India’s strategic move to liberalise FDI flows from land-bordering countries

In a strategic move aimed at attracting foreign direct investment (FDI) inflows into India and power India’s manufacturing capabilities, the Government of India (GOI) has decided to liberalise FDI inflows into India from countries with which India shares a land border or land-bordering countries (LBC).

Readers will be aware that under the current regime (called the PN3 regime), FDI from any entity that was incorporated in an LBC, or any entity whose beneficial owner was situated in or was a citizen of an LBC, could invest in India only with the approval of the GOI. The PN3 regime did not clarify what constitutes “beneficial ownership”.

While authorised dealer banks did their best to guide clients, the absence of a formal clarification from GOI resulted in investors and investee companies filing applications with the GOI as a matter of abundant caution. This hurdle significantly impacted deal timelines and deal certainty. Even if a foreign investor braved the risk based on a bona fide interpretation of the law, the risk of foreign exchange enforcement against such investments was writ large. It was a delicate balancing act that left a lot to be desired.

Recent policy changes to the FDI regime clarify that a citizen of, and/or a legal entity incorporated in, an LBC (“Restricted Persons”) have been permitted to own up to a prescribed percentage of non-controlling stake in another entity from a non-land border sharing country that invests in India. Such percentage has been fixed at 10% to align with The Prevention of Money Laundering Act, 2002, and the rules issued thereunder. While introducing the 10% threshold, the GOI has made it clear that regardless of the actual ownership percentage, ‘control’ of both the investor entity and the Indian investee company must remain outside the control of Restricted Persons. That said, it must be remembered though that FDI emanating directly from a Restricted Entity into the Indian investee company still appears to be under the approval route.

The proposed relaxation will help venture capital funds and other institutional investors whose investors and limited partners may have an LBC connection. The measure sends out a signal to investors that the GOI has a ‘tolerance’ limit of 10% being held by Restricted Persons. From an economic standpoint, the change should help in securing much needed FDI inflows into early-stage companies starved for venture capital and other risk capital.

The second major change is the Cabinet’s decision to introduce an “expedited clearance” of investment in specific sectors. The GOI proposes to introduce a 60-day clearance window for FDI proposals that envisage FDI inflows directly (without any investment company) from Restricted Persons in manufacturing capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer. In each case, ownership and control of the Indian entity must remain with resident Indian citizens. The GOI is likely to introduce these changes into the FDI framework shortly. This move will provide much needed FDI inflows into manufacturing, improve our production capacity and create more employment and integrating India into the global supply chain.

Both the changes discussed above augurs well for India’s efforts to become a manufacturing powerhouse, especially in electronics and components. Readers will remember that the GOI has already committed billions of dollars of support for electronics manufacturing through the PLI scheme. The measures must be viewed as part of the larger strategy of the GOI.

Both these measures come at a crucial juncture for India. With geopolitical uncertainties all around us, this seems to be a prudent and practical move. While the government has taken the first steps by issuing the Cabinet announcement followed by the release of Press Note 2 of 2026, the formal amendments to the FEMA (Non-Debt Instrument) Rules, 2019, is required for some of the changes to take effect. The GOI may also need to amend the SOP that they have put in place to deal with FDI proposals.

(The author is Partner, JSA Advocates & Solicitors. Views are personal.)