India has approved significant changes to its foreign direct investment framework governing investments from countries that share land borders with the country, easing certain restrictions introduced during the Covid-19 pandemic while retaining safeguards to protect strategic interests and domestic control.
The Union Cabinet, chaired by Prime Minister Narendra Modi, has cleared amendments to the guidelines regulating investments from land-bordering countries under the foreign direct investment policy. The revised framework aims to unlock greater foreign investment, provide clarity to investors and support India’s manufacturing ambitions.
Under the new guidelines, investors with non-controlling beneficial ownership of up to 10 percent from countries sharing land borders with India will now be permitted to invest through the automatic route. These investments will remain subject to sectoral caps, entry routes and compliance conditions, and the investee entity will be required to report relevant information to the Department for Promotion of Industry and Internal Trade.
Clear rules introduced for beneficial ownership
A key element of the policy revision is the formal incorporation of a definition and criteria for determining beneficial ownership. The government has aligned the definition with the framework under the Prevention of Money Laundering Rules, 2005, which is widely used by the international investment community.
The beneficial ownership test will now be applied at the level of the investor entity. A beneficial owner is considered the ultimate owner or controlling entity behind an investment. By allowing limited non-controlling ownership from land-bordering countries up to the 10 percent threshold, the government aims to address concerns that earlier restrictions discouraged global funds with minor exposure to such investors.
The previous rules had also affected global private equity and venture capital funds that held small ownership links to investors from neighbouring countries, which in turn slowed investment flows into Indian startups and technology firms.
Faster approvals for key manufacturing sectors
The Cabinet has also introduced a faster approval mechanism for investments from land-bordering countries in selected manufacturing sectors. Proposals involving manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer will now be processed and decided within a defined timeline of 60 days.
These sectors are considered important for strengthening India’s manufacturing ecosystem, particularly in electronics and solar supply chains.
Despite the relaxation, strict safeguards remain in place. Majority shareholding and control of the investee entity must remain with resident Indian citizens or with Indian entities owned and controlled by resident Indian citizens at all times. A Committee of Secretaries, chaired by the Cabinet Secretary, may also revise the list of sectors eligible for such expedited approvals.
Background to Press Note 3 restrictions
The revised policy modifies provisions introduced through Press Note 3 issued on April 17, 2020, during the Covid-19 pandemic. The rule required that any investment from countries sharing a land border with India must receive prior government approval.
The restriction also applied where the beneficial owner of an investment was situated in, or a citizen of, any such country. Additionally, any transfer of ownership of existing or future foreign direct investment in an Indian entity that resulted in beneficial ownership shifting to such jurisdictions required government approval.
The policy applied to investors from China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan. It was introduced to prevent opportunistic takeovers or acquisitions of Indian companies during the pandemic-induced economic slowdown and to safeguard national economic interests.
Balancing investment needs with strategic safeguards
Officials say the amended guidelines are intended to improve the ease of doing business while continuing to protect critical sectors. Strategic areas such as semiconductors will continue to remain restricted.
The government believes the policy shift will help attract greater foreign direct investment, support technology transfer and strengthen domestic manufacturing capacity. Increased inflows are expected to supplement domestic capital, expand Indian firms and deepen integration with global supply chains.
The move is also seen as part of a broader effort to enhance India’s competitiveness as a preferred investment and manufacturing destination, while supporting the objectives of Atmanirbhar Bharat and accelerating overall economic growth.
