Introduction
On March 10, 2026, the Union Cabinet approved significant amendments to Press Note 3 (“Amendment Notification“) which governs India’s foreign direct investment policy towards investments from countries that share land borders with India.[1]
The Amendment Notification addresses a fundamental problem that had emerged since Press Note 3 was first introduced in April 2020; the governing regulation for foreign investment had become so restrictive that while it was aimed at blocking strategically concerning investments from neighbouring countries, it heavily restricted routine capital flows from major global institutional investors whose only connection to those countries was minor or passive participation. The Amendment Notification attempts to restore the balance between national security screening and maintaining an attractive investment climate.
Background
Before Press Note 3, most foreign investments into India operated under the “automatic route” (except prohibited sectors and thresholds), which meant that investors could proceed with time sensitive transactions and notify the Reserve Bank of India, without waiting for government approval. This system allowed for rapid capital deployment and made India an attractive destination for international investors who valued speed and certainty in deal execution.
Press Note 3 changed this for a specific category of investors by requiring prior government approval for any investment from an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country—specifically China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan. Press Note 3 sought to protect Indian companies from opportunistic takeovers by investors from land bordering countries[2].
Over the years that followed, the breadth of Press Note 3 generated unintended consequences. Global private equity funds, venture capital investors, and institutional asset managers with diversified investor bases often found themselves unable to access India’s automatic investment route because a small portion of their capital originated from institutions located in countries sharing land borders with India. Hundreds of foreign investment proposals were submitted for approval under the Press Note 3 regime, with approval rates remaining relatively low and many applications remaining pending for extended periods.
Beneficial Ownership
The key feature that created the most business friction was not the restriction on direct investments from these countries, but rather the “beneficial ownership” rule that Press Note 3 introduced. A beneficial owner was not defined under Press Note 3, despite the concept being central to determining whether an investment would fall within the government approval route. The absence of an explicit definition or threshold created interpretive uncertainty. In practise, regulatory authorities assessed beneficial ownership by reference to the standards prescribed under the Prevention of Money Laundering Act, 2002 and the accompanying Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PMLA“), which set out established criteria for identifying the ultimate natural person exercising ownership or control. Through this, a beneficial owner was understood as the person or entity that ultimately owns or controls an investment, even if the investment is made through intermediate holding companies or fund vehicles.
A further challenge was that Press Note 3 did not specify any minimum threshold for determining when beneficial ownership would trigger the approval requirement. It applied to any investor anywhere in the world if the ultimate beneficial owner was from a land-bordering country. The practical consequences were severe, approval processes could take six to twelve months or longer, with no guaranteed timeline, limited transparency.
What the Amendment Notification Changed
The Amendment Notification seeks to address these unintended consequences through two significant policy adjustments:
- The first and most consequential change is the introduction of a clear threshold for beneficial ownership.
- Definition The Amendment Notification expressly links the determination of beneficial ownership to the framework under PMLA, thereby providing long overdue regulatory clarity.
- Revised threshold Under the revised framework, investors based in jurisdictions that do not share a land border with India may proceed through the automatic route if the beneficial ownership attributable to investors from land-bordering countries is below 10% (ten percent) and the investment does not confer control. This change is designed primarily to address the challenges faced by global institutional investors whose ownership structures include small passive stakes from a wide range of jurisdictions.
The Amendment Notification incorporates “control override,” which strategically addressed the concerning investments that Press Note 3 is intended to govern. Even if beneficial ownership from land-bordering countries is below 10% (ten percent), government approval is still required if the investment confers control. Control is assessed not just by ownership percentage but by examining the full range of rights and mechanisms through which influence can be exercised. This includes board representation, veto rights over major business decisions such as mergers or asset sales, technology transfer arrangements that create dependency or operational integration, rights to appoint key management personnel, protective provisions that go beyond standard minority investor protections, and information rights that extend into operational decision making rather than passive financial monitoring. However, the government has made clear that the relaxation does not apply to investors directly located in land-bordering countries. Companies directly incorporated in land-bordering countries still require government approval regardless of the size of their investment as clarified by the Department for Promotion of Industry and Internal Trade on March 11, 2026.
- Time Frame of ApprovalThe second major change introduced by the Amendment Notification is the establishment of a 60 (sixty) day fast-track approval process for investments in specified manufacturing sectors. The sectors currently designated for fast-track treatment include advanced battery components, rare earth processing and rare earth permanent magnets, capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer manufacturing for semiconductors. These sectors are strategically chosen areas where India is actively trying to build domestic manufacturing capacity and reduce dependence on imports but currently lacks the proprietary technology and manufacturing know-how at commercial scale.
Impact on Business
The Amendment Notification restore the practicality of the automatic route for funds whose exposure to land-bordering jurisdictions is limited and passive. The 60 (sixty) day fast-track approval mechanism provides greater predictability for investors considering joint ventures in priority sectors.
Conclusion
The Amendment Notification represents a meaningful recalibration of India’s foreign investment framework. The government has recognized that the original Press Note 3 was too broad in its application and caught global institutional investors who posed no genuine security risk, creating unnecessary friction in India’s capital markets and making the country less competitive for international investment relative to other major emerging markets. By introducing a clear beneficial ownership threshold and streamlining approval timelines for selected manufacturing sectors, the government has addressed some of the practical challenges created by the original notification.
[1] https://www.pib.gov.in/PressReleasePage.aspx?PRID=2237806®=3&lang=2
[2] https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=1615711®=3&lang=2
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