Indian Cabinet relaxes PN3 restrictions for certain land‑border investments

Key takeaways

• India’s Union Cabinet has approved targeted reforms to the foreign direct investment (FDI) regime applicable to investors from countries sharing a land border with India.
• A new beneficial ownership test aligned with the Prevention of Money Laundering Rules will be introduced.
• Non‑controlling beneficial ownership from land‑border jurisdictions of up to 10% may qualify for the automatic route, subject to sectoral caps and conditions.
• A fast‑track approval mechanism will process investments in certain manufacturing sectors within 60 days.
• The reforms aim to facilitate investment by global private equity and venture capital funds, while preserving scrutiny over controlling investments.

Background

On 10 March 2026, the Union Cabinet approved significant changes to India’s foreign direct investment framework for investments from countries sharing a land border with India (Land Bordering Countries, or LBCs). The reforms recalibrate the regime introduced under Press Note 3 of 2020 (PN3), which requires government approval for investments from such jurisdictions or where the beneficial owner of the investment is situated in, or is a citizen of, such jurisdictions.

The Cabinet’s decision introduces a limited automatic‑route exception for certain non‑controlling investments and establishes a definitive 60‑day approval timeline for investments in specified manufacturing sectors. The stated policy objective is to facilitate greater FDI inflows, support startups and deep‑tech businesses, and strengthen India’s manufacturing ecosystem.

Key policy changes

1. Beneficial ownership test aligned with PML Rules

The reforms introduce a definition of ‘beneficial owner’ aligned with the framework under the Prevention of Money Laundering Rules, 2005. The beneficial ownership test will be applied at the level of the investor entity. This clarification addresses a longstanding issue under PN3, which did not define the term ‘beneficial owner’ and created uncertainty in transactions involving layered offshore investment structures.

2. Automatic route for certain non‑controlling LBC ownership up to 10%

Investments where non‑controlling beneficial ownership from LBC jurisdictions does not exceed 10% will be eligible for the automatic route, subject to applicable sectoral caps and conditions. This change is intended to address concerns that PN3 captured passive interests held by LBC‑linked investors in global private equity and venture capital funds, even where those investors had no control or governance influence over the investment.

3. Fast‑track approval process for specified manufacturing sectors

The Cabinet has also approved an expedited review framework under which proposals involving LBC investments in certain manufacturing sectors will be processed within 60 days. These sectors currently include capital goods, electronic capital goods, electronic components, and polysilicon and ingot‑wafer manufacturing.

4. Ongoing Indian control requirement

For investments falling within the fast‑track sectors, the majority shareholding and control of the Indian investee entity must remain at all times with resident Indian citizens and/or entities owned and controlled by resident Indian citizens. This requirement indicates that the fast‑track mechanism is intended to support technology partnerships and manufacturing collaborations without transferring effective control of the Indian operating company.

Why this matters for investor’s?

The reforms signal a calibrated liberalisation of India’s land‑border investment restrictions. While the government continues to scrutinise strategic and controlling investments, the new framework creates additional flexibility for passive capital flows and manufacturing collaborations.

The changes are likely to be particularly relevant for global funds with diversified investor bases, startups and venture‑stage companies raising capital, and manufacturing joint ventures seeking technology partnerships in electronics, capital equipment and renewable energy supply chains.

Points to watch

• The practical interpretation of ‘non‑controlling’ ownership and the treatment of governance rights.
• How the 10% threshold will be assessed across layered investment structures.
• Whether the threshold applies per investor or on an aggregated basis.
• Details of the DPIIT reporting requirement for investee companies.
• Operational implementation of the 60‑day approval timeline.
• Whether existing PN3 approval applications may benefit from the revised framework.

The detailed implementing notification amending the FDI Policy and associated FEMA reporting framework is awaited. Transaction planning and documentation should be reviewed once the formal amendments are issued.

Action points for investors and companies

• Reassess PN3 screening analyses for minority and fund‑based investments.
• Map beneficial ownership at the investor‑entity level.
• Review governance rights to ensure minority interests do not constitute control.
• Assess whether proposed investments fall within the identified manufacturing sectors.
• Revisit regulatory conditions, long‑stop dates and approval covenants in transaction documentation.

Disclaimer – This update is intended solely for general informational purposes and does not constitute legal advice or a legal opinion. Readers are advised to seek specific legal advice before acting on the basis of any information contained herein. The authors and the firm disclaim any liability arising from reliance on this update.