Recalibrating India's FDI Screening Framework for Land-Bordering Countries
- Mar 17
- 4 min read
Updated: 2 days ago
Press Note No. 2 (2026 Series): Recalibrating India's FDI Screening Framework for Land-Bordering Countries
Recently, the Union Cabinet has approved amendments[1] to the restrictions applicable to investments from countries sharing land border with India (“LBC”) as previously notified vide Press Note 3 (2020) dated April 17, 2020 (“PN3”). By way of background, pursuant to PN3, a proviso was added to Rule 6(a) of Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (“NDI Rules”) which required prior governmental approval in case of investments into India under Schedule I of NDI Rules from entities incorporated in LBCs or whose beneficial owner was situated in or was a citizen of such LBCs. PN3 was introduced with a view to restrict opportunistic takeovers/ acquisitions of Indian companies in the wake of the COVID-19 pandemic.
Pursuant to the aforementioned press release, the Department for Promotion of Industry and Internal Trade (“DPIIT”) has issued Press Note 2 (2026 Series) (“PN2”) on March 15, 2026, providing for amendments to PN3. The amendments will take effect from the date of notification under the NDI Rules.
Set out below are the key takeaways from PN2:
Citizenship as the only restriction for beneficial ownership
Per PN3, any beneficial owner ‘situated in’ or a citizen of LBCs was required to seek prior governmental approval before investing in the Indian entity. However, PN2 removes the concept of ‘situated in’ and limits the requirement of prior governmental approval to only cases where the beneficial owner being a natural person, is a citizen of LBCs.
Consequently, if the beneficial owner is a permanent resident of a LBC but not a citizen of LBC, the requirement of prior governmental approval to invest in Indian entities may not be applicable.
“Beneficial Owner” Test
PN2 has inserted a definition of ‘beneficial owner’ in alignment with the Prevention of Money Laundering Act, 2002 (“PMLA”) and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”). PN2 expressly adopts the definition of ‘beneficial owner’ as elucidated in Section 2 (fa) of the PMLA[2] and the criteria laid down in Rule 9 (3) of the PML Rules. Effectively, PML Rules identify a natural person having more than 10% (ten percent) interest in a company / partnership firm or having “control”, either individually or through one or more juridical persons, as a beneficial owner. In case of a trust, the author, trustee and beneficiaries holding 10% (ten percent) or more interest shall be identified as beneficial owner.
PN2 requires that the evaluation of beneficial owner should be done vis a vis the investing entity (that is the entity investing in the target Indian entity) and not the Indian investee entity.
However, interestingly, PN2 provides for an overarching proviso to state that beneficial ownership will be deemed to vest in a LBC if ‘citizens of an LBC’ or ‘entities incorporated or registered in an LBC’, directly or indirectly, individually or cumulatively, independently or collectively, acting together or otherwise:
i) hold rights or entitlements beyond prescribed thresholds under the PML Rules in an investor entity outside of the LBC;
ii) exercise ‘control’ over the investor entity; or
iii) ultimately exercise ‘effective control’ over the Indian investee entity in any manner.
Accordingly, this provision also triggers requirement of prior governmental approval for investing in an Indian company for an entity incorporated in LBC (who is not a natural person) if such entity holds 10% or more in the investing entity (directly or indirectly) or controls the investing entity or ultimately exercise ‘effective control’ over Indian investee entity. It is an interesting departure from the erstwhile PN3 itself and the general construct of determining or attributing beneficial ownership to a natural person.
However, PN2 does not provide detailed guidance on how such indirect ownership should be assessed in multi-layered investment structures. For example, if the investing entity is incorporated in the United States of America (“US Co”) and is 100% owned by an entity in Singapore (“Singapore Co”) but an entity in Hong Kong (a land bordering country) (“HK Co”) owns 10% of the Singapore Co, will HK Co be considered to indirectly hold 10% in the US Co on a look through basis or will HK Co not be considered to hold US Co since it does not control Singapore Co? Basis guidelines under other Indian laws to determine indirect ownership, while the latter seems to be a more appropriate test, guidance under the amendment to the NDI Rules pursuant to PN2 would be welcome.
Similarly, PN2 does not provide for a separate definition of ‘control’. If the general definition of ‘control’ under the NDI Rules (rule 2(da)) is to be considered, the same is linked to the Companies Act, 2013 (section 2(27)) which states ‘control’ shall include the right to appoint majority of the Directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
Accordingly, control is an expansive definition and its determination maybe subjective, depending upon relevant facts of the matter. Whilst courts have time and again made a distinction between protective rights and rights conferring control, testing this definition in context of PN2 will be relevant, in particular considering that control may be exercised “in any other manner”.
Further, insertion of point (iii) of an overarching test of ultimate effective control on Indian company will need to be carefully evaluated in transactions, especially in cases such as technology collaboration agreements and similar arrangements wherein the evaluation of control test will be relevant.
Reporting Requirements
Lastly, in cases where prior approval is not required but any person (either a citizen or entity in LBC) has a direct or indirect ownership in the investing entity, then such investments must still be reported to the DPIIT in the format prescribed under the standard operating procedure issued by DPIIT.
Overall, considering the subjectivity aspect in determining beneficial owner and requirement to report indirect ownership from any person in LBC even if no prior approval is required, a layer-by-layer analysis for investors / funds continues to be a pre-requisite, with an added burden of reporting indirect ownership not amounting to beneficial ownership.
-Neha Londhe, Mahak Agarwal & Jenisha Parikh
[2] Section 2(fa) of the PMLA defines "beneficial owner" as “an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person.”
