Easing of FDI Norms for Land Bordering Countries: A Calibrated Policy Shift and Its Practical Impact

By Vikrant Rana and Shantam Sharma

Introduction

India’s foreign direct investment regime has undergone a noticeable shift over the last few years, shaped both by global economic conditions and domestic policy priorities. While India has continued to attract steady foreign capital, particularly into manufacturing and technology-linked sectors, it has also tightened its regulatory lens in areas involving ownership and control.

This tension was most visible in April 2020, when Press Note 3[1] introduced a broad approval requirement for investments connected with countries sharing land borders with India. The objective at the time was clear. It was designed as a protective measure in response to concerns around opportunistic acquisitions during a period of economic uncertainty.

In the years since, however, the market has had to operate within a framework that, while well-intentioned, often captured a wider set of transactions than originally anticipated. The absence of a defined threshold for beneficial ownership and the lack of a clear approval timeline meant that even routine transactions could face delays.

The recent amendments (via Press Note 2 of 2026)[2] to this framework suggest that the Government is now moving towards a more stable and nuanced approach. The focus has shifted from a broad precautionary rule to a more calibrated system that distinguishes between meaningful ownership and incidental exposure, while continuing to retain oversight in cases involving control or strategic risk.

Scope of the Framework: Who Is Covered

The restrictions apply to investments connected with countries that share a land border with India. These include China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan.

The framework is triggered not only where the investor is directly based in one of these jurisdictions, but also where the beneficial owner of the investment is situated in, or is a citizen of, such a country.

This broad formulation ensures that indirect investments routed through other jurisdictions are also captured where ultimate ownership or control can be traced back to a land bordering country. It is this feature that made the earlier regime particularly wide in its application.

The Earlier Position and Its Practical Challenges

Press Note 3 required all such investments to obtain prior government approval.

In practice, this resulted in a number of challenges. First, the term “beneficial ownership” was not defined, which meant that investors and advisors had to rely on analogous definitions under other laws. This led to inconsistent interpretations and a tendency to adopt conservative positions, particularly in complex fund structures.

Secondly, the approval process did not operate within a defined timeline. For transaction parties, this created uncertainty around deal completion, affected negotiation of long-stop dates, and in some cases impacted commercial outcomes.

As a result, while the policy achieved its immediate objective of increased scrutiny, it also introduced friction in routine cross-border transactions, especially those involving global funds with diversified investor bases.

The Revised Framework: A Shift Towards Proportionality

The recent amendments seek to address these concerns without diluting the core objective of regulatory oversight.

A central feature of the revised framework is the introduction of a clearer benchmark for assessing beneficial ownership. By linking the concept to the Prevention of Money Laundering framework[3], the policy effectively recognises a 10 percent threshold as a point of materiality. This brings much-needed clarity and aligns the FDI regime with an existing statutory standard.

The practical effect of this change is significant. It acknowledges that not all forms of ownership warrant the same level of regulatory scrutiny. Investments that involve only limited, non-controlling exposure to land bordering jurisdictions are now treated differently from those involving substantial ownership or influence.

Distinguishing Ownership from Control

One of the more important aspects of the revised framework is the distinction it draws between passive ownership and control.

Where the level of beneficial ownership from a land bordering jurisdiction remains below the prescribed threshold and does not confer control, investments are now permitted to proceed under the automatic route, subject to a reporting requirement. This marks a departure from the earlier position, where even such investments required prior approval.

At the same time, the framework continues to place emphasis on control. The policy makes it clear that numerical thresholds are not the sole determinant. Rights that enable an investor to influence management or policy decisions, whether through board representation, veto rights, or contractual arrangements, remain relevant in assessing whether approval is required.

This dual test of ownership and control means that transaction structuring will need to focus not only on equity percentages, but also on the nature of investor rights.

Time-Bound Approvals and Sectoral Focus

Another notable development is the introduction of a defined timeline for processing approval applications in certain sectors. Investments that require approval and are made into Indian owned and controlled companies operating in specified “focus sectors” are now expected to be processed within 60 days.

The applicability of this timeline is not universal and depends on a combination of factors:

The focus sectors currently include manufacturing capital goods, electronic capital goods, electronic components, and upstream inputs such as polysilicon and ingot-wafer.

The policy intent behind this is clear. These sectors are closely linked to India’s efforts to strengthen domestic manufacturing and build resilient supply chains, particularly in electronics and semiconductors.

At the same time, it is important to recognise the limits of this facilitation:

The Government has also retained flexibility to revise the list of sectors over time through a Cabinet Secretary-led mechanism. This suggests that the scope of fast-tracked approvals may evolve in line with industrial and economic priorities.

From Pre-Approval to Post-Investment Monitoring

The revised framework also introduces a reporting requirement for investments that do not require prior approval but involve some degree of ownership from land bordering jurisdictions.

This reflects a shift in regulatory approach. Instead of subjecting all such investments to pre-approval scrutiny, the Government has moved towards a model that allows certain transactions to proceed while ensuring visibility through post-investment reporting.

From a practical standpoint, this reduces transaction delays while maintaining a level of regulatory oversight.

Practical Implications for Transactions

The cumulative effect of these changes is a more structured and predictable framework for assessing FDI approvals.

Investors are now better placed to evaluate, at the outset, whether a transaction is likely to require government approval. The introduction of a defined threshold reduces reliance on interpretational assumptions, while the distinction between ownership and control provides a clearer analytical framework.

For global investment funds, the changes are particularly relevant. Many such funds have limited exposure to investors from land bordering jurisdictions as part of a broader investor base. Under the earlier regime, this often resulted in approval requirements despite the absence of meaningful control. The revised framework addresses this concern, provided that such exposure remains below the threshold and does not translate into control rights.

At the same time, the emphasis on control means that transaction documentation will require careful consideration. Rights that are standard in private equity investments, such as veto rights or affirmative voting rights, may need to be evaluated in light of their potential to trigger regulatory scrutiny.

The introduction of a 60-day timeline for approvals in specified sectors is also likely to have a direct impact on deal execution. While it does not eliminate regulatory risk, it provides a degree of predictability that was previously missing, allowing parties to better align transaction timelines and manage expectations.

Conclusion

The easing of FDI norms for investments linked to countries sharing land borders with India represents a measured evolution of the framework introduced in 2020.

The policy does not signal a departure from the Government’s original objective of safeguarding strategic interests. Instead, it reflects a more refined approach that distinguishes between different levels of ownership and influence, and that seeks to facilitate investment where risks are limited.

For investors and companies, the revised framework offers greater clarity and improved deal certainty. At the same time, it reinforces the importance of careful structuring, particularly in relation to beneficial ownership and control.

In that sense, the regime is not necessarily lighter, but it is more precise.

[1] https://cgishanghai.gov.in/pdf/PressNote3_23Nov2022.pdf, Department for Promotion of Industry and Internal Trade

[2] https://www.dpiit.gov.in/static/uploads/2026/03/b9da5830b052c2f2d788593e97d07c63.pdf, Department for Promotion of Industry and Internal Trade

[3] The expression ‘beneficial owner’ shall have the same meaning as defined Page 1 of 3 under Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002, as amended from time to time, and shall be determined as per the criteria stipulated under Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, as amended from time to time (the PML Rules).