PN-3 2.0: Key takeaways from India’s updated FDI policy for land border investors

On 10 March 2026, the Union Cabinet approved amendments to India’s foreign direct investment (‘FDI’) policy governing investments originating from countries that share a land border with India (Land Border Countries or ‘LBCs’) (See, PIB Press Release here). Subsequently the Department for Promotion of Industry and Internal Trade (DPIIT) on 15 March 2026 has issued Press Note No. 2 (2026 Series), formally amending Para 3.1.1 of the Foreign Direct Investment Policy to address certain concerns stemming from PN-3 (defined below). These amendments introduce greater clarity on the determination of beneficial ownership and establish defined timelines for regulatory approvals in specified manufacturing sectors. The revised framework seeks to address long‑standing ambiguities arising under Press Note 3 of 2020 (‘PN-3’), while simultaneously advancing the objectives of ease of doing business and facilitating increased foreign capital inflows into select manufacturing‑led sectors.

PN-3 was introduced during the COVID‑19 pandemic as a preventive measure to address concerns surrounding opportunistic acquisitions of Indian companies. It mandated prior government approval for any FDI originating from LBCs, as well as for investments where the foreign investor was beneficially owned by persons resident in, or citizens of, LBCs. While the policy intention was protective in nature, the PN-3 regime posed considerable practical challenges, most notably due to the absence of a statutory definition of ‘beneficial ownership’.

In the absence of express guidance, market participants relied on analogous thresholds under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 and the ‘Significant Beneficial Owner’ framework under the Companies Act, 2013. These frameworks generally converge around a 10% ownership benchmark. However, transactions that breached these thresholds were routed through government approval processes that lacked any defined timeline, undermining deal certainty and complicating M&A execution.

The Cabinet’s recent decision addresses these concerns through four critical interventions.

First, the government has formally codified a 10% beneficial ownership threshold for LBC investors. This clarification aligns regulatory treatment with prevailing market practice and provides a clearer basis for assessing approval requirements.

Second, foreign investors with less than 10% non‑controlling beneficial ownership from LBCs are now permitted to invest under the automatic route, subject to the absence of other sectoral or FDI‑linked approval triggers. This represents a significant departure from the earlier blanket requirement for mandatory government approval and is expected to materially reduce regulatory friction in cross‑border investment transactions. Such investments, however, will be subject to a post‑investment reporting obligation, to be discharged by the Indian investee company before the Department for Promotion of Industry and Internal Trade (‘DPIIT’).

Third, in cases where LBC investors hold beneficial ownership exceeding 10% and propose investments into Indian‑owned and controlled companies operating in specified ‘Focus Sectors’, the approval process under the government route will now be subject to a definitive timeline of 60 days. The identified Focus Sectors currently include manufacturing capital goods, electronic capital goods, electronic components, polysilicon, and ingot‑wafer businesses sectors considered critical to India’s manufacturing and technological ecosystem.

Fourth, the Cabinet Secretary has been vested with the authority to amend the list of Focus Sectors from time to time. This enables the framework to remain responsive to evolving economic priorities and sectoral requirements, thereby introducing an element of regulatory flexibility.

It must be noted that the benefit of expedited approvals is confined to investments made into Indian companies that are majority owned and controlled by resident Indian citizens or Indian entities owned and controlled by such citizens. Investments into foreign‑owned or foreign‑controlled Indian companies continue to remain subject to the existing approval regime without relaxation, thereby preserving the core objective of PN3 namely, safeguarding against opportunistic acquisitions.

In conclusion, the Cabinet’s decision reflects a calibrated policy approach that balances national security considerations with India’s strategic objective of attracting foreign investment into priority sectors. By reducing ambiguity, introducing defined approval timelines, and selectively liberalising entry routes, the revised framework enhances deal certainty and strengthens India’s positioning as a manufacturing and investment destination. Additional clarity is anticipated once consequential amendments to the Foreign Exchange Management (Non‑Debt Instruments) Rules, 2019 are notified, particularly in relation to reporting requirements and procedural implementation.

[The author is an Associate in Corporate and M&A Team at Lakshmikumaran & Sridharan Attorneys, Hyderabad]