In 2026, India’s Union Cabinet introduced key amendments to the Foreign Direct Investment (FDI) regulations with the release of Press Note 2 (2026 Series) by the Department for Promotion of Industry and Internal Trade (DPIIT). This development marks a pivotal change in the oversight of FDI from nations sharing land borders with India. This modification revisits Paragraph 3.1.1 of the Consolidated FDI Policy, 2020, which was initially altered through Press Note 3 during the COVID-19 pandemic.
The introduction of Press Note 2 signifies a transition from a framework primarily focused on protection, as seen in Press Note 3, to one that balances regulatory oversight with facilitating genuine investments. While Press Note 3 was designed to prevent opportunistic acquisitions, Press Note 2 clarifies and systematizes the framework, particularly addressing ambiguities related to beneficial ownership. This adjustment ensures that while legitimate investments are encouraged through transparency and reporting, sensitive investments remain under stringent scrutiny.
Evolution of the FDI Framework
India’s FDI framework has undergone significant evolution, especially when comparing the pre-2020 regime to the changes introduced in 2020. Prior to 2020, the Consolidated FDI Policy 2017 promoted a liberal and investor-friendly environment with limited sectoral restrictions, focusing on jurisdiction-based rather than ownership-based scrutiny. However, the introduction of Press Note 3 in 2020 marked a shift towards a cautious and security-oriented regime. This change expanded regulatory scrutiny to include beneficial ownership from neighboring countries, transitioning from a formalistic to a substance-based framework with a focus on economic security and strategic control.
Pre-2020 Regime
Before 2020, India’s FDI policy facilitated foreign capital inflows with sector-specific safeguards. According to the Consolidated FDI Policy 2017’s Paragraph 3.1.1:
- Non-resident entities could invest in India, barring explicitly prohibited sectors.
- Investors from Bangladesh and Pakistan required government approval.
- Restrictions for Pakistan were limited to sensitive sectors like defense and atomic energy.
- Investors from Nepal and Bhutan, including NRIs, could invest on a repatriation basis, subject to specific remittance conditions.
Press Note 3
Press Note 3 (2020) significantly tightened FDI regulations by requiring government approval for investments from countries sharing land borders with India. This policy extended beyond direct investments to include beneficial ownership, capturing indirect investments via third countries. Although the intention was clear, implementation led to over-inclusivity, affecting both bona fide transactions and high-risk investments.
Need for Press Note 2 (2026 Series)
The challenges of implementing Press Note 3 highlighted several issues, particularly regarding clarity and proportionality.
Lack of Clarity on Beneficial Ownership
The term “beneficial ownership” was undefined under Press Note 3, leading to uncertainty in multi-layered holding structures and diversified investment funds. This lack of uniform guidance resulted in inconsistent interpretations by regulatory authorities, reducing predictability for investors.
Impact on Global Investment Structures
Press Note 3’s framework posed challenges for global private equity and venture capital funds with multinational investors. Even minimal exposure to restricted jurisdictions could trigger government approval requirements, complicating operations through international financial hubs and discouraging investment in India.
Procedural Bottlenecks
The approval mechanism, intended to be structured, proved time-consuming and administratively complex, with multiple ministries involved in reviews and extensive documentation requirements causing delays.
Press Note 2 addresses these issues by introducing clarity, proportionality, and alignment with international best practices, while maintaining national security safeguards.
Summary of Press Note 2 (2026 Series)
Press Note 2 aims to resolve ambiguities, improve regulatory clarity, and introduce more nuanced oversight, balancing national security with facilitating legitimate cross-border investments.
Continued Government Route for Restricted Investments
Press Note 2 retains the requirement for investments linked to countries sharing a land border with India to undergo government approval, ensuring national security remains central to FDI regulation.
Statutory Definition of Beneficial Ownership
The term “beneficial owner” is now linked to existing statutory frameworks, such as the Prevention of Money Laundering Act, 2002, establishing clear ownership thresholds and reducing interpretational uncertainty.
Introduction of Reporting-Based Oversight
Press Note 2 introduces a reporting-based compliance mechanism, requiring disclosure for investments below approval-triggering thresholds, shifting towards a tiered approach combining approval for high-risk cases with disclosure for lower-risk investments.
SOP Process for FDI Proposals
DPIIT’s 2023 Standard Operating Procedure (SOP) established a transparent, time-bound process for FDI proposals requiring government approval. The revised 2026 SOP enhances this framework with paperless approval through the National Single Window System (NSWS) portal, clear timelines, and a 60-day expedited approval timeline for specified sectors, such as capital goods manufacturing and electronic components.
The 2026 SOP reflects a calibrated policy approach, furthering ease of doing business in line with India’s industrial and manufacturing objectives.
Conclusion
The evolution of India’s FDI policy for land-bordering countries shows a progressive refinement of regulatory philosophy. The 2017 regime prioritized openness and ease of investment; Press Note 3 emphasized national security; and Press Note 2 strikes a balance between security and investment facilitation, introducing a clear statutory basis for beneficial ownership. The Press Note 2 framework enhances legal certainty and investor confidence.
About the authors: Pradnesh Warke is a Partner and Pragya Rani is an Associate at Luthra and Luthra Law Offices India.
Disclaimer: The opinions expressed in this article are those of the author(s) and do not necessarily reflect the views of Bar & Bench.
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