The Union Cabinet has approved amendments to India’s foreign investment framework for countries sharing a land border with India. The changes revisit elements of the Press Note 3 (2020) regime and reflect an attempt to balance national security priorities with investment facilitation and ease of doing business.

Background: Introduced in April 2020, Press Note 3 required prior government approval for investments from countries sharing a land border with India, including cases involving beneficial ownership linked to such jurisdictions. The policy also applied to any transfer of ownership of existing or future foreign direct investment resulting in such beneficial ownership. Although aimed at protecting Indian companies from opportunistic takeovers during the pandemic, it created execution challenges for global PE and VC funds, where even limited indirect interests from such jurisdictions could trigger approval requirements and delay transactions.

One of the most significant changes is the introduction of a definition of “beneficial owner”, aligned with the Prevention of Money Laundering Rules, 2005. Under the revised framework, non-controlling beneficial ownership from land-bordering countries of up to 10% may be permitted under the automatic route, subject to sectoral limits, applicable conditions, and reporting requirements. The beneficial ownership assessment will also now be undertaken at the level of the investor entity, which should bring greater clarity for investment structuring and compliance. This is expected to particularly ease concerns for global investment funds with diversified investor pools that include small land-bordering countries investors without control rights.

The revised framework also introduces a 60 day approval timeline for investments from land bordering countries in certain strategic manufacturing sectors, including capital goods, electronic components, polysilicon, and ingot-wafer manufacturing. In these cases, the majority ownership and control of the investee entity remain with resident Indian citizens or Indian-controlled entities. The list of eligible sectors may also be revised or expanded by the CoS under the Cabinet Secretary.

The Cabinet’s decision marks an important development in the evolution of India’s foreign investment regime. With clearer beneficial ownership parameters and a faster approval pathway for certain strategic sectors, the revised framework seeks to balance legitimate national security concerns with the objective of maintaining India’s attractiveness as an investment destination.

Credits: Kajal Tandon (Counsel) & Arnav Mithal (Associate)