The Union Cabinet has recently approved revisions to India’s foreign direct investment (“FDI”) framework governing investments from countries that share a land border with India. The decision introduces targeted relaxations and procedural clarifications to the regulatory framework originally introduced under Press Note 3 of 2020 (“Press Note 3”), which required prior government approval for such investments.
The revised policy attempts to strike a balance between safeguarding national security concerns and facilitating foreign investment into the Indian economy. By providing greater clarity on ownership thresholds and introducing faster approval timelines in certain sectors, the government aims to improve regulatory certainty and encourage capital inflows into strategic industries. These changes reflect the policy position set out in Press Note 2 (2026) and are subject to corresponding amendments under the Foreign Exchange Management Act, 1999 and related rules before becoming fully operational.
Background
In April 2020, during the economic disruption caused by the COVID-19 pandemic, the Government of India introduced Press Note 3 to regulate investments from countries sharing land borders with India. The measure was implemented to prevent opportunistic takeovers of Indian companies when market valuations were depressed.
Under this framework, any investment in India from entities situated in, or whose beneficial owner was located in a country sharing a land border with India required prior government approval. However, Press Note 3 did not define ‘beneficial ownership’, leading to interpretational challenges, particularly in cases involving indirect holdings and control rights.
While Press Note 3 served its protective objective, it also led to certain operational challenges. Venture capital funds, global investors, and multinational companies with complex shareholding structures often faced delays due to the ambiguity surrounding beneficial ownership thresholds and approval timelines.
Key Changes Approved by the Cabinet
The recently approved revisions introduce several important modifications intended to streamline investment processes while retaining appropriate safeguards.
- Introduction of a 10% Beneficial Ownership Threshold
Under the revised framework, investments from countries sharing a land border with India may be permitted under the automatic route where such investment is non-controlling and the beneficial ownership of such investors does not exceed 10% (ten percent), subject to sectoral caps and applicable conditions. The assessment of beneficial ownership is not solely percentage-based and also considers the existence of control. Earlier, even minimal ownership from such jurisdictions required government approval. Investments falling within the automatic route under this framework are subject to prescribed reporting requirements to the Department for Promotion of Industry and Internal Trade.
- Expedited Approval Mechanism
The revised framework also introduces a time bound approval mechanism for certain sectors. Investment proposals involving entities from land bordering countries in specified manufacturing sectors will now be processed within 60 (sixty) days. This is intended to reduce procedural delays that previously discouraged investors.
The mechanism initially applies to sectors such as:
- Capital goods manufacturing;
- Electronic capital goods;
- Electronic components; and
- Polysilicon and ingot-wafer manufacturing.
- Requirement of Indian Control
Despite these relaxations, the government has retained safeguards to ensure domestic oversight of strategic investments. For investments proposed in specified sectors where expedited approvals are contemplated, the framework indicates that the investee entity will be required to be owned and controlled by resident Indian citizens or Indian entities controlled by them.
Strategic Objectives of the Reforms
The revisions appear to be guided by several broader policy considerations.
- Enhancing Ease of Doing Business
The earlier framework created compliance challenges for global funds and investors with diversified shareholding structures. By introducing clear thresholds and timelines, the revised guidelines aim to reduce regulatory uncertainty.
- Encouraging Foreign Capital and Technology
Strategic sectors such as electronics and advanced manufacturing require significant capital and technological collaboration. Facilitating foreign participation may help India strengthen domestic manufacturing capabilities and integrate more effectively into global supply chains.
- Maintaining Strategic Safeguards
While easing certain restrictions, the government continues to maintain safeguards through beneficial ownership tests and the requirement that Indian entities retain majority control.
Implications for Investors and Industry
The revised policy is expected to have several implications for foreign investors, startups, and Indian companies seeking cross-border capital.
- Relief for Global Investment Funds
Many venture capital and private equity funds have investors from multiple jurisdictions, including countries sharing land borders with India. The 10% (ten percent) threshold provides regulatory clarity and reduces the need for approvals in cases involving small indirect holdings.
- Improved Investment Climate for Startups
Indian startups often rely on foreign capital. The revised framework may facilitate funding rounds where international funds have minority investors from neighboring countries.
- Faster Investment Decisions in Manufacturing
The introduction of a 60 (sixty) day timeline for approvals in certain sectors can significantly improve deal certainty for investors and project developers.
Regulatory Position and Way Forward
While the Union Cabinet has approved the proposed changes to the FDI framework governing investments from countries sharing a land border with India, the amendments are yet to be formally brought into force. The approved modifications will become operational only after the Department for Promotion of Industry and Internal Trade issues the relevant press note or notification and the changes are incorporated into the Consolidated FDI Policy. Until such formal notification is issued by the Government of India, the existing regulatory framework introduced through Press Note 3 continues to remain applicable.
While the protective approach introduced in 2020 addressed national security concerns during a period of economic vulnerability, the updated framework reflects a more nuanced strategy. By introducing a beneficial ownership threshold, clarifying regulatory definitions, and providing time-bound approval mechanisms, the government seeks to encourage responsible foreign investment while maintaining adequate oversight. Going forward, the effectiveness of these reforms will depend on their implementation and the extent to which they facilitate capital inflows without compromising strategic interests.
For more information about the aforesaid developments you may write to us at: solutions@bridgeheadlaw.com
Karan Narvekar | Partner
Missba Zariwala | Associate
Views expressed are personal to the authors and do not constitute as legal advice.