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Automatic route for minority LBC investments: Up to 10% LBC Beneficial Ownership now allowed without prior Government approval.
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PN3 BO aligned with PMLA: Beneficial Ownership definition now clarified, reducing regulatory ambiguity.
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Fast-track approvals: FDI in specified sectors to be processed within 60 days.
Introduction
In a major policy shift, the Union Cabinet, vide its Press Release dated March 10, 2026 (“Press Release”)1 approved amendments to Press Note 3 (2020 Series) dated April 17, 2020 (popularly known as “PN3”)2, which governs India’s Foreign Direct Investment (“FDI”) policy applicable to investments from countries sharing land borders with India (“LBC”). These changes have been further elaborated through Press Note 2 (2026 Series) dated March 15, 2026 (“PN2 of 2026”)3 issued by the Department for Promotion of Industry & Internal Trade (“DPIIT”), which amends para 3.1.1 of Consolidated FDI Policy Circular of 2020 dated 15.10.2020 (“FDI Policy”). Collectively, the Press Release and PN2 of 2026 introduce a revised beneficial ownership (“BO”) and approval framework under PN3 (“Revised Framework”).
The Revised Framework is expected to be followed by corresponding amendments to the FDI Policy, the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”)4, the Standard Operating Procedure for Processing FDI proposals (“SOP”)5 and related implementation guidelines.
Background: PN3 Regime
PN3 was issued on April 17, 2020, amid the COVID-19 pandemic to “curb opportunistic takeovers/acquisition of Indian companies”. Pursuant to PN3, an entity of a country that 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, may invest only through the Government approval route. Additionally, any transfer of ownership of existing or future FDI in an Indian entity that results in the BO falling within the aforesaid jurisdictions also requires Government approval. The effect of this framework was to impose a blanket requirement for Government approval for investments originating from China (including Hong Kong and Macau), Pakistan, Bangladesh, Nepal, Bhutan, Afghanistan, and Myanmar, irrespective of the sector involved.
Following the issuance of PN3, several amendments were introduced across different Indian laws and regulations to ensure alignment with its requirements, thereby embedding PN3 firmly within India’s FDI regulatory framework. While the measure served its intended objective of safeguarding national security, it also created uncertainty for several otherwise innocuous investments.
Key Amendments Approved under the Revised Framework
a) “Beneficial Ownership” under PN3 Defined: From Ambiguity to Alignment and Automatic Route Relief
Earlier, a key source of uncertainty under PN3 was the absence of a definition of the term “beneficial owner”, which led to significant interpretational ambiguity. This ambiguity was compounded by differing thresholds and terminology across Indian regulatory regimes, including “beneficial owner” under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”)6and “significant beneficial owner” (“SBO”) under the Companies Act. Consequently, market participants adopted inconsistent approaches some relying on the SBO framework, others applying the PMLA Rules, while in certain cases even minimal direct or indirect LBC shareholding was treated as triggering Government approval. The revised disclosure norms introduced under the SOP dated August 17, 2023, had further reinforced the perception that any direct or indirect LBC investment, irrespective of shareholding percentage or number of shares, would require prior Government approval under PN3. This lack of clarity led to inconsistent interpretations among banks and market participants, with even small minority interests from LBC jurisdictions potentially requiring prior Government approval.
The Revised Framework now expressly clarifies that “beneficial owner” for PN3 purposes shall carry the meaning assigned under Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 (“PMLA”)7and be determined in accordance with Rule 9(3) of the PMLA Rules, as amended from time to time. The Press Release further clarifies that the BO test is to be applied at the investor entity level.
Under the PMLA Rules, a beneficial owner is generally the natural person who ultimately owns or controls an entity through either a controlling ownership interest (i.e., more than 10% of shares, capital, or profits) or other forms of control, including rights to appoint a majority of directors or influence management or policy decisions. PN3, however, has historically targeted both entities situated in LBC jurisdictions and citizens of such jurisdictions.
To reconcile these approaches, the Revised Framework (as clarified through PN2 of 2026) adopts a hybrid BO model, applying PMLA Rules-based thresholds and control tests to both LBC-based entities and individuals. As per this, BO will be deemed to vest in an LBC where citizens or entities from LBC jurisdictions directly or indirectly hold rights or entitlements that –
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exceed prescribed BO thresholds in a non-LBC entity investing in an Indian entity; or
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enable control over such investor entity; or
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enable ultimate effective control over the investee entity.
Notably, while the Press Release requires the BO assessment (including control) to be undertaken at the investor entity level, PN2 of 2026 introduces an additional test to cover ultimate effective control over the investee entity.
Consequently, investments involving non-controlling BO from LBC jurisdictions of up to 10% will now be permitted under the automatic route, subject to applicable sectoral caps and FDI entry conditions. This provides significant relief to global private equity (“PE”) and venture capital (“VC”) funds, offshore listed companies with minority LBC shareholders, and Indian start-ups seeking to reverse-flip their structures to India, all of which had previously faced challenges due to incidental and non-controlling LBC investor exposure. Such investments may now proceed without the prior Government approval.
Alignment with PMLA Rules-based BO criteria is not unprecedented. A similar approach was adopted by SEBI through its circular dated October 08, 20248 in relation to Alternative Investment Funds (“AIFs”), which introduced enhanced due diligence requirements where LBC participation crossed specified thresholds.
Importantly, the exemption applies only to indirect investments involving non-controlling LBC BO of up to 10%. Direct investments by entities situated in, or citizens of, LBC jurisdictions will continue to require prior Government approval irrespective of investment size.
b) DPIT Reporting
Under the Revised Framework, investments involving non-controlling BO from LBC jurisdictions of up to 10% are permitted under the automatic route, subject to sectoral caps and entry conditions however, the Indian investee company is now required to report prescribed details to the DPIIT of investments received which involves direct or indirect ownership by a citizen or an entity from LBC jurisdictions or the cases not requiring Government approval under the Revised Framework, in the format referenced under the SOP.
Introduction of this additional reporting layer give rise to incremental compliance considerations for both investee companies and investors. Also, notably, the existing SOP currently prescribes formats only for FDI approval applications, thereby creating an operational gap that may require regulatory clarification.
c) Expedited Approval Timelines for Specified Sectors:
As per the Revised Framework, FDI proposals involving LBC jurisdictions in specified manufacturing sectors will now be subject to expedited processing. The identified sectors presently include manufacturing in capital goods, electronic capital goods, electronic components, and polysilicon and ingot-wafer, with applications in these sectors to be processed and decided within 60 days. Investee companies seeking to avail this fast-track mechanism should ensure that majority shareholding and control remain with resident Indian citizens or Indian entities at all times i.e., Indian Owned and Controlled Companies (“IOCC”), thereby preserving the core premise of PN3 that businesses in sensitive sectors remain Indian-controlled. The Committee of Secretaries, under the Cabinet Secretary, may expand or revise the list of eligible sectors from time to time.
Key Takeaways and Implications
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Adoption of PMLA Rules-Based BO Criteria for PN3 Matters:
The adoption of the PMLA Rules–based BO criteria, with necessary customization for PN3, is a welcome development, given that the PMLA framework is already widely applied by financial-sector regulators, banks, and financial institutions.
Under the PMLA Rules, BO identification is exempt for entities listed on stock exchanges in jurisdictions notified by the Central Government and their subsidiaries. Earlier, in the absence of clear guidance on BO thresholds, even listed multinational companies were often required to trace ultimate natural person owners, which proved impractical in cases of widely dispersed shareholding. Now, with the adoption of PMLA Rules–based BO criteria, listed entities from notified jurisdictions should benefit from such exemption. Accordingly, where an investor is listed in a notified jurisdiction (for instance, the United States) but has LBC entities or individuals holding more than 10%, approval requirement under PN3 should not arise.
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Treatment of Pre-Existing LBC Investments Compliant with PMLA-Rules based BO Criteria
While the amendment introduced through the Revised Framework provides welcome relief for global VC/PE funds with non-controlling LBC BO in respect of future investments, it appears to operate prospectively and does not grandfather existing structures already compliant with the PMLA Rules-based BO criteria. Several investors had previously invested based on regulatory comfort from their Authorised Dealer (“AD”) banks, often in anticipation of future regulatory clarification or relaxation.
In the absence of grandfathering relief, the investments undertaken prior to this Revised Framework, even if compliant with the PMLA Rules, may continue to be subject to uncertainty.
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Expedited LBC Investment Approvals for Select Sectors
The sectors identified for expedited LBC approvals within the 60-day timeline do not appear arbitrary; rather, they reflect a calibrated policy assessment based on India’s import dependencies, technology gaps, and China’s dominance across certain global supply chains. Collectively, these sectors accounted for approximately 60% (by value) of India’s imports from China in 20259. The selection therefore appears to prioritise areas where national security sensitivities are comparatively lower, while the economic gains from reducing external dependence and strengthening domestic manufacturing capabilities are significant. Notably, this fast-track mechanism is not available to foreign owned or controlled companies (“FOCCs”), even where they operate within these identified sectors.
Earlier, although the SOP dated August 17, 2023 envisaged a 12-week timeline for processing PN3 applications, approvals in practice often took significantly longer, typically ranging from eight months to a year. While timelines have improved somewhat in recent years, adherence to prescribed processing periods has remained inconsistent. It remains to be seen whether the newly introduced 60-day timeline will translate into materially faster approvals in practice.
By comparison, sensitive foreign investment reviews in the United States operate within legally prescribed timelines with clear accountability for delays. Introducing a similar level of process accountability across sectors in India could improve predictability in the approval process. This is particularly important as PE, sovereign wealth funds, and pension funds are increasingly looking to invest in sectors such as healthcare, financial services, and e-commerce, which are currently not covered under the 60-day approval framework.
Approval Routes and Timelines under Revised Framework
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Investment Scenario
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LBC Beneficial Ownership
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Approval Route
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60-day Fast-track
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Investment with LBC BO exposure
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Up to 10%
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Automatic
(subject to DPIIT reporting)
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Not applicable
(no approval required)
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Investment in IOCC
in Select Sectors with LBC BO exposure
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Above 10%
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Government
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Fast-track processing
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Investment in FOCC
in Select Sectors with LBC BO exposure
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Above 10%
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Government
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No Fast-track
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Investments in Other Sectors with LBC BO exposure
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Above 10%
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Government
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No Fast-track
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Direct investment by an LBC Investor in any sector
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Any percentage
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Government
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No Fast-track
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Further Reform Considerations
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While the Revised Framework aligns BO determination with the 10% threshold under the PMLA Rules, a wider relaxation could have been considered for non-sensitive sectors for instance, allowing investments up to 24% (as earlier suggested by NITI Aayog10) or even 49% under the automatic route without prior Government approval.
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Although a 60-day timeline has been introduced for processing sector-specific applications, its practical implementation remains to be tested. A uniform 60-day approval timeline across all sectors involving direct or indirect LBC exposure, rather than only selected sectors, could have further improved regulatory certainty.
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Greater transparency in the approval process including periodic status updates on pending applications and publication by DPIIT of aggregate PN3 data (applications received, approvals granted, rejections, and sectoral trends) would significantly enhance investor confidence and predictability.
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Any follow-on investments by LBC investors holding shares prior to the introduction of PN3 could be exempted from approval requirements, or routed through a fast-track mechanism, where such investments merely maintain pre-PN3 shareholding levels, including participation in rights or bonus issues or exercise of investor protection rights.
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In the absence of explicit clarification, many AD banks have historically adopted conservative interpretations of PN3, extending its application to other foreign investment routes such as LLP investments under Schedule VI and investments by FVCIs under Schedule VII of the NDI Rules. The Revised Framework could have explicitly clarified on the scope of PN3.
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Further, the relief under the Revised Framework could have been also extended retrospectively by grandfathering earlier investments that are compliant with the PMLA Rules–based BO criteria.
Conclusion
Taken together, the Revised Framework reflects a calibrated effort to balance national security considerations with India’s broader economic and investment objectives. By easing norms for indirect, passive investments and introducing expedited approval timelines in select manufacturing sectors, the Government has taken a meaningful step toward improving investment certainty. However, continued monitoring and targeted further refinements such as expanding the scope of sectors eligible for fast-track approvals and addressing the additional reform areas discussed above could further enhance ease of doing business while preserving the core safeguards underlying PN3.
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