections indicating sustained premium growth over the coming years further strengthen the attractiveness of the sector for long-term international investment.

When viewed together with the broader foreign investment reforms introduced during 2026, the insurance liberalisation reflects a wider policy trend toward increasing sectoral openness while continuing to retain regulatory supervision through sector-specific regulators such as IRDAI.

8. Practical Implications for Investors and Transaction Advisors

The revised framework does not necessarily make compliance simpler. The analysis may now be more detailed and control-focused, but investors and advisors at least have a clearer understanding of the legal standards against which transactions will be assessed.

One of the most important practical consequences of the amendments is that ownership analysis alone is no longer sufficient. The revised framework requires a much closer examination of governance arrangements and investor rights. Transaction documents such as shareholder agreements, limited partner agreements, side letters, observer arrangements and co-investment structures will now need to be evaluated through the broader lens of “control”.

As a result, governance rights that were historically treated as standard minority investor protections may require reconsideration where investors connected to LBCs are involved. Rights relating to board participation, affirmative voting, reserved matters, information access and strategic decision-making could potentially influence the regulatory assessment even where ownership remains below the prescribed threshold.

The amendments also have implications for existing investment structures. Funds and investment vehicles with Indian portfolio companies that were structured prior to the notification of the revised framework may need to reassess their upstream ownership profiles and governance arrangements in light of the new control-based analysis. In several cases, a fresh review of existing structures may become necessary, particularly where future ownership changes or restructuring events could alter the applicable compliance position.

Another important consequence is that compliance obligations now extend well beyond the initial closing of the transaction. Under the revised framework, events such as limited partner secondary transfers, continuation vehicle arrangements, internal group reorganisations or changes in upstream ownership may potentially trigger fresh approval requirements if they result in beneficial ownership from an LBC crossing the prescribed threshold.

Accordingly, post-closing monitoring can no longer be treated as a routine administrative exercise. Fund managers and investment platforms with India exposure may increasingly need to implement ongoing ownership monitoring and compliance review mechanisms capable of identifying changes that could affect the regulatory status of Indian portfolio companies.

At the same time, it is important to recognise that the relaxation introduced under the revised framework is limited in scope. Entities incorporated in land-bordering countries, as well as citizens of such jurisdictions, continue to require prior Government approval irrespective of the size of their investment or the nature of their participation rights. The benefit of the automatic route is presently available only in situations involving non-LBC incorporated investment vehicles with limited and non-controlling upstream participation from LBC investors.

9. Conclusion

Press Note 2 of 2026 and the corresponding FEMA amendments do not dismantle India’s land-border investment screening framework. The broader approval regime continues to remain in place, and the Government has consciously retained significant regulatory oversight over investments involving strategic influence or control. What has changed, however, is the structure and clarity of the framework itself.

For several years, investors, Indian businesses and transaction advisors operated in an environment where beneficial ownership lacked any clearly identifiable legal standard. In the absence of defined thresholds or interpretational guidance, market participants were often forced to adopt highly conservative positions, resulting in prolonged approval timelines, inconsistent compliance approaches and considerable transactional uncertainty.

The revised framework seeks to address that uncertainty by introducing a more structured methodology. The alignment with the PML Rules framework provides a clearer starting point for beneficial ownership analysis. The separation between approval-based and reporting-based compliance creates a more proportionate regulatory outcome depending upon the level of exposure and influence involved. Most importantly, the framework now places substantive control and governance influence at the centre of the analysis rather than relying solely on upstream ownership percentages.

From a broader policy perspective, the amendments also indicate a gradual shift in India’s investment approach. While the Government continues to maintain strategic oversight over investments connected with land-bordering jurisdictions, the revised framework reflects a recognition that passive economic participation and strategic influence cannot be treated identically.

The commercial impact of the reforms may initially be gradual. However, the policy direction itself is significant, particularly when viewed against the backdrop of increasing competition from other Asian manufacturing and investment destinations.

At the same time, the revised framework should not be mistaken for deregulation. If anything, the compliance exercise has become more sophisticated. A control-based framework requires a far deeper assessment of governance structures, contractual rights and operational influence than a simple ownership-threshold model.

Accordingly, investors, fund managers and legal advisors who approach the 2026 amendments as a mere relaxation of the earlier regime risk overlooking the more important shift that has taken place. The framework has not become less regulated. It has become more structured, more nuanced and considerably more governance-focused. That evolution will require a correspondingly more sophisticated compliance and transaction advisory approach going forward.

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