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Press Note 3 and FDI from Land Border Countries
For five years, any investment with a beneficial owner in a bordering country needed government approval, however indirect the connection. In 2026 that changed to a ten percent test. Structures built under the old rule are worth re-examining.
- The 2026 relaxation, explained
- How to trace beneficial ownership properly
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Quick Answer
Does Press Note 3 still require government approval?
Not in the blanket form it originally took. Press Note 2 of the 2026 series replaced the all-or-nothing rule with a beneficial ownership test set at ten percent. Aggregate holdings by investors from land border countries below that threshold, without control rights, no longer need government approval. Above it, or with control, approval is still required.
The position in six lines
- The land border countries are China including Hong Kong and Macau, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan.
- Press Note 3 of 2020 required approval wherever an investor or beneficial owner was situated in or a citizen of one of those countries, at any percentage.
- Press Note 2 of the 2026 series, issued in March 2026, moved to a ten percent aggregate beneficial ownership test.
- The test now looks at the citizenship of the beneficial owner rather than at both citizenship and residence.
- Control rights trigger approval regardless of percentage.
- A pre-closing reporting obligation applies even where approval is not required.
This page covers the land border rules specifically. For route determination generally, see FDI automatic route vs government approval. For the reporting that follows, see FDI compliance and FEMA advisory in India.
The 2020 Rule
What Press Note 3 of 2020 did
Issued in April 2020, in the early weeks of the pandemic, and aimed at opportunistic acquisition of Indian companies whose valuations had fallen. It amended the FDI policy so that an entity of a country sharing a land border with India, or where the beneficial owner of an investment was situated in or was a citizen of such a country, could invest only under the government route.
| Feature | Position under Press Note 3 of 2020 |
|---|---|
| Threshold | None. Any level of beneficial ownership triggered the requirement. |
| Test | Situated in, or a citizen of, a land border country. Residence and citizenship both counted. |
| Scope | Every sector, including those otherwise fully open under the automatic route. |
| Transfers | Also applied to a transfer of ownership that resulted in beneficial ownership falling within the restriction. |
| Beneficial ownership | Not defined in the Press Note itself, which is where most of the difficulty came from. |
Why it caught so much
The rule was drafted to stop a specific kind of acquisition. Because it applied at any percentage and used an undefined concept of beneficial ownership, it caught a far wider set of transactions than the ones it was aimed at. A global fund with a small limited partner interest traced to a bordering country, or a portfolio company several layers below such a fund, could find an ordinary growth round routed into a government approval process measured in quarters rather than weeks.
Beneficial Ownership
The beneficial ownership problem
The practical difficulty was never with the obvious cases. A Chinese strategic investor acquiring an Indian company knew where it stood. The difficulty was with everyone else, who had to prove a negative through an ownership chain they did not control.
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The fund problem
A private equity or venture fund has limited partners it is contractually bound not to disclose. Establishing that no limited partner was a beneficial owner in a bordering country meant asking questions the fund could not answer publicly, and Indian counsel could not verify. Many funds responded with a representation rather than evidence, which shifted risk without resolving it.
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The residence problem
Because the old test caught investors situated in a bordering country as well as citizens of one, a fund manager who happened to be resident in Hong Kong could bring an otherwise unconnected structure into scope. This was the single largest source of unnecessary applications, and it is precisely what the 2026 amendment addresses.
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The layering problem
With no threshold, ownership had to be traced to the end of the chain rather than to a sensible cut-off. On a structure with several intermediate holding companies and a widely held listed entity somewhere above, that exercise had no natural stopping point.
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The consequence
Deals were delayed, repriced or abandoned. Some investors accepted the approval process and waited. Others restructured to remove the exposure. A third group proceeded on a representation and now hold an investment whose position was never properly established, which surfaces in diligence.
2026 Relaxation
What changed in 2026 Updated
Press Note 2 of the 2026 series was issued in March 2026 and given effect through an amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules. It keeps the restriction but makes it workable.
| Point | 2020 | 2026 |
|---|---|---|
| Threshold | None. Any percentage triggered approval. | More than 10% for a company under the PML Rules, or control/ultimate effective control, subject to the detailed test. |
| Test | Situated in, or a citizen of, a land border country. | Citizenship of the beneficial owner. Residence alone no longer brings a structure into scope. |
| Control | Not separately articulated. | Control rights trigger approval regardless of percentage. Board appointment rights, veto rights and the ability to direct management or policy all count. |
| Reporting where approval is not needed | Not applicable. | A pre-closing reporting obligation applies, in a format prescribed by the standard operating procedure. |
| Strategic sectors | Same process as any other application. | An expedited track with a sixty-day processing commitment for a specified list including capital goods, electronic capital goods, electric components, polysilicon and ingot-wafer. |
Who this actually helps
Global funds with small, diffuse limited partner exposure to bordering countries, which is most large funds. Structures with a Hong Kong or Singapore holding company where the connection was residence rather than ownership. And investors whose exposure sits below ten percent in aggregate and who hold no governance rights.
It does not help a strategic investor from a bordering country, a fund with a single large limited partner from one, or any investor taking board or veto rights. Those cases sit exactly where they did.
Confirm the commencement position before relying on it
A Press Note takes effect when the corresponding amendment to the Non-Debt Instruments Rules is notified, not on the date of the Press Note. Published sources give slightly different dates for both the issue of Press Note 2 and the notification that gave it effect. Before applying the ten percent test to a live transaction, confirm the notification date and check whether the standard operating procedure prescribing the reporting format has been published.
Still Requires Approval
What still requires government approval
- Aggregate beneficial ownership above ten percent traced to citizens of a land border country.
- Any control rights held by such an investor, whatever the percentage. The right to appoint a majority of directors, a veto over reserved matters, or the ability to direct management or policy decisions.
- A transfer of existing shares that results in beneficial ownership crossing the threshold or conferring control.
- Investors from Pakistan, which has historically been treated more restrictively than the other land border countries in several parts of the framework. Confirm the current position separately.
- Sectors that require government approval in any event, where the land border question is additional to the sectoral one rather than instead of it.
Two approvals, not one
Where a land border investor puts money into a sector that itself carries a government route condition, both requirements apply. The application is a single filing but it is assessed against both, and the security clearance step that the land border position triggers is usually what sets the timeline.
Tracing Ownership
How to trace beneficial ownership in practice
The ten percent threshold makes the exercise finite, which the old rule did not. It is still an exercise, and doing it properly is what turns a representation into a defensible position.
Map the chain above the immediate investor
Every holder above the investing entity, layer by layer, with percentages at each level. Stop at a widely held listed entity or a regulated fund where no single holder reaches the threshold, and record why you stopped.
Multiply through, do not read at each level
A twenty percent holder of a fifty percent holder is a ten percent beneficial owner, not a twenty percent one. Aggregate holdings by all land border persons together, since the threshold is an aggregate.
Test citizenship, not just registration
The test attaches to the citizenship of the beneficial owner. An individual who is a citizen of a land border country is in scope whether they live there or not. Conversely, an entity registered in a bordering country is in scope on its own account.
Look for control separately from ownership
Read the shareholders agreement and the articles, not just the cap table. Board appointment rights, reserved matter vetoes, affirmative vote requirements and management rights can confer control at a holding well below ten percent.
Document the conclusion contemporaneously
A memorandum recording the chain, the sources relied on, the arithmetic and the conclusion, dated before completion. This is what a buyer's counsel will ask for in three years. A bare representation in a subscription agreement is not the same thing and will not carry the same weight.
Where the evidence comes from
Register extracts and constitutional documents for corporate holders. Beneficial ownership registers where the jurisdiction maintains one. Fund side letters, limited partner schedules or a manager's certificate where the holder is a fund. For a listed entity, the substantial shareholder disclosures it is obliged to publish. Where a link genuinely cannot be verified, record that, and take a view on it explicitly rather than leaving it unstated.
Approval Process
If approval is required
The application goes through the same portal as any other government route case, but the assessment is different because security clearance is central rather than incidental.
| Point | Detail |
|---|---|
| Where to file | The Foreign Investment Facilitation Portal, routed to the administrative ministry for the sector. |
| Security clearance | Referred to the Ministry of Home Affairs. On land border cases this is the substantive assessment, not a formality. |
| What to disclose | The full ownership chain with percentages, the identity and citizenship of every beneficial owner above the threshold, the source of funds, the governance rights being taken, and the commercial rationale. |
| Timeline | Historically measured in quarters rather than weeks. The expedited sixty-day track applies only to the specified strategic sectors. |
| Outcome | Approval may carry conditions on the shareholding, on governance rights or on the activity, and those conditions bind afterwards. |
| While pending | The investment cannot be made. Money received before approval is a contravention. |
Disclose the chain fully in the first filing
The most common cause of delay is a partial ownership disclosure that generates a query, which generates a further query. An application that sets out the full chain, explains the stopping point, and addresses the obvious questions before they are asked moves considerably faster than one that treats disclosure as something to be minimised.
Common Pitfalls
Where Press Note 3 analysis goes wrong
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The chain was read one layer deep
The immediate investor is Dutch, so the question was treated as closed. Beneficial ownership runs to the end of the chain, and a Dutch holding company can sit above a structure with land border ownership two or three layers up.
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Percentages were read at each level rather than multiplied
A holder at thirty percent of an intermediate entity that itself holds twenty percent is a six percent beneficial owner. Reading the thirty at face value produces a false positive. Reading only the twenty produces a false negative on the layer above.
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Control was never tested
The cap table was checked and the shareholders agreement was not. A nine percent holder with a veto over the business plan and a board seat has control, and control triggers approval at any percentage.
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A representation was accepted as the analysis
The investor warranted that Press Note 3 did not apply, and nobody tested it. A warranty allocates risk between the parties. It does not make the investment lawful, and a regulator or an acquirer will ask for the analysis rather than the warranty.
Investments made between 2020 and 2026 are worth revisiting
Two situations recur. An investor who obtained approval under the old blanket rule may now hold conditions that are stricter than the current framework requires, and may be able to seek relief. An investor who proceeded on a representation without analysis may find that the position is now defensible under the ten percent test even though it was not under the old one, which is worth documenting properly before the next round rather than during it.
Why IMC
How IMC handles Press Note 3 work
What the engagement covers
A written beneficial ownership assessment mapping the chain, aggregating holdings, testing citizenship and control, and stating a conclusion with the evidence relied on and the stopping point explained. Where approval is required, preparation of the application including the ownership disclosure, and management of queries through to the approval letter.
For investments already made, a review of the position under the current framework and, where an approval carries conditions that the 2026 position no longer requires, an assessment of whether relief is available.
Meet The Team
Experts behind this service
The people who will actually run your branch or liaison office approval, end to end.
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Shriya Mandal
Director - Compliance
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Deepakshi Sukhwani
Senior Associate - Corporate Services
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Mudita Gehlot
Senior Associate - Corporate Services
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Poornima J
Director - Strategic Partnerships & Business Development
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Ninad Parkar
Director
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Aishwarya Shiva
Director - Strategic Partnerships & Business Development
FAQs
Countries sharing a land border with India: China including Hong Kong and Macau, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan. The restriction attaches to investors from those countries and to beneficial owners who are citizens of them, not only to entities registered there.
The restriction remains, but in amended form. Press Note 2 of the 2026 series replaced the blanket requirement with a ten percent aggregate beneficial ownership test and dropped residence from the test, leaving citizenship. Control rights still trigger approval at any percentage.
Aggregate beneficial ownership traced through the chain, multiplied at each level rather than read at face value, and totalled across all land border persons together. A twenty percent holder of a fifty percent holder is a ten percent beneficial owner.
Under the 2026 position, not where the aggregate exposure stays below ten percent and no control rights attach. This is the main relief the amendment provides, since diffuse limited partner exposure was the most common reason ordinary transactions were caught by the 2020 rule.
Yes. The right to appoint a majority of directors, a veto over reserved matters, or the ability to direct management or policy decisions triggers approval regardless of percentage. The shareholders agreement and articles have to be read, not just the cap table.
Yes. Press Note 2 introduced a pre-closing reporting obligation in a format prescribed by the standard operating procedure, applying even where the investment falls below the threshold and needs no approval. Confirm the prescribed format has been published before relying on it.
Historically measured in quarters rather than weeks, because security clearance from the Ministry of Home Affairs is the substantive assessment. An expedited sixty-day track applies to a specified list of strategic sectors including capital goods, electronic capital goods, electric components, polysilicon and ingot-wafer.
Not by itself. The test looks through to beneficial ownership, so an intermediate holding company in a treaty jurisdiction does not break the chain. What the 2026 amendment did change is that residence no longer counts, so a structure caught only because a manager was resident in Hong Kong may now fall outside.
No. Money received before the approval letter is issued is a contravention of FEMA, regularised by compounding rather than a late fee. A completion date should not be committed in a subscription agreement before the position is established.
Often yes. An approval obtained under the blanket rule may carry conditions stricter than the current framework requires. An investment made on a bare representation without analysis may now be defensible under the ten percent test, and is better documented before the next funding round than during it.
Get Started
Establish the position before completion
Send the ownership chain above the investing entity with percentages at each level, and the governance rights being taken. We will produce a written assessment recording the arithmetic, the evidence and the conclusion, which is what a buyer's counsel will ask for later.
Response within one working day. Initial view at no cost.
IMC