India’s New FDI Rules: Press Note 2 Breakdown

The Government of India has recently refined its Foreign Direct Investment (FDI) policy through the issuance of Press Note 2 (2026 Series). This update provides essential legal clarity and a more nuanced regulatory framework for investments originating from countries that share a land border with India.

By moving away from the broad restrictions established during the pandemic, the 2026 update introduces a more sophisticated system based on statutory ownership thresholds and mandatory reporting.

A Shift from Crisis Management to Regulatory Precision

To understand the significance of the 2026 update, it is necessary to compare it with its predecessor, Press Note 3 (2020).

• Objective: Press Note 3 of 2020 was implemented as an emergency measure to prevent “opportunistic takeovers” of Indian companies during the economic volatility of the COVID-19 pandemic. In contrast, Press Note 2 of 2026 aims to establish a permanent, legally defined mechanism for identifying and tracking foreign control.
• Definition of Ownership: The 2020 policy required government approval for any investment where the “beneficial owner” was situated in a land-border sharing country, but it lacked a precise legal definition for that term. The 2026 policy resolves this by adopting the definitions found in Section 2(1)(fa) of the Prevention of Money-laundering Act (PMLA), 2002.

The “10% Threshold” and the Automatic Route

The most significant benefit of the 2026 update is the introduction of a clear ownership threshold that facilitates smaller investments.

• Alignment with PML Rules: Press Note 2 stipulates that “beneficial ownership” will now be determined by the criteria in Rule 9(3) of the Prevention of Money-laundering (PML) Rules, 2005.
• The 10% Benefit: Under these rules, the threshold for determining a “beneficial owner” is generally set at 10% for many entities. Consequently, if an investor from a land-border sharing country holds a stake below this 10% threshold—and does not exercise “control” or “ultimate effective control”— no prior approval of Government is required for such investment.
• Streamlined Access: This effectively allows these smaller, non-controlling investments to proceed under the Automatic Route, provided they do not fall under other prohibited categories.

Enhanced Transparency and Reporting

While the 2026 update provides a path for smaller investments, it also strengthens government oversight. Even when an investment does not require prior Government approval, it is now subject to a mandatory reporting requirement if there is any direct or indirect ownership from a land-border sharing country. This ensures that the Department for Promotion of Industry and Internal Trade (DPIIT) maintains full visibility into foreign capital flows.

Continued Restrictions: The Case of Pakistan

It is important to note that the relaxations regarding the automatic route do not extend to investments from Pakistan. The 2026 policy maintains the strict stance that any investment from a citizen or entity incorporated in Pakistan must follow the Government Route. Furthermore, Pakistan remains entirely prohibited from investing in sensitive sectors, including defence, space, and atomic energy.

Conclusion

Press Note 2 of 2026 represents a maturing of India’s investment climate. By replacing broad restrictions with precise legal definitions and threshold-based compliance, the government has created a more predictable environment for foreign investors while maintaining robust national security safeguards. For most neighbouring countries, the 10% threshold offers a welcome return to the ease of the automatic route, balanced by a new era of transparency through mandatory reporting.