The Union Cabinet approved amendments to the existing Policy on Foreign Direct Investment in India. The revised Policy makes significant amendments to the norms outlined in Press Note 3 of 2020. The amendments aim to strike a balance between concerns of national security and investments that will make India a more attractive destination for capital in a highly competitive global landscape.
Background: The Genesis and Impact of Press Note 3 (2020)
In the wake of economic uncertainty triggered by the pandemic, the Department for Promotion of Industry and Internal Trade (DPIIT) through Press Note 3 issued in April 2020 sought to address perceived regulatory gaps in the foreign investment regulation in order to pre-empt any opportunistic acquisitions of Indian companies, especially when their valuations were depressed due to pandemic-induced market downturns.
Under PN3:
Any investment from companies based in countries that (geographically) share a land border with India would require prior government approval.
The same requirement applied where the beneficial owner of the investment was from such countries, even if the investing entity itself was based elsewhere.
The scope of restriction was not confined only to Bangladesh & Pakistan; it also includes – China, Nepal, Bhutan, Myanmar & Afghanistan, as well as Hong Kong and Macau (treated as sharing land borders via China).
Although the Policy had the desired effect, it had unforeseen consequences as well. Absence of a codified definition of beneficial ownership and quantum of interest across sectors, coupled with absence of thresholds, caused delay as even any nominal presence/interest in neighboring jurisdictions became grounds for approval. Private equity and venture capital firms with dispersed base of LPs found this overly prescriptive system restrictive. Technology & startup investments suffered particularly due to these stringent conditions and several were forced to forego or restructure.
Key Amendments, Detailed Explanations, and Analytical Observations
In order to develop a more effective regulatory approach, the 2026 amendments to the existing FDI Policy refined the regime by introducing clarity, flexibility and efficiency whilst maintaining crucial safeguards. The revised regime is organised into four key areas.
1. Formalisation of Beneficial Ownership Criteria
Beneficial Ownership has for the first time been defined in the FDI Policy and follows the Prevention of Money Laundering Rules, 2005. This is a significant step forward.
It introduces a standard that is clear and internationally recognised for the identification of ownership and control. Provides a more precise view of layered and indirect investments. Clarifies an interpretational issue previously subject to inconsistent application of PN3.
By implementing the new policy within the legal framework currently in place, the government provides a clearer picture of what is to come for investors and regulators alike.
2. Automatic Route for Non?Controlling Investments
The most significant change is the introduction of a threshold?based exemption for non?controlling investments. Under the amended policy:
- Investments having beneficial ownership up to 10% from land?bordering countries in the form of non?controlling shareholdings shall be allowed under the automatic route provided all other conditions including sectoral limits are satisfied.
- Mandatory reporting to DPIIT for transparency and regulatory compliance.
The safe harbour is a key reform building on PN3, which in effect removes the requirement of prior approval for all such minority, non?controlling investments. This should facilitate global funds’ participation in India, particularly where their India exposure is ancillary to their broader geographic investments and not a core focus of their strategy
3. Safeguards on Ownership and Control
Although relaxations and exemptions have been granted to ease regulatory compliance, the new policy affirms a strong stance in protecting ‘national interests’. Accordingly, majority ownership and effective control of ‘sensitive sectors’ (as notified) will continue to be restricted to ‘resident Indian persons/Indian?controlled companies’ as per the government’s national security/strategic sector focus.
The policy objective is to keep the decision?making authority on critical technology acquisition with local entities and not with foreign entities and entities from sensitive jurisdictions. This is critical for various industries including those that are related to critical infrastructure, emerging technologies and highly data?intensive industries
4. Expedited Approval Mechanism for Priority Sectors
To encourage greater investment in strategic manufacturing sectors, the government has instituted a time?bound approval process: the new procedure outlines specific time frames for the issuance of approval to ensure that investors are not confronted with protracted bureaucratic delays.
A maximum period of 60 days has been prescribed for considering approval of investments made by companies owned by citizens and/or registered in countries that share land borders with India, in fields identified as strategic: electronic capital goods; electronic/auto components; electronics/system design & manufacturing (ESDM); polysilicon and ingot-wafer manufacturing; solar cells; semiconductor fabs/ATMP/OSAT; atomic energy; telecom equipment; drones; and data centres.
The Priority Sector List can be amended or expanded by the Committee of Secretaries headed by the Cabinet Secretary (Committee of Secretaries on FDI, or CoS-FDI).
This reform is not only designed to ease bureaucratic burdens, but also signals government's intent to be facilitative for investments in high?impact industries such as manufacturing.
'Strategy' as Economic Imperative: Examining the 'Grand Strategy' in the Context of International Politics and Economic Competition
The suggested changes are made to match the changing economy. For India to grow faster, it needs a lot of money to be invested in important areas like infrastructure, manufacturing, and technology.
At the same time, Some of the countries immediately neighbouring India (particularly China) are relatively affluent with an industrial capability.
The global investment scenario includes multi?layered ownership structures which simply cannot be hindered by inflexible rules.
India offers higher returns on investment as compared to traditional markets globally.
The new policy distinguishes between strategic influence and passive investment and will allow limited non?controlling investment to encourage capital flows while closely monitoring strategic sectors.
Economic and Regulatory Implications
The changes ushered in by the 2026 amendments have far?reaching effects that will be felt immediately as well as in the long?term.
- Higher volumes of capital inflows: Reducing the approval requirements for minority investments is expected to stimulate greater involvement of PE/VC funds and institutional investors in the market, including those that are actively operating in various regions of the world.
- Enhancement of manufacturing capabilities: With focus on electronics and semiconductor?related fields, this initiative supports the larger industrial policy of India to increase domestic value addition and enhance supply chain resilience.
- Easier business: Clear thresholds, definite timelines and simpler procedures make it easier to do business.
- Global integration: The policy will help Indian companies facilitate global integration through collaborations, joint ventures, technology agreements etc.
| Aspect |
Press Note 3 (2020) |
2026 Amendments |
| Beneficial Ownership |
No codified definition; led to inconsistent application and delays for any nominal interest from land-bordering countries. |
Formal definition aligned with Prevention of Money Laundering Rules, 2005; provides clarity for layered/indirect investments. |
| Non-Controlling Investments |
All investments from land-bordering countries (or beneficial owners) required prior government approval, regardless of size. |
Automatic route allowed for beneficial ownership ≤10% in non-controlling shareholdings (with mandatory DPIIT reporting), if other conditions met. |
| Ownership & Control in Sensitive Sectors |
Prior approval required; no explicit thresholds or sector focus. |
Majority ownership/control restricted to resident Indian persons/Indian-controlled companies in notified sensitive sectors (e.g., critical infrastructure, emerging tech). |
| Approval Process |
No time-bound mechanism; caused protracted delays, especially for PE/VC and startups. |
Expedited 60-day timeline for priority strategic sectors (e.g., semiconductors, ESDM, drones, data centres); list expandable by CoS-FDI. |
Conclusion
The 2026 amendments to India’s FDI policy represent a calibrated transition from a precautionary regime to a more refined and facilitative framework. By introducing clarity in beneficial ownership, enabling non?controlling investments under the automatic route, and maintaining robust safeguards on control in sensitive sectors, the government has struck a delicate balance between openness and security.
In doing so, India reinforces its position as a credible and competitive destination for global investment. The reforms not only address the limitations of Press Note 3 but also lay the foundation for a more resilient, transparent, and growth?oriented investment ecosystem one that is aligned with India’s long?term economic aspirations and its evolving role in the global economy.
How India Law Offices LLP Can Assist
Our team provides strategic guidance to foreign investors, multinational enterprises and Indian companies. We assist foreign investors and Indian companies in structuring investments in accordance with the revised FDI framework, evaluating the requirements of beneficial ownership and determining whether an application requires to be processed under the “automatic route” or “approval route”.
Our team with decades of experience in cross border transactions guide clients on compliance requirement, documentation for seeking approval from DPIIT and compliance with Sub Sector under various Industry Classification. The Firm can also assist in structuring joint ventures, mergers & acquisitions and investment restructuring to comply with requirements of ownership and control under the said policy. ILO team having combination of regulatory understanding and commercial transaction experience helps clients to navigate the entry and expansion into the Indian market in a proactive, informed, and efficient manner.
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