Reform in India’s FDI Regime: Investments from Land-Border Countries

Within India’s foreign direct investment framework, substantive policy changes are articulated by the Department for Promotion of Industry and Internal Trade (“DPIIT”) through Press Notes, which set out amendments to the Consolidated FDI Policy and are subsequently codified in the next consolidated policy circular.

In the wake of the COVID‑19 pandemic and a global spike in strategic acquisitions, the Government of India issued Press Note 3 (2020 Series) (“PN3”) on April 17, 2020 to recalibrate the Foreign Direct Investment (“FDI”) regime for countries sharing land borders with India. PN3 was aimed at preventing opportunistic takeovers of Indian companies during a period of economic stress while preserving the existing sectoral caps and conditions under the FDI Policy 2020. (see FDI Policy 2020 – here).

Position Before 17/04/2020

Before the introduction of PN3, most foreign investments in India were permitted under the automatic route, subject to sectoral caps and conditions under the FDI Policy. Investment by entities from Bangladesh and Pakistan was already ring‑fenced and permitted only under the Government route, with prohibitions on investment in sensitive sectors such as defence, space, atomic energy and other sectors in which foreign investment was otherwise restricted. other sectors prohibited for foreign investment.

Position Since 17/04/2020

PN3 expanded the approval requirement for investment in India to all countries sharing land borders with India. Under this policy, any investment from such countries or where the beneficial owner (“BO”) of the investment is situated in or is a citizen of these countries, prior Government approval is required.

The policy also covers indirect transfers of ownership. If the transfer of ownership of an existing or future FDI in an Indian entity results in beneficial ownership falling within the restricted category, such transfer will also require Government approval.

Current Position w.e.f. 10/03/2026

The Government introduced certain Clarifications to PN3 on March 10, 2026 (Clarifications) to remove ambiguity and facilitate ease of doing business. Apart from clarification on definition of ‘BO’, a definitive timeline for approval of investments in critical sectors has also been prescribed. The reform is intended to enhance ease of doing business, unlock greater foreign investment, particularly for startups and deep-tech sectors and facilitate joint ventures and technology collaborations. By expediting approvals, the policy aims to strengthen domestic manufacturing and integrate Indian firms into global supply chains, particularly in sectors such as electronic components, capital goods, and solar cells.

MEANING OF BENEFICIAL OWNERSHIP FOR FDI PURPOSES 

Earlier the term “BO” was not defined in the PN3 which created ambiguity given the several definitions provided under various statutes. In terms of the Clarification issued on March 10, 2026 for the purpose of ownership scrutiny, the definition of “beneficial owner” under Section 2(fa) of the Prevention of Money Laundering Act, 2002 (“PMLA”), shall be taken into consideration. BO refers to the person who ultimately owns or controls an entity or on whose behalf a transaction is conducted.

The amendment further provides that where investors from land bordering countries have a non‑controlling beneficial ownership of up to 10%, such investments may be allowed under the automatic route subject to sectoral conditions and reporting requirements.

TIMELINES FOR INVESTMENT APPROVAL

Earlier, no specific timeline existed for government approval of such investments. Under the Clarification, investments from land bordering countries in certain manufacturing sectors such as capital goods, electronic capital goods, electronic components, polysilicon and ingot‑wafer manufacturing must be processed within 60 days. The list of such sectors may be reviewed periodically by the Committee of Secretaries.

IMPLICATIONS

The clarified BO standard and the limited automatic route for non‑controlling sub‑10% stakes are expected to provide much‑needed predictability to investors while preserving the national‑security filter for sensitive cases. Time‑bound approvals in priority manufacturing segments should help crowd in FDI, facilitate access to advanced technologies, deepen domestic value addition and strengthen India’s position in global supply chains, thereby supporting Atmanirbhar Bharat and broader economic growth objectives.

Authors: Ms. Aayushi Singh (Adv.), Sr. Partner; Mr. Anurag Nahata (Adv.), Jr. Associate

Legum Solis in association with GRATA International

Advocates and Corporate Law Consultants, New Delhi