India's Press Note 3 Overhaul: From Restriction To Strategic Recalibration

The Indian government recently approved a significant amendment to the country’s Foreign Direct Investment (FDI) framework, specifically targeting investments in which the ultimate beneficial ownership traces back to countries sharing a land border with India (LBCs). The formal implementing notification was issued by the Department for Promotion of Industry and Internal Trade (DPIIT) in Press Note 2 (2026 Series) on March 15, 2026 (PN2), amending the extant FDI Policy. However, the revised framework only acquires full legal force once the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FEM NDI Rules) are amended accordingly.

The Press Note 3 of 2020 (PN3) was introduced as an emergency measure to prevent opportunistic acquisitions of Indian companies during the COVID-19 pandemic. It required prior Government approval for any investment, direct or indirect, into an Indian entity where the beneficial owner is a citizen of or situated in an LBC. However, PN3 neither defined ‘beneficial ownership’ nor prescribed any minimum threshold for triggering such approvals, resulting in the creation of a rigid framework that could apply even to marginal LBC interests. This placed a disproportionate burden on global private equity investors with passive LBC-linked limited partners and on listed companies with dispersed shareholding, neither of whom could realistically guarantee the complete absence of LBC-connected investors. Due to the uncertainties in cross-border M&A transactions, over a period of time, the market gravitated towards an informal 10% benchmark drawn from Rule 9(3)(a) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 and authorised dealer bank guidance. However, this was never formally codified in PN3, and regulatory authorities were known to apply approval standards even below that threshold. The resulting ambiguity became a persistent source of deal friction, timeline risk, and structuring complexity.

The PN2 formally codifies a 10% threshold for non-controlling LBC beneficial ownership at the investor entity level, below which investments may proceed under the automatic route without prior Government approval, with the definition of ‘beneficial owner’ now formally aligned with the Prevention of Money Laundering Act, 2002 (PMLA). Despite these reforms, several important gaps remain:

• Security clearance requirements for LBC national directors under the Companies Act, 2013, continue to apply in full, and the ‘look-through’ principle (looking beyond the immediate, direct investor entity to identify the ultimate beneficial owners) remains intact, rendering third-country routing through Singapore, Mauritius, or other intermediate jurisdictions ineffective, a position further reinforced by the new FEMA reporting requirements mandating identification of ultimate beneficial owners.
• The 10% threshold operates only at the investor level, leaving layered ownership structures where LBC participation sits at an intermediate or upstream position without clear guidance.
• Since the automatic route benefit is expressly limited to non-controlling interests, contractual rights, veto provisions, board nomination rights, and information rights capable of conferring practical control remain a live structuring consideration even for sub-10% shareholding.
• Finally, PN2 contains no grandfathering provision for transactions completed under the old regime, leaving parties to such arrangements without any transitional way out.

The introduction of PN2 has significant implications for the deal and transactions landscape:

• Share Purchase Agreement (SPA) warranties and transaction structuring

• One of the most practically significant consequences of the PN3 framework and one that PN2 directly affects is how PN3 compliance-related warranties are negotiated in the transaction documents, typically under the SPAs. Since 2020, PN3 warranties have become a standard and frequently contentious feature of SPAs involving foreign investors with any possible LBC connection. Due to the absence of a defined threshold, sellers sought broad warranties confirming that neither the foreign acquirer’s existing shareholding structure nor the proposed transaction triggered approval requirements. The acquirers resisted the width of such warranties, given the difficulty of mapping beneficial ownership across complex fund structures with large limited partner bases. The result was an inconsistent legal framework across the market, some transactions relying on the informal 10% norm, others including heavily qualified carve-outs, and many treating Government approval as a standalone condition precedent to closing, with no statutory deadline to anchor deal timelines.

• The 10% threshold in Press Note 2 provides a clear contractual anchor for warranty drafting. Overseas investors can now warrant that no investor in the chain holds non-controlling LBC beneficial ownership exceeding 10%, or that all required approvals have been obtained for any interests above the threshold. Due diligence obligations persist, but shall now be much narrower. Acquirer’s counsel must still carefully trace beneficial ownership chains, especially in multi-layered fund structures, and assess any contractual control exercised by LBC-linked participants below the ownership threshold.

• Secondary transfers

• PN2 expressly provides that any subsequent change in beneficial ownership, whether arising from a secondary sale, fund restructuring, internal reorganisation, or upstream transfer that results in beneficial ownership shifting into a restricted LBC, will require prior Government approval. This is a consequential provision for the secondary market, where Limited Partner (LP) transfers, co-invest restructurings, and fund rollovers are an increasingly common feature of modern private equity and venture capital transactions.

• For investment funds, this means that compliance analysis cannot end once the first inbound investment has been completed; funds will need to continuously monitor upstream transfers, which might alter beneficial ownerships. In practical terms, deal counsels will need to incorporate PN2 approval triggers as a condition in secondary transfer documentation. Exit strategies involving LBC-linked co-investors, even at sub-10% levels, will require careful structuring to ensure that the transfer does not inadvertently push LBC beneficial ownership above the threshold prescribed under law.

• Third-country routing and intermediate holding structures

• It is pertinent to note that investments routed through jurisdictions like Singapore or Mauritius continue to fall under PN3 due to the look-through principle. Beneficial ownership is attributed to LBCs if their citizens or entities hold over 10% (including an indirect holding) in the investor entity. The law requiring disclosure of ultimate beneficial owners makes it harder to use intermediary structures. Transaction counsels must conduct true look-through analyses, and investment banks need to incorporate PN2 beneficial ownership checks into pre-deal diligence.

• Joint Ventures, Shareholder Agreements and Control Provisions

• The express limitation of the automatic route benefit to non-controlling interests introduces a significant new dimension to the negotiation of shareholder agreements (SHAs) involving LBC-connected investors. While the concern is not merely one of equity percentage, PN2 further specifies that control continues to remain a trigger to ascertain beneficial ownership of an LBC in an investor entity, despite the shareholding of the LBC being below the 10% threshold, and the introduction of an undefined test of ‘ultimate effective control’ allows regulators to look beyond shareholding to assess control. In deal terms, this means that standard minority protection provisions, veto rights over reserved matters, affirmative consent rights for key business decisions, board nomination rights even for a single director, and information rights that go beyond what a passive investor would typically receive, may, depending on their scope, be characterised as conferring practical control and thereby triggering the Government approval requirement even for sub-10% stakes. Deal parties will need to carefully calibrate the protective rights package available to LBC-connected investors.

• Post-closing compliance

• PN2 introduces a new compliance layer for transactions that qualify under the automatic route: investments by foreign investors with any direct or indirect LBC ownership below the 10% threshold are subject to mandatory reporting in a format to be prescribed by DPIIT under a Standard Operating Procedure. The reporting format and mechanics have not yet been notified, creating a near-term compliance gap. For deal structuring purposes, this means that closing deliverables will need to include a post-closing reporting obligation, and transaction documents should contain representations as to the investor's continued compliance with the reporting framework. Funds will need to build this obligation into their ongoing portfolio monitoring procedures, as non-compliance with a reporting requirement, even for an automatic route investment, carries regulatory risk.

The PN2 marks a genuine and long-overdue recalibration of India's FDI framework for LBC-linked investment. By anchoring the beneficial ownership test to a defined 10% threshold, aligning it with established anti-money laundering standards, and introducing expedited processing for priority manufacturing sectors, the Government has removed a significant source of regulatory uncertainty that has weighed on cross-border deal-making since the pandemic. The reform carries particular practical significance for negotiation of transaction documents, where it replaces years of improvised market practice with a clear, codified standard.

The next critical step is the notification of the corresponding amendments to the FEM NDI Rules, which will bring the revised framework into full legal force and address the residual questions around ownership chains, control definitions, and compliance mechanics that PN2 alone cannot resolve. Until that notification is published, market participants should continue to approach deal structuring with rigour, treating the policy as an authoritative and encouraging signal, while awaiting the final legal text before transacting with complete confidence.

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