Press Note 2 (2026): Beneficial Ownership Tests and FDI Compliance for Land-Border Investments

From Blanket Restrictions to Beneficial Ownership Analysis

The Department for Promotion of Industry and Internal Trade (DPIIT) released Press Note 2 (2026 Series), introducing a fundamental shift in how India regulates Foreign Direct Investment (FDI) from countries sharing a land border. Moving beyond the jurisdiction-based blanket restrictions of Press Note 3 (2020), the new framework centres on beneficial ownership analysis and control-based thresholds to determine when government approval is required.

This article focuses on the beneficial ownership tests, compliance obligations, and practical implications of Press Note 2, building on the FEMA compliance framework that governs cross-border investment in India.

The Beneficial Ownership Test: PMLA Linkage

The most significant innovation in Press Note 2 is the formal adoption of a beneficial ownership definition linked to the Prevention of Money Laundering Act, 2002 (PMLA) and Rule 9(3) of the PML (Maintenance of Records) Rules, 2005. Under the PMLA framework, beneficial ownership is determined based on a materiality threshold, and the government has effectively established a 10% ownership threshold as the key dividing line for FDI from Neighbouring Countries.

The beneficial ownership of an investment is considered to be vested in a Neighbouring Country if a citizen or entity of that country holds rights or entitlements that meet any of the following conditions: they exceed the thresholds prescribed in the PMLA KYC Rules over the foreign investor; they enable the exercise of "control" over the foreign investor; or they enable the exercise of ultimate effective control over the Indian investee entity in any manner, whether directly or indirectly, individually or cumulatively.

The 10% Automatic Route Threshold

Press Note 2 creates a significant carve-out from the government approval requirement. Investors from Land Bordering Countries (LBCs) with a non-controlling beneficial ownership of up to 10% are now permitted to invest via the automatic route, provided the sector itself allows automatic FDI. This represents a major change from Press Note 3, where virtually all investments with any connection to an LBC required prior government approval.

The countries covered by these restrictions remain the same: China, Pakistan, Nepal, Bhutan, Bangladesh, Myanmar, and Afghanistan. The practical effect of the 10% threshold is that multi-layered investment structures where an LBC entity holds a minor, non-controlling stake in the foreign investor will no longer trigger the government approval requirement automatically.

Focus Sectors and the 60-Day Fast-Track Approval

For investments that still require government approval, Press Note 2 introduces a fast-track mechanism for specified "Focus Sectors." Government approval for foreign investments in manufacturing activities covering capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer will be processed and decided within 60 days.

This fast-track mechanism comes with an important condition: the majority shareholding and control of the Indian investee company must remain with resident Indian citizens and entities owned and controlled by resident Indian citizens at all times. This "Indian control" requirement ensures that while LBC capital can participate in these strategic sectors, operational and ownership control stays domestically anchored.

Reporting Obligations Under the New Framework

Press Note 2 introduces a new reporting requirement under Para 3.1.1(d) of the Consolidated FDI Policy. Investments into India from an investor entity having any direct or indirect ownership by a citizen or entity of an LBC, even if not requiring prior government approval (i.e., investments within the 10% automatic route threshold), are subject to a reporting requirement. The format will be prescribed under a Standard Operating Procedure (SOP) to be laid down by DPIIT.

This reporting obligation is in addition to compliance with applicable sectoral caps, entry routes, and attendant conditions. The practical implication is that even investments that qualify for the automatic route will carry an additional compliance burden of reporting to DPIIT, creating a monitoring mechanism that did not exist under Press Note 3. Companies receiving such investments must build this reporting into their RBI cross-border payment compliance workflows.

Compliance Considerations for Indian Companies

Indian companies receiving foreign investment must now conduct a thorough beneficial ownership analysis of their foreign investors to determine whether any LBC nexus exists. This requires looking beyond the immediate investor to trace ownership through layers of holding companies and fund structures. The PMLA-linked definition means that companies must apply the same beneficial ownership identification standards used in anti-money laundering compliance.

For startups raising foreign funding, the change is significant. Venture capital funds and private equity investors with global limited partners must now be screened for LBC beneficial ownership. If a fund's investor base includes LBC entities with ownership exceeding 10%, the fund's investment into India may require government approval, even if the fund itself is domiciled in a non-LBC jurisdiction such as Singapore or the United States.

The intersection with merger control regulations is also noteworthy. Transactions involving LBC-linked investors that cross both the FDI approval threshold and the CCI deal value threshold will face dual regulatory scrutiny, potentially extending deal timelines.

Practical Steps for Compliance

Companies and investors should take several steps to prepare for the new regime. First, conduct a thorough review of existing investor structures to identify any LBC beneficial ownership. Second, implement ongoing monitoring mechanisms to detect changes in beneficial ownership that might trigger new compliance obligations. Third, engage with legal and compliance advisors to assess whether existing investments require retrospective reporting or fresh government approval under the new framework.

The alignment with PMLA beneficial ownership standards means that companies should leverage their existing KYC and anti-money laundering compliance infrastructure for FDI compliance purposes. Director duties under the Companies Act require boards to ensure that the company's investment receipts comply with applicable FDI regulations, and failure to do so could expose directors to personal liability.

Press Note 2 represents a maturation of India's approach to FDI regulation from land-border countries. By moving from a blunt jurisdictional filter to a nuanced, ownership-based analysis, the framework better balances national security concerns with the need for foreign capital. However, the compliance burden, particularly the beneficial ownership tracing requirement, demands careful attention from companies and their advisors. As the DPIIT SOP for reporting is awaited, companies should begin preparing their compliance processes now to avoid disruptions when the formal reporting mechanism is activated.

For broader context on India's evolving corporate regulatory landscape, including SEBI's LODR amendments and data protection compliance requirements, companies with LBC-linked investors should take a holistic view of their compliance obligations across all regulatory domains.