How is India adjusting its FDI policy for land-bordering countries?

Short Answer

In March 2026, the Indian government revised its foreign direct investment (FDI) policy for land-bordering countries (LBC), replacing Press Note 3 (PN3) implemented in 2020. The new rules clarify the criteria for determining beneficial owners, exempt small investments (not exceeding 10%) made through the automatic route from case-by-case approval, and provide a 60-day fast-track approval channel for key manufacturing sectors such as electronics, capital goods, and silicon materials. This move aims to balance national security needs with attracting foreign investment, promoting manufacturing development and economic growth.

Detailed Explanation

Definition

FDI refers to an investment made by an investor of one country into an enterprise of another country, with the aim of obtaining lasting interest and management control. India's adjustment of its FDI policy for LBC refers to changes to the previous restrictive provisions on investment from land-bordering countries (including China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, etc.). Under the new rules, the "automatic route" means that investment can be made without prior government approval, provided that the specified sectors and conditions are met. Previously, PN3 required all investments from LBC, regardless of amount, to obtain government approval, whereas the new rules provide exemptions for small investments and establish a fast-track approval channel for specific manufacturing sectors.

Background

In April 2020, at the outset of the COVID-19 pandemic, India issued PN3, requiring all FDI from land-bordering countries, or where the beneficial owner is an entity of such countries, to undergo government approval, in order to prevent "opportunistic takeovers" during the pandemic. However, due to vague definitions, particularly the lack of a clear definition of "beneficial ownership," the policy led to a large backlog of investment applications and a decline in FDI inflows. Reference data show that India's net FDI fell by 27% in FY2022-23. This prompted the Indian government to review the relevant policies to improve the investment climate. The new rules are the result of this adjustment, aiming to address the problems caused by the old policy while maintaining the necessary national security review.

How It Works

The operational mechanism of the new rules includes the following key aspects:

1. Beneficial ownership test: The new rules refer to the standards under the Prevention of Money Laundering Act (PMLA), clarifying the definition of a beneficial owner as an individual or entity holding 10% or more ownership or control. For investors from LBC, if their shareholding is below 10%, they may be deemed not to trigger government approval requirements.2. 10% threshold for the automatic route: For minority shareholder investments from LBC, as long as beneficial ownership does not exceed 10%, the automatic route will apply without requiring prior government approval. This makes it easier for diverse investors in global private equity, venture capital, and startups to make small investments, reducing administrative burden.

2. Fast-track approval for manufacturing: For projects investing in key manufacturing sectors such as capital goods, electronics, and silicon materials, the Indian government will establish a ministerial committee to complete approvals within 60 days, accelerating technology collaboration and joint venture setup. This time commitment improves approval efficiency and enhances investor certainty.

3. Control restrictions: Despite the lowered thresholds, in fast-track industries, the Indian government still requires that majority ownership and control be held by Indian residents, reflecting its cautious approach to strategic asset control. This means foreign capital can participate in equity, but ultimate control remains in India.

Key Elements

The key elements of the new policy include:

• 10% beneficial ownership threshold: Defines the boundary between investments requiring approval and those on the automatic route, providing convenience for minority shareholders.
• Alignment with PMLA definitions: Provides legal consistency, reduces interpretive ambiguity, and enables investors to more clearly assess their obligations.
• Priority industry list: Capital goods, electronics, silicon materials, etc., aligning with "Make in India" and the Production-Linked Incentive (PLI) scheme, channeling investment toward national strategic areas.
• 60-day approval commitment: Improves approval efficiency and enhances investment predictability.
• Residual review authority: The government retains discretion to review complex equity structures and conduct security screening of directors, especially when "ultimate effective control" is involved.

Examples

Take the electronics manufacturing sector as an example. Previously, a global chip company wishing to invest in an Indian assembly line might have had to wait months for government approval because LBC investors were among its ultimate shareholders. Under the new rules, if its stake in the Indian joint venture is below 10%, it can proceed directly through the automatic route; if it is a critical project, it can apply for fast-track approval and receive a decision within 60 days.

Another example is a private equity fund whose limited partners may include sovereign wealth funds from land border countries. Under the old rules, even if the fund itself was not registered in an LBC, the entire investment could be subject to approval as long as any beneficial owner included an LBC entity, causing transaction delays. The new 10% threshold provides convenience for such structured investors, allowing them to avoid lengthy reviews as long as no single LBC beneficial owner holds more than 10%.

Related Concepts- Automatic Route vs. Government Approval Route: The automatic route allows eligible investments to flow in directly, while the government approval route requires case-by-case review. This adjustment expanded the scope of the automatic route but did not completely eliminate approvals.

• Beneficial Ownership: Refers to natural or legal persons who actually control an enterprise through equity, voting rights, etc. A clear definition is the foundation for effective implementation of foreign investment policies and is one of the key points of this reform.
• Greenfield Investment vs. M&A: Greenfield investment builds new facilities, while M&A acquires existing enterprises. India's new rules mainly benefit greenfield investments and technical cooperation through fast-track approvals in manufacturing, but may also involve joint ventures, which are a form of M&A.
• Inbound FDI vs. Outbound FDI: Inbound refers to foreign investment entering India, while outbound refers to Indian enterprises investing abroad. This article discusses inbound FDI policy.

Common Misunderstandings

• Misconception 1: The new rules fully open up foreign investment. In reality, the new rules only relax restrictions on specific thresholds and industries. Most LBC investments still need to meet conditions, and ultimate control must remain in India.
• Misconception 2: FDI is just building factories. In fact, FDI also includes M&A, capital increases, technical cooperation, and other forms. This policy adjustment also involves joint ventures.
• Misconception 3: Security review has been abolished. The government still retains the power to review directors' backgrounds and complex structures; only the process is clearer and thresholds are more defined.
• Misconception 4: The policy treats all countries equally. This policy only targets land-border countries adjacent to India. FDI from other countries is subject to different rules, for example, the list of industries under the automatic route may be broader.

Frequently Related Questions

Q1: What is Foreign Direct Investment (FDI)? FDI is a long-term investment made by investors of one country into enterprises of another country, characterized by obtaining management rights and lasting interests, usually involving the establishment of production facilities, joint ventures, or acquisition of equity.

Q2: Why did India adjust its FDI policy toward land-border neighbors? The main reasons include: the vague definition of the original policy led to approval backlogs and declining investment; promoting manufacturing development and attracting foreign investment into key sectors; and seeking a balance between national security and economic growth.

Q3: What impact do the new rules have on investors? For LBC investors holding no more than 10% of shares, approval is exempted; key manufacturing projects have faster approval channels; at the same time, the investment environment is more predictable, but control requirements still need attention.

Q4: Which industries are listed as fast-track approval industries? Electronics, capital goods, and silicon materials are explicitly designated as priority manufacturing sectors, and these industries are closely related to the Indian government's industrial policies.Q5: How to apply for fast-track approval? Investors need to submit applications to relevant departments, and a ministerial committee will make a decision within 60 days. Specific procedures are pending the official release of implementation rules.