On March 10, 2026, the Government of India (‘Government’) issued a press release (‘Press Release’) notifying Cabinet approval regarding changes in the extant guidelines on investments from countries sharing land-borders with India (‘Neighbouring Countries’) including:

1. incorporation of a definition and criteria for determination of beneficial ownership;
2. expedited clearance of investments in specific sectors; and
3. reporting requirements.

Subsequently, on March 15, 2026, the Department for Promotion of Industry and Internal Trade (‘DPIIT’), Ministry of Commerce & Industry issued Press Note No. 2 (2026 Series) (‘PN2/2026’) amending the Consolidated FDI Policy Circular of 2020 dated October 15, 2020 (‘FDI Policy’) in relation to cross-border investments originating from or involving beneficial owner(s) from Neighbouring Countries.

The changes will become law, effective from the date of the notification of amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 under the Foreign Exchange Management Act, 1999 (‘FEMA Notification’). Set out below are the key changes introduced through PN2/2026.

i.    Introduction of Criteria to Determine Beneficial Owners:

a. As per Press Note 3 (2020 Series) dated April 17, 2020 (‘PN3/2020’), foreign investment, directly or indirectly, by an entity of a Neighbouring Country or where the beneficial owner of such investment into India is situated in, or is a citizen of, any Neighbouring Country, requires prior approval of the Government. PN3/2020 does not define the term ‘beneficial owner’.

b. PN2/2026 provides a definition for the term ‘beneficial owner’, specifying that the expression means the beneficial owner of a foreign investor entity (which is itself not incorporated or registered in a Neighbouring Country). It further clarifies that the term ‘beneficial owner’ has the same meaning as prescribed under Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 and is to be determined as per the criteria stipulated under Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (‘PMLA KYC Rules’).

c. As per PN2/2026, the beneficial ownership of an investment into India is considered to be vested in a Neighbouring Country if a citizen of a Neighbouring Country or an entity incorporated or registered in a Neighbouring Country has the ability to, directly or indirectly, individually or cumulatively, independently or collectively, whether acting together or otherwise, hold any rights or entitlements:

• in excess of the thresholds prescribed in the PMLA KYC Rules, over the foreign investor; or
• which enable such citizens and/or entities to exercise ‘control’ over the foreign investor; or
• which enable such citizens and/or entities to exercise ultimate effective control over the Indian investee entity in any manner.

d. Following are the key principles and thresholds for determination of a ‘beneficial owner’ of the foreign investor based on the PMLA KYC Rules:

1. In case of a company, the beneficial owner is a person who (whether acting alone or together, or through one or more persons):

• owns or is entitled to more than 10% of the shares or capital or profits of such company; or
• exercises control over such company (including through a right to appoint a majority of the directors or to control the management or policy decisions including by virtue of shareholding or management rights or shareholders agreements or voting agreements).

2. In case of a partnership firm, the beneficial owner is a person who (whether acting alone or together, or through one or more persons):

• owns or is entitled to more than 10% of capital or profits of the partnership; or
• exercises control over such partnership firm (including through the right to control its management or policy decisions).

3. In case of an unincorporated association or body of individuals, the beneficial owner is such person who (whether acting alone or together, or through one or more persons) owns or is entitled to more than 15% of the property or capital or profits of such association or body of individuals.
4. Where no natural person is identified under (1) or (2) or (3) above, the beneficial owner is the individual who holds the position of senior managing official.
5. In case of a trust, the identification of beneficial owner(s) will include identification of the author of the trust, the trustee, the beneficiaries with 10% or more interest in the trust and any other person exercising ultimate effective control over the trust through a chain of control or ownership.
6. In case the investor entity is an entity resident in such jurisdictions as notified by the Government (i.e. USA, Japan, South Korea, United Kingdom (excluding British Overseas Territories), France, Germany, Canada and International Financial Services Centre in India) and listed on stock exchanges in such jurisdictions, or is a subsidiary of such listed entity, it is not necessary to identify and verify the identity of any shareholder or beneficial owner.

While PN3/2020 did not define the term ‘beneficial owner’, market practice has largely evolved to adopt the 10% threshold under the Companies (Significant Beneficial Owners) Rules, 2018 and the PMLA KYC Rules as a practical threshold for determining if Government approval should be sought. PN2/2026 clarifies this view. It further clarifies that in case of individuals, the relevant test is citizenship (and not residency), which was also a view being taken by market participants.

ii.   Reporting Requirements

a. As per PN2/2026, investments made by foreign investors, with any direct or indirect ownership of a citizen or entity from a Neighbouring Country, which do not require prior Government approval, are subject to reporting requirements (which, per the Press Release, is to be done by the Indian investee company).

b. While PN2/2026 does not prescribe the format and process for such reporting, we expect the same to be prescribed by the DPIIT by way of amendments to the existing standard operating procedure (‘SOP’) for processing foreign direct investment proposals.

iii.  Expedited Clearance of Investments in Focus Sectors

a. As per the Press Release, Government approval for foreign investments by entities or citizens of Neighbouring Countries in specified sectors/activities of manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer (‘Focus Sectors’), will be processed and decided within 60 days.

b. In such cases, the majority shareholding and control of the Indian investee company should remain with resident Indian citizens and/or resident Indian entities owned and controlled by resident Indian citizens, at all times.

c. While the abovementioned timeline for approval of investments in Focus Sectors has not been included in the PN2/2026, we expect the same to be prescribed by the DPIIT, in due course, by way of amendments to the SOP for processing foreign direct investment proposals.