The Government of India has revised the foreign investment framework introduced through Press Note 3 (2020 Series) issued by the Department for Promotion of Industry and Internal Trade (DPIIT). Press Note 3, introduced in April 2020, requires prior government approval for investments into India where the investor is an entity of a country sharing a land border with India, or where the beneficial owner of the investment has such nexus.

Following the earlier policy announcement through Press Note 2 (2026 Series), the Ministry of Finance has now notified the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2026 in the Official Gazette on 2 May 2026. The relaxations and clarifications announced at the policy level are therefore now formally reflected in the FEMA framework and now have operative legal effect.

Broadly, the changes improve ease of doing business while preserving the core national security rationale underlying the Press Note 3 regime. The revised framework distinguishes between passive, non-controlling upstream exposure and investments that present a more substantive nexus warranting regulatory scrutiny. In that sense, the recent amendment is a calibration of the regime rather than a rollback of its underlying policy objective.

1. KEY CHANGES

1.1 Clarification on beneficial ownership – A significant change is the clarification on how beneficial ownership is to be assessed. This has been a key structuring issue for global private equity and venture capital funds and, until now, market practice had often proceeded on the basis of the significant beneficial owner framework under the Companies Act, 2013. The revised position aligns the beneficial ownership analysis under the Press Note 3 regime with the Prevention of Money Laundering framework. This should provide a more settled basis for determining whether a transaction falls within the government approval regime.

1.2 Automatic route for certain investments – The revised framework permits investments under the automatic route where the beneficial interest in the investing entity held by an entity resident in, or a citizen of, a country sharing a land border with India is less than 10%, and such person does not have control, in each case subject to applicable sectoral caps, entry conditions and reporting requirements.

This relaxation is, however, limited in scope and should be understood carefully. It is relevant only in the context of indirect ownership, namely where the land-border nexus arises through beneficial ownership in an overseas investing entity. It does not dilute the government approval requirement for direct investments by an entity of, or citizen from, a land-bordering country. Such direct investments continue to require prior government approval irrespective of the level of investment.

Practically, the revised regime distinguishes more clearly between passive upstream exposure and a direct investment nexus. That distinction is likely to be particularly relevant for funds and investment platforms with diverse investor bases, where a relatively limited upstream exposure from a land-bordering country may no longer, by itself, require government approval provided there is no control.

1.3 Time-bound approval process – Where approval is required, the revised framework contemplates a 60-days’ decision timeline in specified sectors (including the manufacture of capital goods, electronic capital goods, electronic components, polysilicon and ingot wafers) provided majority shareholding and control of the investee entity remain with resident Indian citizens or Indian entities. The stated objective is to facilitate collaborations and joint ventures that support manufacturing in India, access to technology and integration with global supply chains.

1.4 Multilateral institutions – The NDI rules amendment also clarifies that a multilateral bank or fund of which India is a member will not be treated as an entity of any particular country, and consequently, no country will be regarded as the beneficial owner of investments made by such institution in India. This is a useful clarification for investments routed through multilateral platforms, because it reduces the risk of attribution of the land-border test merely by reference to the nationality of member states or contributors.

2. IMPACT AND PRACTICAL CONSIDERATIONS

2.1 Greater certainty for funds and diversified investor groups – The clarification on beneficial ownership should be especially helpful for funds, multi-layered investment structures and other diversified platforms. A clear linkage to the anti-money laundering framework gives parties a more objective basis for analysing whether a land-border nexus is triggered. At the same time, existing structures may need to be reassessed where the earlier analysis relied on different ownership tests or informal thresholds, given the regulatory ambiguity.

2.2 Direct versus indirect investment remains critical – The most important practical point is that the sub-10% relaxation is only for certain indirect investments. The distinction between direct and indirect investment remains central to the regime. If an investment is made directly by an entity of, or citizen from, a land-bordering country, the government route continues to apply regardless of the size of the investment. This means that investors and Indian targets should not assess the revised regime solely by reference to percentage ownership, but should first identify whether the investment is direct or indirect, and then assess the ownership and control position accordingly. Again, this will be most relevant for funds and investors with diversified shareholdings.

2.3 Control analysis still relevant – Even in an indirect ownership scenario, a structure that appears to fall below the 10% beneficial ownership threshold may still require closer analysis if governance rights, veto rights, board rights or other arrangements confer influence or control to the investor/s from a land-bordering country. The revised framework therefore reduces uncertainty, but it does not eliminate the need for careful structuring analysis.

2.4 Potential revival of delayed transactions – The regulatory relaxations and the time-bound approval process under the NDI rules amendment may revive transactions that had been delayed or reconsidered because of uncertainty around beneficial ownership analysis or because relatively limited upstream exposure risked triggering a full approval process. This is likely to be relevant in particular for PE and VC investments, strategic minority investments and cross-border joint ventures where indirect exposure from a land-bordering country was not accompanied by meaningful control.

Parties should review pending transactions, current cap tables and upstream investor positions to confirm whether the revised framework changes the approval analysis or affects execution planning.

TT&A will continue to monitor further amendments to the FDI Policy and the NDI rules in relation to this framework. We would be happy to discuss the implications for specific transactions or structures.

Authors – Feroz Dubash, Sachin Mehta, Amrita Patnaik, Dushyant Bagga & Pratika Shankar – Partners

Disclaimer: This alert only highlights key issues and is not intended to be comprehensive. The contents of this alert do not constitute any opinion or determination on, or certification in respect of, the application of Indian law by Talwar Thakore & Associates (“TT&A”). No part of this alert should be considered an advertisement or solicitation of TT&A’s professional services.