Press Note 3 gets clearer: Beneficial ownership rules for investments from land bordering countries clarified

Press Note No. 3 (2020 Series) dated April 17, 2020 (“PN 3”) mandates government approval for investments into India made by an entity of a country sharing a land border with India (“LBC”), or where the beneficial owner of the investment into India is situated in or is a citizen of a LBC. For over 5 years, a key question that remained unresolved for dealmakers in Indian transactions has been: who is ‘beneficial owner’? 

Finally, the government of India has attempted to clarify this dilemma through the press release dated March 7, 2026 (“Press Release”) and the Press Note No. 2 (2026 Series) dated March 15, 2026 (“PN 2”).

Matching intent from the Press Release, the PN 2 has formally anchored the determination of beneficial owner to section 2(1)(fa) of the Prevention of Money-Laundering Act, 2002 ("PMLA") and Rule 9(3) of the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”).

The provisions under PN 2 will be effective from the date of corresponding amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. Pursuant to the PN 2, please note that the law has not changed but rather has been clarified. 

PN 2 revises paragraph 3.1.1 of the Consolidated FDI Policy, 2020 and provides that beneficial ownership shall be deemed to vest in a LBC where citizen(s) of a LBC and/or entity(ies) incorporated or registered in a LBC, have the ability to directly or indirectly, individually or cumulatively, independently or collectively, whether acting together or otherwise, hold rights/entitlements: 

(a) in excess of the applicable thresholds prescribed under Rule 9(3) of the PML Rules in an investor entity incorporated outside a LBC; or 

(b) which enable them to exercise control over the investor entity; or 

(c) which enable them to exercise ultimate effective control over the investee entity in any manner. 

Accordingly, the PN 2 framework is not solely a numerical test of ownership threshold. Governance rights, shareholders’ agreements and other mechanisms through which control may be exercised including board rights, veto rights, would also be relevant for determination of beneficial ownership. 

Additionally, limb (c) above requires assessment of whether rights held by multiple LBC investors result in collective exercise of ultimate effective control over the Indian investee entity. For example, an investment vehicle in Singapore having multiple limited partners from LBC, each holding relatively small interests, may need to be collectively considered to assess ultimate effective control over the investee entity.

Further, ultimate effective control also suggests a broader look-through approach to ownership analysis, and investors with multi-layered holding structures or investing from regional investment hubs should carefully assess ownership and governance arrangements. 

While the Press Release had indicated a 60 days’ timeline for processing government approvals in the following sectors: manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer, PN 2 does not incorporate the principle on time bound fast track approval for these priority sectors. Until formally adopted, the 60 days’ timeline should be regarded as guiding policy rather than a binding legal provision. 

PN 2 also clarifies that investments involving non-controlling beneficial ownership which do not meet the applicable thresholds from citizens or entities of LBC may proceed under the automatic route, subject to reporting requirements to the Department for Promotion of Industry and Internal Trade (“DPIIT”) under a standard operating procedure. Accordingly, even if the investment qualifies under the automatic route, the investee entity would be required to report the transaction if there is any direct or indirect ownership by a citizen or entity of a LBC.

Such post-transaction monitoring/ reporting results in investments with LBC exposure remaining visible to the regulator even if government approval may not be required. This reporting will become clearer as it gets implemented over the next few months, however, if authorised dealer banks will require granular tracing of beneficial ownership in every case, the compliance burden would increase for investments that otherwise fall under the automatic route.

Lastly, the existing standard operating procedure dated August 17, 2023 relates to investments requiring government approval, and would likely need to be revised to provide some operational guidance to authorized dealer banks on the reporting requirements. 

Holistically, in conclusion, the new PN 2 framework signals a more facilitative approach for minority investments while retaining robust regulatory oversight over investments with LBC exposure. 

(Shekhar is Partner, CMS INDUSLAW; Abhyankar is Senior Associate, CMS INDUSLAW. Views are personal.)