Investments from Countries Sharing Land Border with India
Investments from Countries Sharing Land Border with India
Background
Press Note 3 (2020) was introduced during the COVID-19 pandemic to prevent opportunistic takeovers or acquisitions of Indian companies. It required prior Government approval for investments from entities or citizens of countries sharing a land border with India (LBCs – Land Border Countries). The restriction also applied where the beneficial owner of the investment was situated in or was a citizen of such countries.
Over time, practical challenges were observed in determining beneficial ownership, especially in cases involving multi-layered investment structures and global funds with diversified investor bases. In this context, the Government has reviewed Para 3.1.1 of the Consolidated FDI Policy, 2020 and issued Press Note 2 of 2026 to clarify the framework for identifying beneficial ownership and to introduce additional reporting requirements.
Key Amendments
- Clarification of Beneficial Owner
The Press Note formally clarifies the meaning of ‘beneficial owner’ for the purposes of investments under the LBC restriction.
The term shall have the same meaning as defined under:
- Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002, and
- Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.
Accordingly, beneficial ownership will be determined based on prescribed thresholds and control criteria, applied at the level of the investor entity.
Under the PMLA framework, a beneficial owner refers to the natural person who ultimately owns or controls an entity or on whose behalf a transaction is conducted. Rule 9(3) further prescribes thresholds based on shareholding, voting rights, capital contribution, or profit entitlement, and also captures situations where control is exercised through other means such as agreements or management influence. Importantly, the framework covers indirect ownership, layered structures, and ultimate effective control, ensuring that substance prevails over form in identifying ownership. This alignment brings greater clarity and consistency to the FDI regime.
- Determination of LBC Beneficial Ownership
The amendment clarifies when beneficial ownership will be or considered to be vested in a country sharing a land border with India. This will be the case where citizens or entities from such countries have the ability to:
- hold rights or entitlements exceeding the thresholds prescribed under Rule 9(3) of the PML Rules in the investor entity; or
- exercise control over the investor entity; or
- exercise ultimate effective control over the investee entity in India.
Where such ownership or control exists, the investment will fall within the Government approval requirement under Para 3.1.1(a).
This provision clarifies that the assessment is not limited to direct shareholding. Even where ownership is structured through multiple jurisdictions or entities, the presence of control rights, veto rights, or the ability to influence key decisions may result in the investment being treated as having LBC beneficial ownership. This ensures that indirect or structured investments are appropriately captured under the policy.
Reporting Requirement for Investments with LBC Linkages
The Press Note introduces a reporting requirement for certain investments involving LBC ownership. Where an investor entity has any direct or indirect ownership by a citizen or entity from a country sharing a land border with India, but the investment does not require prior Government approval, the investee entity must:
- report the investment details to Department for Promotion of Industry and Internal Trade (DPIIT),
- in the format prescribed under the Standard Operating Procedure (SOP).
This requirement is in addition to compliance with sectoral caps, entry routes, and other conditions under the FDI Policy.
This is a significant compliance addition. Even where the investment qualifies under the automatic route and does not trigger Government approval, the presence of any LBC ownership (direct or indirect) requires disclosure to DPIIT. This enhances regulatory transparency and monitoring, and companies will need to carefully examine investor structures to ensure accurate reporting.
Key Implications
- The amendment provides clarity on identifying beneficial ownership, reducing ambiguity in complex investment structures.
- It aligns the FDI framework with existing anti-money laundering standards, ensuring consistency across regulatory regimes.
- The introduction of reporting requirements increases compliance obligations, even in cases where Government approval is not required.
The core restriction under Press Note 3 (2020) continues and the investments involving LBC beneficial ownership (as defined) remain subject to Government approval.
Risk Assessment and Mitigation
- Review Investor Structures
Companies should undertake a comprehensive review of their existing and proposed investor base to identify any direct or indirect ownership from LBCs. This review should examine layered holding structures, intermediate entities, and fund-level investors (including limited partners). - Assess Beneficial Ownership under PML Framework
Entities should reassess beneficial ownership in line with the PMLA and Rule 9(3) of the PML Rules, which now form the basis for determining beneficial ownership under the FDI policy. This requires evaluating not only shareholding thresholds, but also voting rights, capital contribution, profit entitlements, and control rights such as veto rights, or the ability to influence key decisions, which could trigger regulatory implications.
- Determine Approval vs. Automatic Route
For each investment, companies must carefully evaluate whether the presence of LBC ownership results in the investment requiring prior Government approval under Para 3.1.1, or whether it can proceed under the automatic route. This determination should be based on whether LBC investors meet the beneficial ownership or control criteria.
Implement DPIIT Reporting Compliance
Where investments involve any direct or indirect LBC ownership but do not require Government approval, companies must ensure compliance with the newly introduced reporting requirements to DPIIT. This will require setting up internal systems to capture relevant ownership information, maintain documentation, and report in accordance with the Standard Operating Procedure (‘SOP’) prescribed by DPIIT. Companies should also monitor for updates on the reporting format and timelines.
- Update Transaction Documents
Companies should revisit their transaction documentation, including shareholders’ agreements, investment agreements, and side letters, to incorporate provisions that address the revised regulatory framework. This may include representations and warranties on beneficial ownership, disclosure obligations for investors, and conditions precedent relating to regulatory approvals or reporting. Such updates will help mitigate compliance risks and ensure transparency in investment arrangements.
- Enhance Due Diligence Processes
Existing due diligence frameworks should be strengthened to capture Ultimate Beneficial Ownership (‘UBO’) in line with the revised policy. This includes conducting look-through analysis of investor structures, obtaining detailed ownership declarations, and verifying control arrangements. Proper documentation of these assessments will be critical for demonstrating compliance in case of regulatory scrutiny.
- Monitor Future Regulatory Updates
Companies should actively track further developments, including amendments to the FEMA (Non-Debt Instruments) Rules, RBI reporting requirements, and DPIIT-issued SOPs. As policy announcements and formal legal amendments may not always be simultaneous, it is important to rely on notified changes and update compliance processes accordingly. Regular monitoring will help ensure that companies remain aligned with evolving regulatory expectations
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