Foreign direct investment: Strategic relaxations for attracting FDI

BACKGROUND

In the wake of geopolitical tensions in April 2020, the Government of India (“GOI”) had restricted the inflow of foreign direct investment (“FDI”) into India from countries with which India shares its land border ("LBCs"). India shares its border with the People’s Republic of China (“PRC”), Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan. India had called the measure a move to ‘prevent opportunistic takeovers’ of Indian companies during the economic disruption caused by the COVID-19 pandemic.

Press Note 3 that introduced this restriction (“PN 3”) into the FDI rules provided that any entity incorporated in an LBC, or any entity whose beneficial owner was situated in or is a citizen of an LBC, could invest in India only with the approval of the Government of India (“GOI”).The PN 3 restriction also applied to transfer of ownership of existing or future FDI in an Indian entity that resulted in beneficial ownership shifting to an LBC jurisdiction.

PN 3 suffered from several interpretational challenges - most notably, what constitutes ‘beneficial ownership’. Over time, a view emerged that beneficial ownership means up to 10% ownership in the Indian company. In the absence of a formal clarification, foreign investors and Indian companies alike filed approval applications with the GOI as a matter of abundant caution. This significantly impacted deal timelines and deal certainty.

On March 10, 2026, the Union Cabinet, chaired by the Hon’ble Prime Minister of India approved amendments[1] to PN 3 framework (“Proposed Amendments”). The Proposed Amendments take effect once the FDI law is formally amended to reflect the change. 

KEY CHANGES

The Proposed Amendments crystallises the understanding that beneficial ownership of more than 10% (ten percent) remains the standard for determining the beneficial ownership, as laid down in Prevention of Money Laundering Act, 2002 and the rules issued thereunder. It provides that where the proposed FDI results in beneficial ownership of 10% or lesser in the hands of LBC Entity and is non-controlling[2], the same can be invested under the automatic route. This is, however, subject to applicable sectoral caps, entry routes, attendant conditions and reporting requirements. For instance, if a particular sector is not covered under the automatic route, then the proposed FDI inflow should come under the approval route regardless of the beneficial ownership. This test would be applied only at the investor level.

For investments from LBCs in certain sectors (detailed below), the revised framework introduces an expedited approval timeline (“Expedited Approval Framework”) of 60 (sixty) days. The Expedited Approval Framework covers FDI proposal in entities engaged in manufacturing capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer production. This list can be expanded by the committee of secretaries chaired by the cabinet secretary.

The Expedited Approval Framework is applicable only in cases where the majority shareholding and control of the Indian investee entity remains with resident Indian citizens or Indian entities owned and controlled by resident Indians. In all other cases, i.e., cases not covered under the Expedited Approval Framework, the current framework which is set out in the GOI’s SOP dated August 17 2023[3] shall apply.

IMPACT OF THE PROPOSED AMENDMENTS

The Proposed Amendments had been in the offing for a while. Geopolitical realities and a greater need to attract FDI from the neighbouring countries, particularly the PRC, has triggered the Proposed Amendments. While one will have to wait for the formal amendments to the FDI law to be carried out, the move is expected to attract investments in key sectors that matter to India. The sectors that fall under the Expedited Approval Framework are expected to make India more resilient and less dependent on other international supply chain frameworks. It is also expected to increase jobs and employment.

The introduction of a 10% (ten percent) threshold will also increase risk capital into non-strategic areas and help Indian start-ups who need the funds and the investment to scale and grow.

While investors and companies alike will wait for the rules, many would also hope that the rules will also clarify the status of pending applications. Whether such applications are considered approved if they fall below the beneficial ownership threshold of 10% contemplated in the Proposed Amendments remains to be seen.