Press Note 3 Gets a Reset: India Clarifies BO Rules for Land Border Investments – Part 2

This update supplements our earlier analysis dated March 12, 2026 (“Part 1”) on the same subject title based on the press release dated March 07, 2026 issued by the government of India (“Press Release”), and this update focuses on the revisions to the Consolidated FDI Policy, 2020 governing investments linked to countries sharing a land border with India (“LBC”) vide Press Note 2 of 2026 (“PN 2”). While the Press Release suggested the introduction of a relatively straightforward 10% beneficial ownership threshold, a closer reading of PN 2 reveals a more nuanced framework that investors should carefully consider.

More particularly, PN 2 amends paragraph 3.1.1 of the Consolidated FDI Policy, 2020 and sets out the base level legal framework for determining beneficial ownership in the context of existing restrictions under press note 3 of 2020 (“PN 3”). An amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 is still awaited for PN 2 to take effect.

As discussed in Part 1 of this news alert, the PN 3 created persistent uncertainty. These uncertainties have led to delays in transactions and hesitancy among investors, particularly those investing through regional financial hubs such as Singapore and Hong Kong.

As anticipated in the Press Release, PN 2 formally adopts the framework under the Prevention of Money-Laundering Act, 2002 ("PMLA") for determining beneficial ownership and makes express reference to Section 2(1)(fa) of the PMLA and Rule 9(3) of the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”) in relation to the definition of ‘beneficial owner’ and the determination criteria for the same. Further, PN 2 also introduces an additional proviso that expands the inquiry beyond the PMLA framework.

As per PN 2, beneficial ownership shall be deemed to vest in an LBC where citizen(s) of an LBC and/or entity(ies) incorporated or registered in an LBC, have the ability to directly or indirectly, individually or cumulatively, independently or collectively, whether acting together or otherwise, hold rights/entitlements:

1. in excess of the applicable thresholds prescribed under Rule 9(3) of the PML Rules in an investor entity incorporated outside an LBC; or
2. which enable them to exercise control over the investor entity; or
3. which enable them to exercise ultimate effective control over the investee entity in any manner.

Importantly, this framework does not rely solely on shareholding/ownership thresholds. In addition to ownership thresholds at the investor level, it considers control rights as well as the ability to exercise ‘ultimate effective control’ over the investor and the investee entity, respectively. As a result, the commonly referenced 10% threshold is not purely a numerical test. Governance rights, shareholder arrangements and other mechanisms through which control may be exercised may also be relevant when determining beneficial ownership. Practically, this means that even if the ownership is below 10%, if the beneficial owner has rights that amount to control, for instance, board rights, veto rights or other governance arrangements, the investment could still require government approval as per PN 2.

PN 2 also clarifies that investments involving non-controlling beneficial ownership which does not meet the applicable thresholds from citizens or entities of LBC may proceed under the automatic route, subject to reporting requirements described below and applicable sectoral caps and conditions.

Additionally, the shareholding held by all LBC citizens/entities shall be aggregated for the purpose of determining the PML Rules thresholds in sub-paragraph (a), irrespective of such LBC citizens/entities not acting in concert or being unrelated parties.

Rule 9(3)(f) of the PML Rules also provides that in case of an entity listed on a recognised stock exchange in India or an entity resident in a foreign jurisdiction notified by the Government and listed on stock exchanges in such notified jurisdictions or its subsidiary, the identification and verification of any underlying shareholder or beneficial owner of such listed entity is not required. Accordingly, express reference of Rule 9(3) of PML Rules under PN 2 is a welcome change, as previously indicated in the Part 1.

As discussed above, PN 2 uses the following phrases ‘directly or indirectly, individually or cumulatively, independently or collectively, whether acting together or otherwise’ and ‘in any manner’ in the context of assessing the ability to exercise ultimate effective control over the investee entity and control over the investor entity. The focus, therefore, is not simply on aggregating shareholding percentages in upstream investor entities, but on whether rights held by multiple such investors may collectively translate into elements of control at the investee entity level and/or investor entity level.

This is especially relevant in consortium investments, shareholder arrangements or governance structures, where rights held by multiple investors from LBC may collectively influence decision-making in the investee entity and/or investor entity. For example, where an investment vehicle based in Singapore has multiple limited partners from LBC jurisdictions holding relatively small interests, their rights may need to be considered collectively when assessing whether control dynamics at the investee entity level or investor entity level are affected.

The reference in PN 2 to exercise ‘ultimate effective control’ over the investee entity also suggests a broader look-through approach to ownership analysis. In practice, exposure to LBC investors may still be relevant even where the immediate investor entity is incorporated outside an LBC. Investors operating through multi-layered holding structures or regional investment hubs may, therefore, need to carefully assess ownership and governance arrangements when structuring transactions.

The single most significant divergence between the Press Release and PN 2 is the absence of any reference to the 60-day approval timeline for strategic manufacturing sectors, which had been provided in the Press Release. Until formal adoption, the expedited approval timelines for manufacturing in identified priority sectors should be considered as more of a guiding policy rather than as a binding change in law.

Another notable change is that PN 2 introduces additional reporting requirements to the Department for Promotion of Industry and Internal Trade (“DPIIT”) under a standard operating procedure. Accordingly, even where investments qualify for the automatic route pursuant to the clarification of the beneficial ownership definition, the investee entity will be required to report transactions where there is any direct or indirect ownership by a citizen or entity of an LBC.

This effectively introduces a post-transaction monitoring regime, ensuring that investments involving such exposure remain visible to regulators even where prior government approval is not required. For institutional investors and funds, this may also result in greater regulatory visibility of investor composition within investment vehicles, including limited partner participation.

Further, the existing standard operating procedure dated August 17, 2023, relate to investments requiring government approval. Accordingly, the same would likely need to be revised to provide operational guidance to authorised dealer banks (“AD Banks”) on the reporting requirements in cases described above.

PN 3 previously covered investments by natural persons under the government approval route in case of being either situated in or a citizen of an LBC, as beneficial owners. However, it has now been clarified under PN 2 that natural persons, as legal owners or beneficial owners, will fall under the government approval route in case they are citizens of any LBC. This suggests that a citizen of a non-LBC can invest under automatic route despite being a resident in an LBC either directly or as a beneficial owner through non-LBC layer(s). However, a direct investment (or investment as a beneficial owner) by a citizen of an LBC will fall under government approval route.

PN 2 provides welcome clarity by formally anchoring the beneficial ownership test to the PMLA framework.

Taken together, the changes to PN 2 indicate that India is signalling a more facilitative approach for minority investments, while retaining robust regulatory oversight over investments with LBC exposure.

For investors operating through Singapore, Hong Kong and other regional investment hubs, the clarifications provide greater visibility into how beneficial ownership will be assessed. At the same time, careful attention will still need to be paid to ownership structures, governance rights and investor composition, particularly in fund-based investment structures.

In the coming months, the approach taken by regulators and financial institutions will become clearer as these changes are implemented.

Lastly, basis the additional DPIIT reporting requirements, if AD Banks now require granular tracing of beneficial ownership in every case, the compliance burden may increase even for investments that are under the automatic route.