India FDI Policy Amendment 2026: Press Note 3 eased, 10% automatic-route carve-out, 60-day approval timeline for manufacturing

Abstract

The Union Cabinet of India approved a set of amendments to the Foreign Direct Investment policy framework in 2026, materially recalibrating the Press Note 3 regime that has governed land-border country investments since April 2020. Under the new framework, the beneficial ownership test is applied at the level of the investor entity. Non-controlling beneficial ownership of up to ten percent from land-border country investors is permitted under the automatic route, subject to sectoral caps and entry conditions. Transparency is preserved through mandatory reporting obligations by the investee entity to the Department for Promotion of Industry and Internal Trade. Equally important is the introduction of a sixty-day timeline for processing proposals in specified manufacturing sectors. Capital goods, electronic capital goods, electronic components, and polysilicon and ingot-wafer production have been identified as critical areas where approvals must be expedited. The requirement that majority shareholding and control remain with resident Indian citizens or entities owned and controlled by them ensures that strategic industries remain under domestic oversight, even as foreign capital is welcomed to strengthen capacity and technology integration.

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Introduction

India's foreign direct investment framework has evolved through three distinct phases over the past three decades. The first phase, from 1991 through 2000, was characterised by sectoral liberalisation through the Foreign Investment Promotion Board (FIPB) regime under the Industrial Policy of 1991. The second phase, from 2000 through 2017, saw the introduction of the Automatic Route for most sectors under the Foreign Exchange Management Act, 1999, with FIPB approval narrowed to specific sectors. The third phase, from 2017 onward, marked the abolition of the FIPB and the consolidation of FDI policy under the Department for Promotion of Industry and Internal Trade (DPIIT), with sectoral approval routes administered by the relevant administrative ministries.

Within this broader trajectory, Press Note 3 of 2020 stands out as a strategic safeguard introduced during the pandemic. The Notice mandated prior government approval for all foreign investment from countries sharing a land border with India, or where the beneficial owner of the investment was situated in or was a citizen of any such country. The land-border countries are China, Bangladesh, Bhutan, Pakistan, Nepal, Myanmar, and Afghanistan. The Notice was designed to prevent opportunistic acquisitions of Indian businesses during the pandemic-induced economic stress, and to protect sensitive industries from hostile takeovers.

Six years on, the operational consequences of Press Note 3 had become apparent. Global private equity and venture capital funds with even minor exposure to investors from these jurisdictions found themselves entangled in approval-route compliance for what would otherwise have been automatic-route investments. The Indian portfolio companies of these funds faced delays of twelve to sixteen weeks on what should have been routine equity rounds. The broader implication was that India's signalling on capital openness was being filtered through a compliance lens designed for a different threat environment.

The 2026 amendment recalibrates this regime without abandoning the strategic protection it was designed to provide. This article walks through the pre-amendment position, the substantive changes introduced by the Union Cabinet, the practical implications for foreign investors and Indian investee companies, and a compliance checklist for cross-border transactions under the new framework.

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Pre-Amendment Scenario

The text of Press Note 3 of 2020, issued by DPIIT on 17 April 2020, modified Paragraph 3.1.1 of the Consolidated FDI Policy. The amended paragraph reads, in substance, that a non-resident entity can invest in India, subject to the FDI Policy except in those sectors or activities which are prohibited. However, an entity of a country which shares a land border with India, or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route, also called the Approval Route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors or activities other than defence, space, atomic energy and sectors or activities prohibited for foreign investment.

The Notice carried three structural problems that the 2026 amendment addresses.

First, the term "beneficial ownership" was not defined in the FDI Policy. Investors and advisors had to rely on analogous definitions under other applicable laws, primarily the Prevention of Money Laundering Act, 2002 and the Companies Act, 2013. The PMLA Rules 2005 defined beneficial owner as a natural person who, ultimately and through whatever means, exercises control over a juridical person, with quantitative thresholds of 25 percent ownership for companies and 15 percent for trusts. The Companies Act SBO (Significant Beneficial Owner) rules adopted a 10 percent threshold. The FDI Policy was silent on which threshold applied, leading to conservative compliance assumptions where any traceable beneficial ownership above 10 percent triggered the approval route.

Second, the approval process did not operate within a defined timeline. While the FDI Policy stated that proposals would be processed in a "time-bound manner", no statutory or administrative deadline applied. In practice, approvals took 12 to 24 weeks for clean files, and substantially longer where multiple administrative ministries were consulted or where the proposal involved sensitive sectors. The absence of a timeline made it difficult for foreign investors to commit to closing schedules and for Indian investees to plan working capital around an inflow date.

Third, the regime was binary, either fully under the automatic route or fully under the approval route. There was no proportionality based on the quantum of beneficial ownership. A fund with 5 percent beneficial ownership from a land-border country had the same compliance path as one with 50 percent. This had a disproportionate impact on large global funds with mixed limited partner bases, where even minor exposure to investors from the listed jurisdictions could trigger the full approval-route compliance for the entire portfolio's Indian investments.

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Post-Amendment Scenario

The 2026 amendment approved by the Union Cabinet introduces three substantive changes, each addressed to the structural problems described above.

Change 1: Definition of beneficial ownership adopted from PMLA Rules 2005

The amendment provides for a definition and criteria for determination of beneficial ownership, drawn from the Prevention of Money Laundering Rules, 2005. The PMLA definition is now the operating standard for the FDI Policy's beneficial-ownership test. This resolves the ambiguity that has prevailed since 2020 and gives investors a predictable test against which to assess their compliance position.

Under the PMLA Rules 2005, beneficial owner means a natural person who, whether acting alone or together, has a controlling ownership interest in a juridical person. For a company, the controlling interest threshold is 25 percent or more of the shares or capital or profits. For a partnership, it is 15 percent. For a trust, it is 15 percent of the capital or profits or property. Where no such natural person can be identified, the senior managing official is treated as the beneficial owner.

The practical consequence is that foreign funds with no single natural person holding 25 percent or more of the equity, capital, or profits from a land-border country will not have a "beneficial owner" from a land-border country under the FDI Policy test. This is a substantial narrowing of the universe of investors who fall within the Press Note 3 net.

Change 2: Ten percent non-controlling automatic-route carve-out

The beneficial ownership test is applied at the level of the investor entity. Investors with non-controlling land-border country beneficial ownership of up to ten percent are permitted under the automatic route, subject to applicable sectoral caps, entry routes, and attendant conditions. Such investments are subject to the reporting of relevant information by the investee entity to the Department for Promotion of Industry and Internal Trade.

The carve-out is qualified in two important ways. First, the ownership must be non-controlling. A 9 percent beneficial owner with veto rights, board representation that exceeds proportionate equity, or contractual control rights will not qualify for the automatic route. Second, the carve-out applies only to the FDI route question, it does not exempt the investment from the sectoral caps and conditionalities that apply to the relevant sector. A 9 percent land-border beneficial-ownership exposure to a multi-brand retail investment still has to satisfy the multi-brand retail conditions (minimum USD 100 million investment, 50 percent in back-end infrastructure, 30 percent local sourcing from SMEs).

The reporting obligation on the investee entity is also operationally significant. Every Indian investee receiving FDI under this carve-out must report relevant beneficial-ownership information to DPIIT. The exact format and frequency of this reporting is awaited in the implementing notification, but the obligation itself creates a transparent compliance trail that DPIIT can audit.

Change 3: Sixty-day timeline for specified manufacturing sectors

Proposals for land-border country investments in specified sectors and activities of manufacturing in capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer production must be processed and decided within sixty days. In these cases, the majority shareholding and control of the investee entity must be with resident Indian citizens or resident Indian entities owned and controlled by resident Indian citizens, at all times.

The list of sectors reflects the Government's industrial policy priorities. Capital goods and electronic capital goods are at the centre of India's Production-Linked Incentive (PLI) schemes for advanced manufacturing. Electronic components, polysilicon, and ingot-wafer are upstream inputs to semiconductor manufacturing and to the solar PV supply chain, both areas where India is actively building domestic capacity through the India Semiconductor Mission and the National Solar Mission. The sixty-day timeline signals that the Government wants foreign capital and technology partnerships in these sectors, while retaining majority Indian control.

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Sectoral and operational implications

The 2026 amendment has differential implications across the sectors and counterparty types where Indian businesses engage with land-border country capital.

For private equity and venture capital funds. Funds with limited partner exposure below the PMLA 25 percent controlling-interest threshold from land-border countries can now invest under the automatic route across most sectors. This unlocks a substantial pool of capital that was effectively side-lined since 2020. KAMRIT expects fund inflows into Indian portfolios to accelerate over the next four quarters as funds revisit India allocations they had paused under the Press Note 3 regime.

For specified manufacturing sectors. The sixty-day timeline is a meaningful operational improvement. For technology transfer engagements involving Chinese equipment suppliers in capital goods, electronic components, and solar PV supply chain, where the underlying technology is most concentrated in China, the new timeline allows joint venture and minority-investment structures to close within a predictable window. The requirement of Indian majority control preserves the strategic intent of Press Note 3 while permitting commercial collaboration.

For sectors not in the manufacturing list. Land-border country FDI in services, software, e-commerce, and other non-manufacturing sectors remains under the broader approval-route regime where the carve-out does not apply. The default 60-day timeline does not extend to these sectors, meaning historical 12-24 week timelines continue.

For Indian investee companies. The reporting obligation to DPIIT under the 10 percent carve-out creates a new compliance workstream. Investee companies must maintain a beneficial-ownership register, conduct periodic review of investor compositions for changes in beneficial ownership, and submit prescribed information to DPIIT in the format and frequency that will be specified by implementing notification.

Compliance checklist for cross-border transactions under the new framework

For any cross-border equity transaction involving an Indian investee, the following checklist should be worked through before the term sheet is signed.

1. Beneficial ownership map. Trace beneficial ownership of every investor entity to the natural person level. Apply the PMLA Rules 2005 thresholds, 25 percent for companies, 15 percent for partnerships, 15 percent for trusts.
2. Land-border country exposure quantum. Aggregate the beneficial ownership attributable to natural persons or entities from China, Bangladesh, Bhutan, Pakistan, Nepal, Myanmar, and Afghanistan.
3. Carve-out eligibility check. If aggregate land-border beneficial ownership is at or below 10 percent and is non-controlling, the automatic route applies subject to sectoral caps and conditions.
4. Approval route trigger check. If aggregate land-border beneficial ownership exceeds 10 percent, or carries any control rights, the proposal goes through the approval route.
5. Manufacturing sector check. If the investee operates in capital goods, electronic capital goods, electronic components, polysilicon, or ingot-wafer production, the 60-day timeline applies and majority Indian control is mandatory.
6. Sectoral conditionalities. Verify all sectoral caps, lock-in periods, capitalisation requirements, and operational conditions specific to the sector.
7. DPIIT reporting set-up. For automatic-route investments under the 10 percent carve-out, set up the beneficial-ownership register and DPIIT reporting workflow in the investee entity.
8. FC-GPR filing within 30 days of allotment. Standard FEMA reporting obligation applies. KAMRIT files FC-GPR at fixed ₹3,899 plus government fees. Get FC-GPR filed.
9. Annual FLA return by 15 July. The Indian investee files the annual Foreign Liabilities and Assets return with the Reserve Bank of India for the prior financial year.

References

1. Department for Promotion of Industry and Internal Trade, Consolidated FDI Policy. https://dpiit.gov.in/foreign-direct-investment/foreign-direct-investment-policy
2. Press Note 3 (2020 Series), DPIIT, dated 17 April 2020.
3. Prevention of Money Laundering (Maintenance of Records) Rules, 2005, Rule 9(3)(a).
4. Foreign Exchange Management Act, 1999, Section 6.
5. Companies Act, 2013, Section 90 (Significant Beneficial Owner Rules).