Relaxation of FDI Rules for India's Neighbouring Countries

A.      INTRODUCTION

In light of COVID-19 pandemic in the year 2020, the Government of India had introduced Press Note 3 (‘PN3’) amending its foreign direct investment (‘FDI’) policy for curbing opportunistic takeovers and acquisitions of Indian companies. The objective behind PN3 was to safeguard the Indian entities during a period of economic vulnerability. Accordingly, PN3 mandated that where an investing entity is situated in a country sharing land border with India (‘Neighbouring Countries’) or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, FDI shall be permitted only with prior Government approval.

B.      KEY CHANGES

On March 10, 2026, the Government of India eased PN3 restrictions allowing the following key changes:

• Beneficial ownership test formalised – The policy now incorporates a formal definition and criteria for determining beneficial ownership in line with the Prevention of Money Laundering Rules, 2005. The beneficial ownership test will be applied at the level of the investor entity.

• Revised beneficial ownership threshold under the automatic route – Investments where beneficial ownership from Neighbouring Countries does not exceed 10 percent and does not result in control will now be permitted under the automatic route, subject to applicable sectoral caps and conditions.

• Approval timeline for certain manufacturing sectors – Government approval proposals relating to investments in critical manufacturing sectors including capital goods, electronic capital goods, electronic components, polysilicon and ingot wafer will be processed within a 60-day timeline.

• Requirement of Indian ownership and control for expedited proposals – For investments benefiting from the expedited approval timeline, the majority shareholding and control of the investee entity must remain with resident Indian citizens or entities owned and controlled by resident Indian citizens.

C.      WAY FORWARD

It is anticipated that the PN3 amendment will foster JVs between India and the Neighbouring Countries by allowing minority foreign ownership through the automatic route and expediting approvals for investments in manufacturing sector. The government aims to facilitate technology partnerships while maintaining domestic strategic control. Consequently, Indian companies seeking to modernize and expand their production capabilities may find it easier to collaborate with foreign investors from Neighbouring Countries, particularly in areas such as electronics manufacturing and renewable energy supply chains.