What the May 2026 notification adds beyond Press Note 2
Press Note 2 of 2026 told us what the Government intended to do. The notification published on 2 May 2026 — the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026 — tells us what is now legally enforceable. The distinction matters more than it sounds, because the notification does not merely codify Press Note 2. It adds, clarifies, and in places sharpens.
1. From Policy to Statute
Press Note 2 (2026 Series), issued by the DPIIT on 15 March 2026, formally amended Paragraph 3.1.1 of the Consolidated FDI Policy to introduce the 10% beneficial ownership threshold, the three-limb test for control, and a 60-day approval timeline for strategic sectors. As is standard for FDI policy reform in India, however, Press Note 2 was a statement of policy. Until the corresponding amendment to the FEMA (Non-Debt Instruments) Rules, 2019 was notified, the reforms had no legal effect — they could not be relied upon by investors, enforced by authorised dealer banks, or applied by the DPIIT in pending applications.
The Ministry of Finance closed this gap through Notification S.O. 2174(E) dated 2 May 2026 (referred to in some press coverage as the “1 May” notification, reflecting the upload date rather than the gazette date). The notification promulgates the FEMA (Non-Debt Instruments) (Amendment) Rules, 2026 (the “Amendment Rules”), which come into force from the date of publication in the Official Gazette.
2. The Substitution of Rule 6(a)
The drafting choice is itself significant. The Amendment Rules do not merely insert provisos or explanations into the existing Rule 6(a); they replace the entire provision. The new Rule 6(a) restates the core position that any entity or citizen of a country sharing a land border with India, or any investment where beneficial ownership is vested in such a country, can invest in Indian companies only under the Government approval route. The three-limb test, the 10% beneficial ownership threshold (aligned with Rule 9(3) of the PML Rules, 2005), and the continuing compliance obligation for post-investment transfers are all embedded directly in the rule, with full statutory force.
This is materially different from the pre-notification position. Under Press Note 2 alone, an investor could not have relied on the 10% automatic-route relaxation in any deal — AD banks would have continued to apply the older, stricter framework. With the notification, AD banks, the RBI, and the DPIIT are bound to apply the new rule.
3. What the Notification Codifies from Press Note 2
The Amendment Rules give statutory enforceability to four reforms first set out in Press Note 2:
- The 10% threshold. Investors with up to 10% LBC beneficial ownership upstream, who do not control the overseas investor and who cannot exercise ultimate effective control over the Indian investee company, may now invest under the automatic route.
- PMLA-aligned beneficial ownership. The expression “beneficial owner” carries the meaning prescribed under Section 2(1)(fa) of the PMLA, 2002, read with Rule 9(3) of the PML Rules, 2005 — a quantitative 10% threshold combined with a control-based check.
- The three-limb test. Beneficial ownership is deemed vested in an LBC if a person of that country (a) exceeds the 10% threshold over the overseas investor entity, (b) controls the overseas investor through other means, or (c) exercises ultimate effective control over the Indian investee company. Any single limb is sufficient to require approval.
- Continuing compliance. Any subsequent direct or indirect transfer that results in beneficial ownership falling within the restricted category requires prior approval before the change takes effect — including for investments originally made under the automatic route.
4. What the Notification Adds Beyond Press Note 2
This is the angle most commentary on the May 2026 notification has under-emphasised. The Amendment Rules go beyond Press Note 2 in four meaningful ways.
(a) Aggregation “whether acting together or otherwise.” Press Note 2 referred to the cumulative test, but the Amendment Rules make it explicit and statutorily binding that the rights and entitlements of LBC-linked citizens or entities are aggregated cumulatively, regardless of whether they are acting in concert. This removes the usual “persons acting in concert” qualifier that runs through Indian corporate law. Three unrelated Chinese 4% holders aggregate to 12% and breach the threshold — even though none of them coordinated, and none individually crosses 10%. For diversified fund structures, this is the single most consequential clarification in the notification.
(b) The multilateral bank carve-out. The Amendment Rules clarify that a multilateral bank or fund of which India is a member shall not be treated as an entity of any particular country, and no country shall be treated as the beneficial owner of investments made by such a bank or fund. This is a notification-only addition with no counterpart in Press Note 2. Practically, it confirms that investments routed through the Asian Development Bank, the New Development Bank, and the Asian Infrastructure Investment Bank fall outside the beneficial-ownership analysis altogether, relevant for a range of infrastructure, energy, and Public – Private Partnership transactions where multilateral co-investment is structurally important.
(c) Oil-field participating interests. Explanation 3 to the substituted Rule 6(a) provides that the issuance or transfer of a participating interest or right in an oil field by an Indian company to a person resident outside India shall be treated as foreign investment and must comply with the conditions under Schedule I of the NDI Rules. Press Note 2 was silent on this; it is a notification-only addition. The practical effect is to bring upstream oil and gas transactions — historically treated as a sui generis category under petroleum and PSC regulation within the standard FDI regulatory ambit, with associated reporting and sectoral-cap consequences.
(d) Pakistan-specific provisions with statutory force. The substituted Rule 6(a) explicitly provides that citizens of Pakistan and entities incorporated in Pakistan can invest only under the Government route, and are additionally prohibited from investing in defence, space, atomic energy, and any other sector notified as prohibited. While the substantive position is consistent with the existing FDI Policy, embedding it in the NDI Rules carries full FEMA enforceability — including penalty exposure of up to three times the amount involved under Section 13 of FEMA for contraventions.
5. The Parallel Insurance Notification
The same regulatory cycle produced a separate notification — the FEMA (Non-Debt Instruments) (Second Amendment) Rules, 2026 — which liberalised foreign investment in the insurance sector. The amendment substitutes Serial No. F.8 in Schedule I of the NDI Rules to permit 100% FDI in Indian insurance companies and intermediaries (including brokers, third-party administrators, and surveyors) under the automatic route, with the Life Insurance Corporation continuing to be capped at 20%. The relaxation remains subject to IRDAI compliance and the governance safeguards already prescribed under insurance law — Indian resident chairperson, MD, or CEO; majority Indian directors; and substantial business retention onshore.
Read together, the May 2026 notifications signal a deliberate dual-track approach: heightened ownership-and-control-based scrutiny in sensitive jurisdictions, parallel liberalisation in regulated growth sectors. The insurance amendment is not directly connected to the LBC reform, but the same cabinet cycle produced both — and they should be read as parts of a coherent policy package.
6. Practical Implications Now That the Reform Is Law
Three operational priorities follow from the May 2026 notification.
Re-look at pending and recent transactions. Investments held back since March 2026 awaiting clarity can now move on the strength of the statutory rule. Conversely, any post-15 March transaction structured on the assumption that AD banks would apply the new framework — without the notification in place — should be re-verified for compliance, including reporting and approval triggers under the now-binding text.
Re-paper shareholder agreements. The continuing compliance obligation is now a statutory requirement, not just a policy intention. Shareholder agreements between Indian companies and foreign holders should be refreshed with covenants on ongoing disclosure of upstream ownership, pre-clearance rights before any change that could push the LBC threshold, and indemnities for undisclosed changes. Where the foreign holder is a pooled investment vehicle, the SHA should also address what happens when an LBC LP is admitted post-investment.
Wait for the SOP, but prepare for it. The reporting obligation for indirect LBC nexus that does not trigger approval applies “in the form and manner to be prescribed under a Standard Operating Procedure” to be issued by DPIIT. The SOP is not yet out. Indian companies with foreign capital should not wait for the SOP to start identifying which of their cap-table structures have LBC nexus — that mapping work should begin now, so that the reporting can be filed promptly once the SOP is released.
7. Outlook
The May 2026 notification closes the policy-to-statute loop on the most consequential FDI reform of the year. The 10% threshold, the three-limb test, and the continuing compliance obligation are now enforceable law. The four notification-only additions — aggregation regardless of concert, the multilateral bank carve-out, the oil-field clarification, and statutorily binding Pakistan-specific restrictions — quietly extend the regulatory architecture in ways the Press Note 2 commentary did not anticipate.
Three things now define the operational picture for inbound investors: the awaited DPIIT Standard Operating Procedure on indirect-LBC reporting; the practical track record of the 60-day timeline in strategic-sector cases; and the early interpretation, in pending applications, of the “ultimate effective control” limb — the most legally textured of the three, and where most contested cases will turn. The next six months of approval practice will determine whether the May 2026 notification delivers the calibrated, risk-based regime it promises, or whether implementation reverts to the conservatism that characterised the previous five years.
This piece is a general analytical overview and does not constitute legal advice. Specific transactions should be reviewed against the text of the FEMA (Non-Debt Instruments) (Amendment) Rules, 2026 and the applicable Standard Operating Procedure when notified.