India Refines Its FDI Security Framework With New Ownership Threshold And Approval Timeline

1. Introduction

After the Union Cabinet approved changes to the rules governing investments from nations that share a land border with India on March 10, 2026, India’s foreign investment framework went through a significant recalibration.¹ These changes create a fixed schedule for the approval of some foreign investments that have previously been subject to prolonged regulatory review and provide more clarity on the determination of beneficial ownership.

The structure established under Press Note 3 (2020), which needed government clearance for investments coming from neighbouring countries or where the beneficial owner was located in such jurisdictions, is modified by the revisions. In order to stop opportunistic acquisitions of financially troubled Indian enterprises, the regulation was implemented during the COVID-19 pandemic.

However, over the time, the vast extent of the prohibitions posed obstacles for minority investments by global funds and technical cooperation including capital from neighbouring countries. The current Cabinet decision aims to address concerns while maintaining regulatory control in key areas.

2. Background: The Press Note 3 Framework

Press Note 3 (2020) significantly impacted India's foreign direct investment (FDI) environment by requiring security-related permission for investments from countries that share a land border with India.

Under that policy: -

1. Investments from countries bordering India require government approval.
2. The requirement also applied if the beneficial owner of the investment was based in that country.
3. Transfer existing FDI that resulted in beneficial ownership transferring to certain jurisdictions required clearance.

This policy affected investors from China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan.² While the framework addressed valid national security concerns, its broad spectrum resulted in procedural delays and unpredictability for cross-border investments, especially when global investment funds had minimal or indirect exposure to investors in neighbouring jurisdictions.

3. Key Amendments Introduced by the Cabinet

The Cabinet has now implemented two structural changes aimed at improving the clarity and efficiency of the existing framework.

1. Beneficial Ownership Framework Introduction

The establishment of a more precise beneficial ownership framework for identifying whether investments from nations that share a land border with India are subject to regulatory scrutiny is a key component of the updated policy.

The revised rules make it evident how ownership arrangements are evaluated in cross-border investments by stating that:

1. The beneficial ownership test will be applied at the level of the investor entity
2. The definition of beneficial ownership will comply with the criteria prescribed under the Prevention of Money Laundering Rules, 2005.

This clarification addresses one of the primary areas of ambiguity under the previous system, especially for venture capital and private equity firms with multi-layered investment structures. By connecting the ownership test with an established regulatory framework, the government hopes to improve uniformity in the interpretation and execution of investment laws.

2. Automatic Route for Non-Controlling Minority Investments

The revised policy has also introduced a beneficial ownership threshold of 10%. Investments with beneficial ownership from a land-bordering country of up to 10% and non-controlling will be permitted using the automatic route, subject to applicable sectoral caps and regulatory criteria.³

This alignment is expected to improve regulatory consistency and eliminate interpretive  ambiguity for both investors and regulators. Investee entities receiving such investments will be required to submit relevant ownership information to the Department for Promotion of Industry and Internal Trade (DPIIT) as part of the reporting system.

This move is especially important for venture capital and private equity funds, which often use worldwide pooled investment structures with minority exposure to investors in neighbouring jurisdictions.

3. 60-Day Approval Timeline for Investments in Certain Manufacturing Sectors

The Cabinet has also implemented a time-bound clearance process for investments in key manufacturing sectors. Proposals involving investors from land-bordering nations in the following industries will now be processed within 60 days⁴:

The policy further states that the majority of the investee entity’s shareholding and control must always be held by Indian residents or Indian-controlled companies. A Committee of Secretaries under the Cabinet Secretary has been authorized to amend the list of eligible sectors as needed, allowing the framework to evolve with industrial policy priorities.

4. Policy Rationale: Balancing Investment With Strategic Oversight

The government has described the modifications as a calibrated policy adjustment rather than a relaxing of the safeguards imposed in Press Note 3.

The updated framework tries to reconcile two main objectives:

1. Protecting national economic and strategic interests.
2. Encouraging genuine investment in priority sectors of the economy.

Over the last decade, India has established itself as a worldwide industrial and technological hub, particularly in electronics, renewable energy, and sophisticated manufacturing. At the same time, concerns about strategic control of indigenous firms and sensitive supply chains have continued to shape FDI policy.

The implementation of a beneficial ownership threshold aims to distinguish between minority financial participation and strategic control, permitting passive investments while keeping oversight over investments that may impact management or ownership.

Similarly, the implementation of a 60-day clearance process intends to give regulatory stability for enterprises looking to establish joint ventures, technical collaborations, or industrial partnerships in India.

5. Implications For Investors And Businesses

The modifications are anticipated to have various practical repercussions for investors and Indian enterprises seeking foreign financing.

1. First, the implementation of a defined ownership requirement may encourage minority investments by global investment funds, particularly in cases where exposure from nearby countries is minimal and non-controlling.
2. Second, the 60-day clearance timetable may help to accelerate investment decisions in industries such as electronics manufacturing and renewable energy supply chains, where India is aggressively looking to improve domestic production capacity.
3. Third, investors and firms will need to carefully investigate beneficial ownership structures, as the availability of the automated route will be determined by the investment entity's ownership composition.

Importantly, the modifications do not abolish all regulatory oversight. Investments that surpass the specified levels or involve strategically critical industries will continue to require government clearance.

6. Legitprolaw’s Suggestion: Structuring Investments Under the Revised Framework

From a practical standpoint, the modifications emphasize the growing relevance of beneficial ownership transparency in international investment structures.

We advise that investors and Indian enterprises use a structured compliance approach when considering investments with global funds or multi-jurisdictional investors. In particular:

1. Review investment arrangements to determine beneficial ownership levels in pooled investment instruments.
2. Representations and guarantees about beneficial ownership thresholds should be included in transaction documentation, especially for investments that use the automated method.
3. Ensure accurate reporting to DPIIT through comprehensive internal documentation and disclosure mechanisms.

Addressing beneficial ownership issues early in the structuring process may assist reduce regulatory delays and allow a smoother execution of cross-border investment transactions under the amended framework.

7. Conclusion

The Cabinet’s decision represents a substantial rebalancing of India’s Press Note 3 regime. By establishing a specified beneficial ownership barrier and a time-bound approval system for particular sectors, the government has attempted to strike a compromise between national security concerns and the need to attract foreign capital and technology.

For investors and Indian businesses, the changes represent a shift toward a more predictable and regulated investment environment, while retaining the protections that continue to underpin India’s foreign investment policy.

As India develops its position as a manufacturing and technological hub in global supply chains, the practical efficacy of this framework will be determined by consistent execution and the responsiveness of the clearance process.

Footnotes

1 Press Information Bureau, Cabinet approves changes in guidelines on investments from countries sharing land border with India (Government of India, 10 March 2026) https://www.pib.gov.in/PressReleasePage.aspx?PRID=2237806

2 Economic Times LegalWorld, ‘Union Cabinet approves changes in investment guidelines for China and other countries sharing land border with India’ (Economic Times LegalWorld, March 2026) https://legal.economictimes.indiatimes.com/

3 Press Information Bureau, Cabinet approves changes in guidelines on investments from countries sharing land border with India (Government of India, 10 March 2026) https://www.pib.gov.in/PressReleasePage.aspx?PRID=2237806

4 Press Information Bureau, Cabinet approves changes in guidelines on investments from countries sharing land border with India (Government of India, 10 March 2026) https://www.pib.gov.in/PressReleasePage.aspx?PRID=2237806

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