India’s 2026 FDI Rule Change: What the New Land-Border Beneficial Ownership Framework Means for Investors

India has made an important change to its foreign direct investment (FDI) framework in 2026, particularly for investments involving beneficial ownership connected with countries sharing a land border with India.

For Indian promoters, startups, manufacturing companies, private equity funds and overseas investors, this is more than a technical amendment. The revised framework can affect whether an investment requires prior Government approval, whether it can proceed under the automatic route, what beneficial ownership must be examined, and what disclosures may be required before funds are brought into India.

The change is already having a practical impact. According to the Government, 29 FDI investments involving proposed investment of ₹4,895.65 crore had been reported under the revised framework up to 20 August 2026, covering sectors including information technology, artificial intelligence, manufacturing, pharmaceuticals, data centres and transport services.

Indian commercial business district representing cross-border investment

Image: Daksh Sammi / Wikimedia Commons, licensed under CC BY-SA 4.0.

Why Was the FDI Rule Changed?

In April 2020, the Government introduced Press Note 3 (2020) against the background of the COVID-19 pandemic.

The policy required investment through the Government route where:

the investing entity was from a country sharing a land border with India; or
the beneficial owner of an investment into India was situated in, or was a citizen of, such a country.

A subsequent direct or indirect transfer resulting in beneficial ownership falling within the restricted category also required Government approval.

The policy was intended to curb opportunistic takeovers and acquisitions of Indian companies during the pandemic.

However, an important practical difficulty subsequently emerged.

Global investment structures can contain investors from many jurisdictions. A PE fund, VC fund or other institutional investment vehicle established in Singapore, Mauritius, the United States or another jurisdiction may itself have upstream investors or stakeholders connected with a land-bordering country.

Consequently, even relatively small and non-controlling interests could create questions about whether prior Government approval was required.

The Government acknowledged this concern while announcing the 2026 reform.

What Changed in 2026?

The Government reviewed the framework and DPIIT issued Press Note No. 2 (2026 Series), dated 15 March 2026.

The corresponding Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026 were notified on 1 May 2026, bringing the revised framework into operation.

One of the most important changes is greater clarity regarding the determination of beneficial ownership.

The amended policy links the meaning of beneficial owner to 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, as amended from time to time.

The beneficial ownership test is applied at the level of the investor entity.

What Is the Much-Discussed 10% Relaxation?

When approving the policy change in March 2026, the Government explained that investors having non-controlling beneficial ownership from land-bordering countries of up to 10% would be permitted under the automatic route, subject to applicable sectoral caps, entry routes and attendant conditions.

This is an important relaxation—but it should not be interpreted as a blanket rule that every investment containing an LBC-linked holding of 10% or less automatically qualifies.

The actual ownership and control structure needs to be examined.

Under Press Note 2, beneficial ownership may be treated as vested in a land-bordering country where relevant persons or entities, directly or indirectly, individually or cumulatively, possess rights exceeding the applicable thresholds under the PML Rules, or exercise control over the investor entity, or exercise ultimate effective control over the Indian investee entity.

Therefore:

Percentage ownership is important, but percentage alone is not the entire test.

Control rights can be equally important.

A Simple Example

Consider an overseas investment fund proposing to invest in an Indian manufacturing company.

The fund itself may be incorporated in Singapore and most of its investors may be from jurisdictions that do not share a land border with India.

Suppose, however, that part of its upstream ownership is connected with an LBC jurisdiction.

The correct analysis should not stop with the statement:

“The investor is a Singapore company, so Press Note 3 does not apply.”

The investment structure may need to be examined further to determine:

who owns the investor;
the percentage held directly and indirectly;
whether relevant persons have board appointment rights;
whether veto or affirmative rights confer control;
whether any person has ultimate effective control;
whether Government approval is required; and
whether the investment instead falls within the reporting framework introduced by the revised policy.

This makes beneficial ownership due diligence an important part of FDI transaction planning.

Automatic Route Does Not Mean “No Compliance”

This distinction is particularly important for Indian promoters.

An investment proceeding under the automatic route generally means that prior Government approval is not required under the applicable FDI entry route.

It does not mean that the investment is outside FEMA, FDI policy or reporting requirements.

Press Note 2 expressly provides that investments from an investor entity having direct or indirect ownership by a citizen or entity of a land-bordering country, but not requiring prior Government approval under the revised provisions, are subject to reporting requirements prescribed through the DPIIT Standard Operating Procedure.

These requirements operate in addition to applicable sectoral caps, entry routes and attendant conditions.

What Information May Have to Be Disclosed?

The revised DPIIT Standard Operating Procedure illustrates the depth of information that can become relevant in beneficial ownership analysis.

The prescribed information can include:

flow of funds from investor to investee;
group or organisational structure;
inter-se shareholding percentages;
place of incorporation or registration;
details of LBC-linked beneficial owners;
upstream shareholders and investors;
directors;
investment committee members;
general partners and limited partners;
key managerial personnel;
ownership or stake percentages;
board appointment rights;
veto rights; and
other rights capable of granting direct, indirect or ultimate effective control.

For complex PE, VC, fund and holding-company structures, the compliance exercise can therefore extend substantially beyond identifying the immediate shareholder of the Indian company.

Why This Matters for PE, VC and Global Funds

This reform is particularly relevant to global investment funds.

An investment vehicle may pool capital from multiple countries. Under the earlier framework, relatively small LBC-linked interests could generate uncertainty over the Government approval requirement.

The 2026 framework attempts to distinguish more clearly between non-controlling ownership and ownership or rights that cross the relevant beneficial-ownership or control tests.

This can potentially reduce transaction friction for legitimate global investment structures while retaining scrutiny where ownership or control reaches the prescribed threshold.

The Reform Is Already Being Used

The Government reported on 21 August 2026 that 29 investments had been reported under the revised framework up to 20 August 2026, involving proposed FDI of ₹4,895.65 crore.

The reported investments covered sectors such as:

Information Technology;
Artificial Intelligence;
Information & Communication;
Manufacturing;
Pharmaceuticals;
Data Centres; and
Transport Services.

The investors/entities were based in jurisdictions including Mauritius, the United States, Republic of Korea, Japan, Singapore, Luxembourg and the Cayman Islands.

This is significant because the reform is not merely theoretical—it is already being used in live cross-border investment structures.

A Separate 60-Day Framework for Certain Strategic Manufacturing Proposals

Another important part of the 2026 reform concerns investments that continue to require Government approval.

The Government announced an expedited framework for LBC investments in specified manufacturing sectors/activities, including:

capital goods;
electronic capital goods;
electronic components; and
polysilicon and ingot-wafer manufacturing.

The Government stated that qualifying proposals in these specified sectors would be processed and decided within 60 days.

However, this should not be confused with the automatic-route relaxation.

The expedited approval mechanism applies to specified proposals requiring Government consideration and carries its own conditions, including requirements concerning resident Indian ownership and control of the investee entity.

What Should an Indian Company Check Before Accepting FDI?

A promoter should ideally conduct an FDI compliance review before signing a binding investment agreement or accepting foreign funds.

At a minimum, the company and its advisers should examine:

1. Investor Jurisdiction

Where is the immediate investor incorporated or resident?

2. Upstream Ownership

Who ultimately owns the investing entity, directly and indirectly?

3. Beneficial Ownership

Does any LBC-linked person or entity cross the applicable beneficial ownership threshold?

4. Control Rights

Does an investor have board rights, veto rights, affirmative voting rights or contractual arrangements capable of creating control even where its economic ownership appears small?

5. Sectoral FDI Policy

Is foreign investment permitted in the Indian company's sector?

If permitted, what is the applicable sectoral cap?

6. Entry Route

Does the investment qualify for the automatic route, or is Government approval required?

7. Instrument

Will the investment be made through equity shares, compulsorily convertible preference shares, compulsorily convertible debentures or another permissible structure?

Instrument selection can have separate FEMA, valuation, corporate-law and commercial consequences.

8. Pricing and Valuation

Does the proposed issue or transfer price comply with applicable FEMA pricing requirements?

A commercial valuation agreed between promoter and investor should not be examined in isolation from regulatory pricing rules.

9. Reporting

What filings and disclosures are required under FEMA/RBI/DPIIT requirements?

10. Transaction Documents

Do the shareholders' agreement, share subscription agreement, reserved matters, board rights, veto rights and exit provisions alter the ownership or control analysis?

This last question is especially important because economic ownership and legal control are not always the same thing.

Why Promoters Should Perform FDI Due Diligence Before Negotiating Valuation

Promoters often begin an equity raise by asking:

“What valuation can we get?”

That is important, but in a cross-border transaction it should not be the first and only question.

A more complete sequence is:

Is the investor eligible to invest?
Is the sector eligible for FDI?
Which entry route applies?
What does the investor's upstream ownership look like?
Is any Government approval required?
What equity instrument should be used?
What valuation and FEMA pricing rules apply?
What rights will the investor receive?
What reporting must follow?
Only then—how should the commercial transaction be structured and closed?

A term sheet can look commercially attractive but still require substantial restructuring if these regulatory issues are discovered only during final due diligence.

What Does the 2026 Reform Mean for Indian Businesses Seeking Foreign Capital?

For genuine investment structures with small, non-controlling LBC-linked ownership, the revised framework can remove an important layer of uncertainty and potentially shorten transaction timelines.

For Indian companies seeking FDI, however, the practical lesson is not simply that the rules have become “easier”.

The better conclusion is:

The rules have become more defined, but ownership, control and disclosure need to be analysed carefully.

This is particularly relevant for companies raising capital from:

global PE and VC funds;
multinational strategic investors;
overseas holding companies;
family offices;
investment funds with multi-jurisdictional LP structures; and
foreign investors using layered corporate structures.

FDI Is a Structure, Not Merely an Inward Remittance

A successful foreign-investment transaction involves considerably more than locating an overseas investor and agreeing on a valuation.

Promoters need to coordinate the investment structure, FEMA eligibility, beneficial ownership, sectoral restrictions, pricing, corporate approvals, transaction documentation, control rights and post-investment reporting.

Addressing these matters before closing can reduce the risk of regulatory complications and transaction delays later.

Monei Matters works with businesses on financing and investment-structuring requirements, including FDI and equity-funding transactions. Businesses evaluating a proposed foreign investment or capital raise can visit Monei Matters to discuss their financing requirements.

This article is intended for general business information and does not constitute legal, tax, investment or regulatory advice. FDI applicability depends on the sector, investor and beneficial ownership structure, instrument, control rights and facts of the transaction. Professional advice should be obtained for a specific transaction.

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