Background 

The Central Government on May 2, 2026, through the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2026 (“PN2 Notification”), notified an amendment to Rule 6(a) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”). The PN2 Notification brought into effect the key changes introduced through the Press Note 2 of 2026, issued by the Department for Promotion of Industry and Internal Trade (“DPIIT”), which provided clarity on key interpretational issues including on how beneficial ownership is to be assessed in relation to investments in Indian companies 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.

Introduction of Below Threshold Reporting Requirement

Significantly however, the PN2 Notification read with the ‘Standard Operating Procedure (SOP) for Processing FDI Proposals’ issued by the DPIIT on May 4, 2026 (“FDI SOP”), has introduced a reporting requirement for investments into India from an investor entity that has any direct or indirect ownership by a citizen or entity of a country sharing a land border with India, where such investment does not otherwise require prior Government approval pursuant to the prescribed land border restrictions (“Below Threshold Reporting”).

In practical terms, even where the proposed investment by the investor does not cross the applicable beneficial ownership threshold and is under the automatic route, the investor is still required to undertake reporting if there is any direct or indirect ownership traceable to such persons.

Crucially, the FDI SOP stipulates that the Below Threshold Reporting must be made prior to the inward remittance of foreign capital, or where the transaction does not involve foreign capital inward remittance, the reporting must be made prior to execution of the relevant transaction (including issuance or transfer of capital instruments, as applicable). The onus of reporting is placed on the Indian investee entity or the resident Indian transferor / transferee, as the case may be.

The Below Threshold Reporting requires extensive disclosures, including information regarding the investor’s upstream shareholding, beneficial owners, organisation and control structure, fund manager/sponsor/general partner/investment committee details, as well as detailed disclosures relating to the Indian investee and the proposed transaction. The reporting must further disclose copies of transaction documents such as the investment agreement, shareholders’ agreement, share transfer agreement, joint venture agreement, term sheet or MoU, if available.

While the FDI SOP stipulates that the Below Threshold Reporting is required to be undertaken online through the Foreign Investment Facilitation (FIF)/NSWS portal (“Portal”), the FDI SOP also provides that the reporting will be governed under the Foreign Exchange Management (Mode of Payment and Reporting of Non-debt Instruments) Regulations, 2019 (“NDI Reporting Regulations”). It is pertinent to note that the form for submission of documents / information relating to Below Threshold Reporting (“LBC Form”) has been operationalised on the Portal, and the relevant entities may accordingly undertake submission of the LBC Form on the Portal as on date. However, it is worth noting that since the corresponding amendments have not been made to the NDI Reporting Regulations, the modalities of making the Below Threshold Reporting to the Reserve Bank of India will need to be reviewed with the authorised dealer banks once the same is operationalised by the Reserve Bank of India under the NDI Reporting Regulations.

Impact and Practical Implications

This development relating to the Below Threshold Reporting is likely to affect a wide range of inbound investment transactions, including investments by foreign funds and strategic investors whose ownership chains include minority participation (including minority protection rights such as veto rights) by citizens of a country sharing a land border with India, even if they are outside the Government approval regime. In practical terms, parties should now assess this requirement early in deal structuring and include the reporting as a condition precedent / pre-closing action to funding or closing, as applicable.

This will also increase the front-end diligence burden. Indian companies and their counsel will need to obtain detailed upstream ownership information from investors, including information on beneficial owners, fund structures, investment committee members, control pattern, and citizenship/place of incorporation analysis. This may be particularly cumbersome where the investor is a pooled vehicle, multi-layered holding structure, or widely held fund with passive limited partner participation. The need to gather and verify upstream ownership information and make a filing before remittance may increase transaction lead times and create a new execution dependency, particularly in deals that previously assumed that no land border approval or filing was required if the beneficial ownership thresholds were not crossed.

Authors – Amrita Patnaik, Harshit Chandra – Partners and Shamik Gupta – Senior Associate

Disclaimer: This alert only highlights key issues and is not intended to be comprehensive. The contents of this publication 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 publication should be considered an advertisement or solicitation of TT&A’s professional services.