India Recalibrates FDI Policy for Land Bordering Countries: A Strategic Shift from Blanket Restriction to Calibrated Engagement

Background: The Genesis of Press Note 3 (2020)

The COVID-19 pandemic triggered an unprecedented wave of global market volatility in early 2020. As equity valuations across Indian listed and unlisted companies fell sharply, the Indian government grew concerned about the risk of opportunistic acquisitions of strategically important Indian enterprises by state-affiliated or state-linked entities from neighbouring countries — in particular, the People's Republic of China.

In response, the Department for Promotion of Industry and Internal Trade (DPIIT) issued Press Note 3 of 2020 (PN3) on 17 April 2020, amending the Consolidated FDI Policy of India. The amendment required that any entity from a country sharing a land border with India — or any entity whose beneficial owner is situated in or is a citizen of such a country — could invest in India only through the Government approval route, irrespective of the sector or the quantum of investment.

India shares land borders with six countries: China, Pakistan, Bangladesh, Nepal, Bhutan, and Myanmar. While the policy was facially neutral across all Land Bordering Countries (LBCs), its practical intent and economic impact was most directly felt in relation to Chinese investors, who represented a significant portion of India's inbound venture capital and private equity ecosystem. PN3 also extended its reach to cover any subsequent transfer of ownership — direct or indirect — that resulted in the beneficial ownership falling within an LBC jurisdiction.

While PN3 served its intended protective purpose, its implementation exposed significant structural difficulties. The definition of 'beneficial owner' was left undefined in the FDI Policy context, leading to interpretive inconsistency. Global funds domiciled in third countries but with minority Chinese limited partner (LP) interests found themselves caught by the approval requirement even where no Chinese entity exercised meaningful control or strategic influence over the investment decision.

The Cabinet-Approved Amendments: What Has Changed?

On 10 March 2026, the Union Cabinet chaired by Prime Minister Narendra Modi approved two significant amendments to the FDI Policy in respect of LBC investments. These amendments are designed to address the structural over-breadth of PN3 while preserving the core national security architecture.

Amendment 1: Codification of the 'Beneficial Owner' Definition

The first and arguably more structurally significant amendment is the incorporation of a formal definition and criteria for determining 'Beneficial Ownership' within the FDI Policy framework. Prior to this amendment, the FDI Policy did not define the term, leaving applicants and approving authorities to rely on analogous definitions in other legal instruments.

The Cabinet has now anchored the beneficial ownership test to the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA Rules), which define a 'beneficial owner' as a natural person who ultimately owns or controls a client or the person on whose behalf a transaction is conducted. Under the PMLA framework, the threshold for attributing beneficial ownership in a company is 25 percent of shares or voting rights.

Critically, the Beneficial Ownership test will be applied at the level of the investor entity — not traced up to the fund's ultimate LP base. This is a meaningful departure from the earlier practice. Under the revised framework, investors with non-controlling LBC Beneficial Ownership of up to 10 percent in the investing entity will be permitted to invest under the automatic route, subject to applicable sectoral caps and entry conditions. The investee entity in India will be required to report relevant information to DPIIT. Investments above the 10 percent threshold or involving controlling LBC beneficial ownership continue to require Government approval.

Amendment 2: Time-Bound Approval for Priority Sectors

The second amendment introduces a structured 60-day timeline for processing and deciding Government approval applications in specified priority sectors. This directly addresses a major operational pain point: approval timelines under the existing framework were indeterminate and frequently extended beyond six to twelve months, making it practically impossible to structure time-sensitive commercial transactions.

The sectors designated for expedited clearance are: (i) manufacturing of capital goods; (ii) manufacturing of electronic capital goods; (iii) manufacturing of electronic components; and (iv) manufacturing of polysilicon and ingot-wafer for the solar energy value chain. A Committee of Secretaries (CoS) under the Cabinet Secretary is empowered to revise this sector list over time.

For investments processed under the expedited track, a mandatory structural condition applies: the majority shareholding and management control of the Indian investee entity must be held by resident Indian citizens or resident Indian entities owned and controlled by resident Indian citizens at all times.

Comparative Analysis: Before and After

Parameter	Pre-Amendment (PN3, 2020)	Post-Amendment (March 2026)
Beneficial Owner Definition	Not defined in FDI Policy; open to interpretation	Formally defined; aligned with PMLA Rules, 2005; applied at investor entity level
Automatic Route Eligibility	No LBC entity eligible — all required Government approval	LBC beneficial ownership ≤10% (non-controlling) eligible for automatic route with DPIIT reporting
PE/VC Global Funds	Caught by PN3 even with minority, non-controlling LBC LP interests	Eligible for automatic route if LBC beneficial ownership in fund entity ≤10% and non-controlling
Approval Timeline	No prescribed timeline; typically 6–12+ months	60-day decision mandate for specified priority sectors
Control Requirement (Approvals)	No explicit resident-control condition for Government-route investments	Majority shareholding and control must vest with resident Indian citizens/entities at all times (for expedited sector approvals)
Sector Flexibility	No sector-specific provisions; uniform Government approval requirement	Priority sectors (capital goods, electronics, solar) get expedited 60-day track; CoS empowered to expand list
Transfer of Ownership	Any transfer resulting in LBC beneficial ownership requires Government approval	Unchanged; Government approval required if transfer results in LBC BO above thresholds

Key Sectors Benefiting from the Relaxations

1. Electronics Manufacturing and Capital Goods

India's ambition to become a global electronics manufacturing hub — anchored by the Production-Linked Incentive (PLI) scheme and the Semiconductor Mission — requires deep integration with East Asian supply chains, including Chinese component suppliers and Taiwanese and South Korean manufacturers with Chinese subsidiary networks. The expedited approval mechanism for electronic components and capital goods is designed to enable time-sensitive joint ventures and technology transfer arrangements, which were previously stalled by approval uncertainty.

2. Solar Energy Value Chain

The inclusion of polysilicon and ingot-wafer manufacturing is particularly strategic. China dominates over 80 percent of global polysilicon production, and any meaningful indigenisation of India's solar manufacturing ecosystem will require engagement with Chinese technology holders. The 60-day approval timeline provides the certainty needed to structure offtake agreements, licensing deals, and joint ventures with LBC entities while ensuring Indian operational control.

3. Startups and Deep Tech

 

The beneficial ownership clarification will be significantly felt in the startup ecosystem. Several marquee Indian unicorns and deep-tech ventures received early-stage capital from global VC funds with Chinese LP participation — including funds domiciled in Singapore, Cayman Islands, and the United States. These funds were systematically caught by PN3's approval requirement despite having no operational nexus with China. The 10 percent non-controlling threshold will allow such funds to re-engage with the Indian startup market under the automatic route, improving India's standing as a capital destination for global technology investors.

4. Global Fund Participation (PE/VC)

Pan-Asian and global private equity funds with diversified LP bases have long flagged PN3 as an impediment to capital deployment in India. The policy framework as amended recognises that passive, minority LBC participation in a fund does not translate into strategic control over the investee company, and provides a proportionate regulatory response. This is consistent with international practice in countries such as Australia and the United Kingdom, which apply national security review mechanisms to controlling investments rather than passive minority holdings.

Legal Effectiveness: The FEMA Notification Requirement

It is essential to understand that the Cabinet approval of these amendments to the FDI Policy does not, by itself, bring the changes into legal force under India's foreign exchange regulatory framework.

Under the Foreign Exchange Management Act, 1999 (FEMA), the substantive regulatory architecture governing foreign investment is established through the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), issued by the Ministry of Finance, and the corresponding Regulations issued by the Reserve Bank of India. The FDI Policy published by DPIIT serves as an administrative articulation of the government's policy intent but derives its legal enforceability through its incorporation into the NDI Rules and RBI Regulations.

Accordingly, the amendments approved by the Cabinet — including the beneficial ownership definition, the 10 percent automatic route threshold, and the 60-day approval timeline for priority sectors — will come into legal force only when notified through a formal amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and the corresponding RBI Regulations. Investors should monitor the Official Gazette for such notifications and must not proceed on the assumption that the amended framework is presently operative as a matter of FEMA law.

This sequencing between policy announcement and FEMA notification has historically resulted in gaps ranging from weeks to several months. Until such notification, transactions involving LBC beneficial ownership at any level continue to require Government approval under the existing PN3 framework.

Conclusion

The Cabinet's approval of these amendments marks a mature recalibration of India's approach to LBC investment — moving from a blunt instrument of blanket government approval to a risk-proportionate framework that distinguishes between passive minority exposure and meaningful strategic control. The anchoring of beneficial ownership to the PMLA standard, the 10 percent automatic route threshold, and the 60-day approval mandate for priority manufacturing sectors are each well-considered responses to the specific market failures that PN3, in its original form, had produced.

For global fund managers, technology companies seeking Indian manufacturing partnerships, and Indian enterprises in capital goods and renewable energy, this policy shift opens a meaningful new chapter. However, the commercial opportunity must be assessed against the continuing reality of FEMA's notification-first architecture: the amended framework will become legally operative only upon formal notification under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and RBI Regulations thereunder.

Disclaimer

The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents.

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