Press Note 2 (2026): Practitioner Analysis of India’s FDI Framework & Press Note 3 Amendment

In April 2020, as global markets crashed and Indian company valuations fell sharply, India moved quickly. Press Note 3 (2020), introduced under India’s FDI policy framework prevent opportunistic foreign takeovers of Indian businesses, particularly from land-bordering jurisdictions.

This shift also reflects the evolving interpretation of the Press Note 3 amendment, which continues to shape how foreign investments are evaluated under India’s regulatory framework.

It was blunt by design. And for the moment, that bluntness served its purpose.

Six years later, in March 2026, the government issued Press Note 2 (2026) — a calibrated refinement of that original framework. The broad brush has been replaced with a more precise instrument. But practitioners would be mistaken to read this as a simple liberalisation. There are new flexibilities, yes — but also new complexities that demand careful attention.

This piece examines both: what has changed, what that change means in practice, and — what has not gone.

Background: What Did Press Note 3 (2020) Actually Do? (Press Note 3 Notification Overview)

The original press note 3 notification introduced a blanket approval mechanism for investments involving land-bordering countries.

Press Note 3 was introduced under the Foreign Exchange Management Act, 1999 (FEMA) framework, through the Foreign Exchange Management (Non-Debt Instruments) Rules, and administered by DPIIT. Its operative effect was straightforward but sweeping.

Any investment — direct or indirect — where the beneficial owner was situated in or a citizen of a Land Bordering Country (LBC) required prior government approval, irrespective of sector, deal size, or the nature of the investor’s stake.

The LBCs covered under this framework are:

China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan

The policy extended well beyond new investments. Any transfer of ownership — whether through secondary transactions, internal restructurings, or exits — that resulted in beneficial ownership shifting to an LBC entity was also caught within its ambit.

In essence, Press Note 3 covered the entire lifecycle of capital, from entry to exit.

The Structural Challenges Created by Press Note 3

These challenges led to increasing demand for clarity in press note 3 approval (PN3 approval) processes. The framework achieved its protective objective. It also created several structural challenges that, over time, became increasingly difficult to justify in a market context.

No defined beneficial ownership threshold. The term “beneficial owner” was not aligned with any statutory threshold. This created significant interpretational ambiguity — even minimal or passive economic interests could, in principle, trigger approval requirements.

Impact on global PE/VC funds. Diversified funds operating through limited partnership structures faced a disproportionate burden. A minor LBC-linked limited partner — even one with no governance rights — could render the entire fund investment subject to government approval, regardless of actual risk.

The “situated in” problem. The phrase covered not just citizenship but residency. This had unintended consequences for multinational companies: ESOP issuances to employees residing in LBC jurisdictions — even if they were not LBC citizens — required approval. This created friction in global talent mobility and cross-border compensation structures.

No distinction between passive and controlling investors. A non-controlling minority investor was treated identically to an acquirer taking a strategic stake. This was disproportionate and discouraged early-stage and growth-stage capital flows. This is where structured financial oversight through virtual CFO services becomes critical for compliance and deal structuring.

Approval timelines were unpredictable. Without defined processing windows, deal certainty suffered — particularly in time-sensitive transactions.

Press Note 2 (2026): A Practitioner-Level Analysis

Press Note 2 (2026), issued pursuant to Union Cabinet approval, introduces a structured, risk-calibrated approach. Below is a practitioner-level analysis of each key amendment.

1. Beneficial Ownership Now Aligned with PMLA

The most foundational change is definitional. The concept of “beneficial owner” is now aligned with the Prevention of Money Laundering Act, 2002 (PMLA) and its associated rules.

This matters for several reasons:

• It introduces clear, quantitative thresholds linked to ownership and control percentages, replacing the previously undefined standard.
• It ensures consistent interpretation across regulatory frameworks — FEMA, KYC, and AML — reducing cross-regulatory ambiguity.
• The threshold varies depending on the nature of the entity (company, LLP, trust, etc.) under PMLA Rules, and practitioners will need to apply the correct test for each structure.

This alignment is overdue and broadly welcome.

2. The 10% Threshold — Relief, But Not Immunity

This newly introduced PN3 threshold 10% is one of the most significant shifts from the earlier framework. One of the most discussed changes is the introduction of a 10% materiality threshold. Under Press Note 2, LBC-linked ownership of up to 10% — provided it is non-controlling — can now proceed under the automatic route.

This is a meaningful step for global funds with incidental LBC exposure. Where a diversified LP structure previously triggered approval due to a minor LBC-linked investor, the threshold now provides relief.

However, practitioners should read this carefully.

First, the conditions: the investment must not confer control or significant influence. This is not a purely numerical test. Even a 10% shareholding can, in certain circumstances, give rise to “significant influence” under accounting standards (such as Ind AS 28) or governance arrangements. Board nomination rights, affirmative veto powers, or information rights that go beyond what is standard for passive investors may independently trigger regulatory scrutiny — regardless of the percentage held.

Second, and more critically: the 10% threshold addresses entry route classification only. It does not extinguish all regulatory exposure.

Entry Route Perspective: Relaxation available up to 10% (non-controlling)

Compliance Perspective: Reporting and disclosure obligations may persist even at sub-10% level of LBC beneficial ownership — potentially at any level.

Put simply: an investment may qualify for the automatic route under the entry regime, while simultaneously attracting compliance obligations that approximate the pre-PN2 framework in their scope.

This is an area where further clarification from DPIIT and RBI is expected and, frankly, necessary. Until that clarity arrives, investors and their advisors should approach the reporting question with caution and not assume that automatic route eligibility equals full exemption from compliance obligations.

3. Removal of “Situated In”: A Genuine Simplification

Press Note 2 removes the phrase “situated in” from the approval trigger. The test is now citizenship-based rather than residency-based.

This is a clean and meaningful reform.

ESOP Impact: Under PN3, ESOPs issued to employees residing in LBC jurisdictions — irrespective of their citizenship — triggered approval. Under PN2, approval is required only if the employee is an LBC citizen. An Indian employee on deputation in China, or a Singapore citizen working in Nepal, is now assessed based on citizenship alone.

This change significantly improves operational flexibility for multinational companies with cross-border workforces.

4. Control Continues to Override Ownership

Despite the relaxations, the policy reinforces a principle that runs through India’s FDI framework more broadly: substance over structure.

Even where ownership falls below prescribed thresholds, the presence of:

• Board representation rights
• Veto or affirmative vote requirements
• Governance or information access provisions beyond passive investor norms

…can independently trigger regulatory scrutiny. The FDI framework does not reward structural engineering that separates economic ownership from effective control. Advisors structuring deals with LBC-linked investors should document the governance architecture with particular care.

“Sting in the Tail”: A Key Risk That Cannot Be Overlooked

This is the issue I would flag most prominently for any investor or compliance officer currently reviewing their structures.

A significant interpretational question arises from the gap between the entry route framework and the compliance/reporting framework:

Does the presence of any level of LBC beneficial ownership — even below 10% — still trigger disclosure and reporting obligations under FDI and allied regulations?

The answer, based on the current regulatory text, appears to be: potentially yes.

This creates a structural dichotomy: an investment may qualify for the automatic route under the entry regime, while simultaneously attracting compliance obligations that approximate the pre-PN2 framework in scope. Investors should not treat automatic-route eligibility as a compliance clearance.

5. Faster Approvals in Specified Sectors

Press Note 2 introduces an indicative 60-day approval timeline for a defined set of sectors, including:

• Electronic components
• Polysilicon and semiconductor value chain

This is a meaningful step for improving investor confidence and deal predictability in sectors of high strategic and economic importance to India. The word “indicative” should not be overlooked — but even as a target timeline, it represents a significant improvement over the previously open-ended process.

6. A Cabinet Secretary-Led Committee for Dynamic Policy Updates

A forward-looking structural feature is the empowerment of a Cabinet Secretary-led Committee to dynamically modify the list of sectors eligible for fast-track approvals.

This is important because it reduces the dependence on formal policy amendments for sectoral changes, enabling more responsive calibration as geopolitical or economic circumstances evolve. For investors in emerging sectors, this provides both a mechanism for relief and a signal that the government intends to remain actively engaged in managing the framework.

Comparative Summary: Press Note 3 (2020) vs Press Note 2 (2026)

Beneficial Ownership Definition

Press Note 3 (2020): UndefinedPress Note 2 (2026): Aligned with PMLA

Threshold for Automatic Route

Press Note 3 (2020): None (effectively 0%)Press Note 2 (2026): <10% (non-controlling)

“Situated In” Test

Press Note 3 (2020): Included (residency-based)Press Note 2 (2026): Removed (citizenship-based only)

ESOP Compliance

Press Note 3 (2020): Triggered by LBC residencyPress Note 2 (2026): Triggered only by LBC citizenship

Approval Timelines

Press Note 3 (2020): UndefinedPress Note 2 (2026): 60-day indicative (select sectors)

Passive vs. Controlling Investors

Press Note 3 (2020): Treated identicallyPress Note 2 (2026): Differentiated treatment

Reporting Below Threshold

Press Note 3 (2020): Broadly appliedPress Note 2 (2026): Clarification pending

What Still Requires Government Approval

The liberalisation is real, but so are the remaining restrictions. Government approval is still required for:

• Investments by LBC citizens in most circumstances, particularly from certain jurisdictions
• Acquisitions resulting in control or significant influence, regardless of ownership percentage
• Investments in strategic or sensitive sectors — defence, telecommunications, critical infrastructure
• Transfer of ownership resulting in beneficial ownership shifting to an LBC entity
• Indirect or downstream beneficial ownership by LBC entities, even through layered structures

National security considerations remain fully intact within the framework.

A Practical Illustration

An Indian startup raises a Series A round. A Singapore-based fund — with an LBC-linked LP holding below 10% — participates as a passive, minority investor with no governance rights beyond standard information covenants.

Under Press Note 3 (2020): Government approval was required.

Under Press Note 2 (2026): The investment may proceed under the automatic route — subject to verification that no control rights arise, that the LBC ownership is accurately determined under PMLA thresholds, and that applicable reporting obligations are assessed and met.

The key word throughout is “may.” The framework has created space for such transactions to proceed without approval — but that space is defined by conditions, not certainties. The structuring and diligence work still needs to be done.

Important Regulatory Caveat

The operational effectiveness of Press Note 2 (2026) remains contingent upon corresponding amendments to the FEMA (Non-Debt Instruments) Rules. Those amendments are currently awaited.

Until the NDI Rules are formally updated to reflect the policy changes introduced by Press Note 2, the full legal enforceability of certain provisions remains open to interpretation. Investors and businesses should factor this into their timelines and structuring decisions, and monitor regulatory developments closely.

From Broad Restriction to Calibrated Regulation

The transition from Press Note 3 to Press Note 2 reflects a deliberate philosophical evolution in India’s FDI regulatory approach.

Press Note 3 was precautionary and broad — appropriate for the moment it addressed. Press Note 2 is differentiated and proportionate — calibrated to the reality that not all LBC-linked capital carries the same risk profile.

The revised framework distinguishes between:

• Passive capital (below threshold, non-controlling) and strategic capital (controlling, governance-influencing)
• Incidental LBC exposure (diversified fund with minor LP) and directed LBC ownership (controlled by or for an LBC entity)

This is a mature regulatory shift. It aligns India more closely with international AML and investment screening frameworks, while preserving — and in some ways reinforcing — the core national security overlay.

Implications for Market Participants

For PE/VC Funds: Funds with diversified LP bases can now invest without triggering approval solely due to minor LBC-linked LP exposure below 10%. Deal execution timelines should improve — but fund managers must still map beneficial ownership carefully under PMLA thresholds.

For MNCs and Start-ups: ESOP grants to employees in LBC jurisdictions are significantly simplified. Talent mobility decisions no longer carry the regulatory overhang they once did — provided citizenship is assessed correctly.

For Minority and Passive Investors: The differentiation between passive and controlling investors is now expressly recognised. Passive capital can flow more freely — but governance documentation must clearly support the passive characterisation.

For All Participants: The compliance question — particularly around reporting obligations below the 10% threshold — remains live. Do not treat automatic-route eligibility as a compliance clearance. Engage advisors on the disclosure and reporting architecture before transaction close.

FDI Trends in 2026 and Policy Evolution

India continues to remain one of the top destinations for global capital, with evolving FDI trends in 2026 indicating increased participation from diversified global funds.

Understanding the Structure of FDI

There are 3 forms of FDI commonly recognized:

1. Equity investments 
2. Reinvested earnings 
3. Other capital (intra-company loans) 

India’s trade ecosystem is further supported by the 4 pillars of EXIM policy:

• Export promotion 
• Trade facilitation 
• Infrastructure development 
• Policy support

Top FDI Contributors to India:

• Singapore 
• USA 
• Mauritius 
• Netherlands 
• Japan 

The regulatory shift from FDI policy in 2020 to the updated framework under Press Note 2 reflects India’s effort to balance national security with economic growth.

Conclusion

Press Note 2 (2026) is a significant and genuinely constructive development in India’s FDI policy landscape. It moves the framework from one-size-fits-all restriction to risk-proportionate regulation. For investors who were deterred or disadvantaged by the breadth of Press Note 3, the relief is real.

But the reform also contains layers that deserve careful reading. The “sting in the tail” around reporting obligations, the pending FEMA NDI Rules alignment, the nuanced treatment of control rights, and the significance-of-influence question under Ind AS — these are not footnotes. They are the operating territory of any serious compliance or transaction structuring exercise under the new framework.

India’s intent is clear: remain an attractive destination for global capital, while maintaining meaningful oversight of investments that carry genuine national security implications. The policy calibration is right. The implementation detail will determine whether that intent translates into execution certainty for the market.

For businesses navigating cross-border investments under Press Note 3 and evolving FDI frameworks, partnering with experienced advisors like USAIndiaCFO can help ensure compliance, clarity, and confident decision-making.

Disclaimer: This article is intended solely for educational and informational purposes and does not constitute legal, tax, or investment advice. The regulatory framework discussed is subject to further clarification through amendments to the FEMA (Non-Debt Instruments) Rules and guidance from DPIIT and RBI, which are currently awaited. Readers are strongly advised to consult qualified professional advisors before making any investment or compliance decision based on the contents of this article.

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