Press Note 3 Gets a Reset: India Clarifies BO Rules for Land Border Investments

Ever since the introduction of Press Note 3 (No. 5(5)/2020-FDI Policy, dated 17/04/2020) (“PN 3”), one of the most fundamental questions investors have grappled with when structuring India transactions is the identification of the ‘beneficial owner’ (“BO”). 

In theory, the concept appeared straightforward. In practice, it rarely was. The authorised dealer banks (“AD Banks”), investors, and regulators often approached the same issue differently. Applications involving exposure to countries sharing a land border with India (“LBCs”) frequently sat in regulatory limbo for months—and in some cases, years—without clear acceptance or rejection. Practitioners working on such transactions will recognise the pattern.

The Government of India has now announced changes concerning BO in investments linked to LBCs through a press release dated March 07, 2026 (“Press Release”). 

While the detailed amendment to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (the “NDI Rules”) is still awaited, the Press Release signals two key developments: (a) a clearer reference point for determining BO; and (b) a faster approval track for investments in certain strategic manufacturing sectors.

To recap, PN 3 and the corresponding proviso in Rule 6 of the NDI Rules mandate government approval where an investment into India is made by an entity incorporated in an LBC, or where the BO of the investment into India is situated in or is a citizen of an LBC.

Investors and the AD Banks have struggled with recurring questions under this regime. How far must beneficial ownership be traced through layered holding structures? How should institutional investors with dispersed ownership approach the test? Are listed companies expected to identify ultimate natural person shareholders? Can minority investments involving limited LBC exposure realistically obtain approval? The result has been prolonged regulatory uncertainty.

The Press Release states that BO will now follow the “well accepted” definition under the Prevention of Money Laundering Act, 2002 (the “PMLA”) and its rules. In effect, this should align the PN 3 analysis with a test that banks and investors are already accustomed to applying, at least in principle. Under that framework, BO, in relation to a company is the natural person who holds more than 10% (ten percent) of shares or capital, or exercises control over management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements, however, if no natural person is identified, then the person holding the position of a senior managing official should be considered. 

Further, in case of an entity listed on a recognised stock exchange in India (or certain notified foreign exchanges) or its subsidiary, the PMLA framework does not require identification and verification of any underlying shareholder or BO.

This reference is significant. The PMLA framework is already widely used by banks and compliance teams, yet PN 3 was often interpreted far more conservatively in practice. For instance, listed multinational companies were sometimes asked to identify ultimate natural person owners, even though the PMLA framework does not normally require such tracing for listed entities. Institutional investors with widely dispersed shareholding also found it difficult to satisfy BO disclosure expectations. The government's reference to the PMLA definition, therefore, appears intended to provide a clearer anchor for determining BO.

At the same time, the Press Release introduces an important qualification. It indicates that non-controlling investments with BO of 10% (ten percent) or less will from LBC will fall under the automatic route. The reference to “non-controlling” beneficial ownership also suggests that contractual control rights or governance rights in favour of such investors may need to be considered carefully when structuring transactions. Also, the Press Release also contemplates reporting of BO information by the investee entity to Department for Promotion of Industry and Internal Trade (“DPIIT”) even where the investment proceeds under the automatic route. This additional reporting layer could introduce practical compliance considerations for investors and AD Banks, particularly, if in practice it goes beyond existing AD declarations and triggers closer scrutiny of underlying ownership. Questions may also arise around the application of the test in complex ownership chains or multi-layered fund structures, which may become clearer once the implementing regulations are notified.

This language will need to be read carefully once the amendment to the NDI Rules is formally notified, particularly in light of the PN 3 framework, and to see if it takes away from other exclusions from BO that the PMLA provides for.

A second feature of the announcement introduces a 60 days’ timeline for processing government approvals in certain sectors. The sectors identified include capital goods manufacturing, electronic capital goods, electronic components, polysilicon manufacturing, and ingot and wafer manufacturing. These sectors closely mirror India's current policy push around electronics manufacturing and semiconductor supply chains.

The 60 days’ processing window is not universal. It applies only to the aforementioned specified sectors, and the government has indicated that the list may be expanded in the future with the approval of the cabinet. Investments outside these sectors may, therefore, continue to follow the existing approval process and patterns.

The Press Release also emphasises that majority ownership and control of the investee entity should remain with resident Indian citizens or resident Indian entities. In other words, for the purpose of the expedited processing timeline mentioned above for the priority sectors, the investee should be an Indian owned and controlled entity.

In practical terms, this points toward joint venture or other structures where the Indian partner retains majority control while the foreign investor holds a minority stake. This is notable because even such minority investments previously struggled to obtain approvals where LBC beneficial ownership was involved. The announcement, therefore, suggests a greater willingness to process these structures, particularly, where they support sectors viewed as strategically important.

The announcement provides clarification but does not fundamentally alter the PN 3 approval regime. Investments with LBC BO will continue to require government approval. At the same time, the Press Release signals a shift toward greater predictability in how BO should be assessed. Minority joint venture structures may become easier to process in the priority sectors. Institutional investors may find the BO test easier to apply if the PMLA framework is followed consistently. However, the additional reporting requirements to DPIIT by the investee entity may result in intervention by the government and practical inconvenience for the AD Banks and the investors.

Much will still depend on how AD Banks interpret the framework in practice. If they treat the new DPIIT reporting expectation as requiring granular tracing in every case, the compliance burden may increase even for investments that are otherwise under the automatic route. In many transactions, the bank's interpretation has effectively determined whether an investment proceeds smoothly or moves into the approval queue. Until the amendment to the NDI Rules is formally issued, the announcement should be viewed as a policy signal rather than a complete change in law.

That said, investors structuring transactions involving LBC exposure may wish to revisit ownership structures and assess whether proposed investments fall within the priority sectors identified for expedited processing. On paper, the change appears largely clarificatory. In practice, it reflects a subtle but important policy shift toward a more workable interpretation of BO and a willingness to process investments in priority sectors on a defined timeline. In a regime where interpretation has often shaped outcomes, that shift in approach could prove just as significant as the legal clarification itself.