Press Note 3 Clarified, With a Sting in the Tail

Press Note 3 (2020 Series) was (“PN3-2020”) issued by the Government of India on April 17, 2020, at the height of the COVID-19 pandemic, as a protective measure against potential opportunistic takeovers and acquisitions of Indian companies. PN3-2020 provided that “an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.” In effect this meant that prior government approval was required for investments by:

• Corporates located in a country with a land border with India (“LBC”); and
• any entity, if any beneficial owner of such investing entity is a resident or a citizen of an LBC or is located in a LBC.

The second limb of the prohibition was difficult to enforce since in many cases, especially when a fund located in a tax friendly jurisdiction (such as the Mauritius or Cayman Islands) made an investment in India, it was not always easy to ascertain if any investor in such fund was a resident or a citizen of a LBC. For example, a fund in Singapore which invests in an Indian corporate may receive investments from funds across the world and a Chinese national living in Canada may have invested into one of the feeder funds. The actual beneficial holding of the Chinese national in the Indian corporate may be miniscule, but it would still be a violation of PN3-2020.

The provisions of PN3-2020 were subsequently incorporated in Para 3.1.1 of the Consolidated FDI Policy Circular of 2020 dated 15.10.2020 (“FDI Policy”).

Since PN3-2020 did not expressly spell out any threshold for beneficial ownership, the market (including investment managers of AIFs) adopted a pragmatic approach by adopting a threshold of 10% for verifying if beneficial ownership was held by any citizen or resident of a LBC.  The Prevention of Money Laundering Act, 2022 (“PMLA”) and Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”) uses 10% as the threshold for determining the ultimate beneficial owner (“UBO”).

On March 11, 2026, Press Note No. 2 (2026 Series) (“PN2-2026”) was issued by the Government of India to substitute Para 3.1.1 of PN3-2020 with language that states that for the purpose of compliance with Para 3.1.1 of the FDI Policy, the expression ‘beneficial owner’ shall have the same meaning as defined under Section 2(1)(fa) of the PMLA and shall be determined as per the criteria stipulated under Rule 9(3) of the PMLA Rules.

The clarification provided by PN2-2026 is a formal recognition of the 10% threshold adopted by the industry for determining beneficial ownership under PN3-2020. However, PN2-2026 clarifies that “the expression ‘beneficial owner’ of an investment into India shall mean the beneficial owner(s) of the investor entity incorporated or registered in a country other than a LBC.” In other words, if a corporate incorporated in China or a Chinese citizen wishes to acquire a 2% direct stake in an Indian corporate or an investment vehicle, such investment would require prior government permission.

PN-2 2026 also provides that any investment in an Indian entity that is made by any foreign entity which is not incorporated in or registered in a LBC (“Non-LBC”) would require prior government approval if:

• One or more citizens of a LBC or entities incorporated in or registered in a LBC jointly hold a stake of more than 10% in the Non-LBC entity which has invested in an Indian entity; or
• citizens of a LBC or entities incorporated in or registered in a LBC exercise control over the Non-LBC entity; or
• such investment would allow citizens of a LBC or entities incorporated in or registered in a LBC to exercise ultimate effective control over the Indian entity in any manner.

PN-2 2026 also imposes an additional compliance requirement, whereby any investment in an Indian entity by a foreign entity in which any citizen of a LBC or any entity incorporated in or registered in a LBC, has any direct or indirect ownership, should be reported to the DPIIT as per the format given in the Standard Operating Procedure laid down by DPIIT, if such investment is one which does not require prior government approval (“Reporting Requirement”). A day before PN2-2026 was issued, the Government of India had issued a press release dated March 10, 2026 (“Press Release”) which states that the onus of complying with the Reporting Requirement lies on the Indian investee entity.

[1] SEBI | Specific due diligence of investors and investments of AIFs

The link to PN3-2020 can be found here.

The link to PN2-2026 can be found here.

The link to the Press Release can be found here.

The link to FDI Policy can be found here.

We hope you have found this information useful. For any queries/clarifications, please write to us at insights@elp-in.com  or write to our authors:

Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com

Saloni Khaitan, Associate – Email – salonikhaitan@elp-in.com