India’s FDI Framework Revisited: A Shift from Press Note 3 (2020) to Press Note 2 (2026)

1. Introduction

The Department for Promotion of Industry and Internal Trade (DPIIT), through Press Note 2 of 2026 (“PN2”), has undertaken a calibrated revision of India’s foreign direct investment (FDI) framework applicable to investments from countries sharing a land border with India.

This marks a transition from the restrictive regime introduced under Press Note 3 of 2020 (“PN3”) towards a more structured, threshold-based approach. The revised framework seeks to preserve national security safeguards while facilitating legitimate capital flows and improving transactional certainty.

2. Background: The PN3 Regime

Press Note 3, issued on April 17, 2020, mandated prior government approval for all FDI originating from, or beneficially owned by, entities in land-bordering countries (LBCs), namely China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Sri Lanka.

The scope of PN3 extended to direct investments, indirect acquisitions, and transfers of ownership resulting in a change in beneficial ownership to LBC entities.

While PN3 addressed concerns of opportunistic acquisitions during a period of economic vulnerability, it also led to increased regulatory uncertainty, prolonged approval timelines, and structuring challenges for global investors with incidental LBC exposure.

3. PN2 (2026): Introduction of a Threshold-Based Framework

PN2 amends Paragraph 3.1.1 of the Consolidated FDI Policy and introduces a more nuanced regulatory structure.

Key Features

• Investments involving beneficial ownership from LBCs are permitted under the automatic route where such ownership does not exceed 10 percent and does not confer control.
• Investments exceeding 10 percent, or resulting in control, require prior government approval.
• Investments permitted under the automatic route are subject to mandatory reporting to DPIIT in accordance with a prescribed Standard Operating Procedure (SOP).
• Investments from Pakistan continue to be restricted, except in limited sectors such as defence, space, and atomic energy.

4. Time-Bound Approvals: Introduction of a 60-Day Processing Timeline

Proposals involving investments from land-bordering countries in identified priority manufacturing sectors, including capital goods, electronic components, and semiconductor value chains (such as polysilicon, ingots, and wafers), are to be processed within a stipulated timeline of 60 days. This introduces a significant departure from the earlier PN3 regime, where approval timelines were not defined and often resulted in delays, impacting deal certainty and transaction execution.

The framework enhances predictability in regulatory decision-making, aligns with India’s objective of strengthening domestic manufacturing and global supply chain integration, and reduces execution risk in time-sensitive transactions. The list of eligible sectors may be revised by a Committee of Secretaries chaired by the Cabinet Secretary. Notably, this expedited mechanism applies only where majority ownership and control of the Indian investee entity remain with resident Indian citizens or Indian-controlled entities, all other proposals shall continue to be governed by the existing approval framework under the Government of India’s SOP dated August 17, 2023

5. Beneficial Ownership: Alignment with PMLA

A central feature of Press Note 2 of 2026 is the formal adoption of the concept of “beneficial ownership” as defined under the Prevention of Money Laundering Act, 2002 (PMLA), specifically Section 2(1)(fa) read with Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.

Under this framework, beneficial ownership is determined based on both ownership thresholds and the ability to exercise control. In the context of foreign investment, an entity will be regarded as having beneficial ownership traceable to a land-bordering country where an individual or entity from such jurisdiction, directly or indirectly, holds more than 10 percent of the equity share capital or voting rights, or otherwise exercises control or significant influence over the investor or the investment structure.

The inclusion of “control” and “significant influence” as determinative factors is particularly noteworthy. It extends the analysis beyond formal shareholding to encompass contractual rights, governance arrangements, and other mechanisms through which decisive influence may be exercised. This would include, for instance, rights to appoint directors, veto rights over strategic decisions, or any arrangement that enables participation in policy-making processes.

Further, the reference to indirect holdings ensures that multi-layered investment structures are appropriately captured. The beneficial ownership test must therefore be applied not only at the level of the immediate investing entity but also by tracing ownership through upstream entities, including limited partners, holding companies, and other intermediate vehicles.

At the same time, the framework imposes a greater onus on investors and Indian investee companies to undertake robust beneficial ownership analysis. This would typically require a detailed examination of shareholding patterns, constitutional documents, shareholder agreements, and fund structures to assess both direct and indirect exposure to land-bordering countries.

In effect, the alignment with PMLA transforms beneficial ownership from a broadly worded policy concern into a legally grounded and operationally testable standard. This is likely to facilitate more predictable deal structuring while ensuring that investments involving material influence from sensitive jurisdictions continue to be subject to appropriate regulatory oversight.

6. Practical Implications

Press Note 2 of 2026 has significant implications across stakeholders, particularly in terms of transaction structuring, regulatory compliance, and capital access.

From an investor standpoint, the introduction of a threshold-based framework materially enhances certainty in deal structuring. Under the earlier regime, even minimal or indirect exposure to land-bordering countries could trigger the government approval requirement, often resulting in delays and increased execution risk. PN2 addresses this concern by permitting minority, non-controlling investments up to the prescribed threshold to proceed under the automatic route. This is particularly relevant for global private equity and venture capital funds, where investor bases are often widely distributed and may include limited partners from multiple jurisdictions, including land-bordering countries. The revised framework enables such funds to deploy capital without necessitating restructuring solely to ring-fence incidental exposure, provided control thresholds are not crossed and reporting obligations are complied with.

For Indian companies, especially startups and enterprises operating in capital-intensive or technology driven sectors, PN2 is likely to improve access to foreign capital. The earlier approval-based regime had, in many cases, resulted in extended deal timelines and, in some instances, the withdrawal or repricing of investments. By reducing regulatory friction for minority investments, PN2 facilitates faster capital infusion and enhances the attractiveness of Indian entities as investment destinations. Additionally, the clearer articulation of beneficial ownership reduces the complexity of diligence exercises, enabling companies to assess investor eligibility with greater confidence and efficiency.

From a transaction execution perspective, the reforms are expected to streamline deal timelines. The availability of the automatic route for specified investments reduces dependence on administrative approvals, while the introduction of defined timelines particularly the 60-day window for certain manufacturing sectors adds a degree of predictability that was previously absent. This is likely to have a positive impact on M&A activity, joint ventures, and growth-stage investments.

From a regulatory standpoint, PN2 reflects a shift from a pre-approval model to a disclosure and monitoring-based framework. By mandating reporting of investments even under the automatic route, the Government retains visibility over capital flows without impeding them at the entry stage. The alignment with PMLA standards further enables regulators to rely on an established legal framework for identifying beneficial ownership, thereby improving consistency in enforcement and reducing interpretational disputes.

At the same time, the revised framework places a greater compliance burden on both investors and investee companies to undertake thorough beneficial ownership analysis. This includes tracing indirect holdings, examining governance rights, and assessing control mechanisms embedded in transaction documents. In practice, this is likely to result in more detailed diligence processes and increased reliance on legal and compliance certifications at the time of investment.

Overall, PN2 recalibrates the balance between regulatory oversight and ease of doing business. It reduces friction for legitimate investments while ensuring that transactions involving material influence or control from land-bordering jurisdictions continue to be subject to appropriate scrutiny.

7. Conclusion

Press Note 2 of 2026 represents a measured and deliberate evolution of India’s FDI policy framework.

While retaining the foundational objective of safeguarding national security, the Government has introduced a more precise and proportionate regulatory approach. By distinguishing between passive investment and controlling interest, and by aligning the concept of beneficial ownership with established statutory standards, PN2 enhances both clarity and efficiency.

The reform signals a clear policy intent to facilitate capital inflows without diluting oversight. Its long- term effectiveness will, however, depend on consistent implementation and the timely issuance of corresponding notifications under FEMA.

Overall, PN2 reflects a mature regulatory posture, one that balances vigilance with openness, and control with commercial practicality.