From Pandemic Protectionism To Strategic Liberalisation: Rethinking India's FDI Security Regime After 2026 Amendment To Press Note 3

The policy significantly modified the Indian regulatory framework of foreign direct investments by the Indian government by requiring investments from such countries to be mandated to prior approval by the Indian government. The policy is issued under the general Indian regulatory framework on the regulation of foreign investments in India under the Foreign Exchange Management Act 1999, which regulates cross-border capital flows.

The impact of this policy on venture capital and private equity funding, cross-border deals, and investment structures soon emerged as a critical issue pursuant to which in March 2026, the Indian Government issued amendments to Press Note 3 with the objective of maintaining a nuance between security concerns and the need to facilitate foreign investments.

Press Note 3: A Policy That Was Born out of Crisis

One major change introduced by Press Note 3 to the foreign investment policy in India is that any investment that is made from an entity located in a country that shares a land border with India must be approved by the government. This policy is applicable to situations where investments are made from entities located in a third country or where the Beneficial Owner (BO) of the investment is located in a country sharing a land border with India.

This means that investments made through third countries such as Singapore, Mauritius, etc are still subject to the terms of this policy if the ultimate beneficial owner is from a country sharing a land border with India.

The application of Press Note 3 is carried out through the approval mechanism carried out by the DPIIT (Department for Promotion of Industry and Internal Trade) under the consolidated FDI Policy framework of 2020

While the policy was aimed at preventing opportunistic acquisitions during the economic slowdown caused by the pandemic, its results are far-reaching.

The Structural Challenges Created by the Policy

In effect, Press Note 3 has created a number of challenges in executing business operations for foreign investors as well as Indian companies.

Firstly, the requirement of government approval has led to bureaucratical delays and as a result a huge time gap in cross-border investment transactions. The problem has been more pronounced for startups as well as early stage companies that require quick funding cycles.

Secondly, a lack of a defined framework for evaluating beneficial ownership had created a huge regulatory confusion. In particular, it has been a challenge to ascertain ultimate controlling interest for venture capital and private equity funds that had a number of limited partners from different jurisdictions.

Lastly, a challenge has been created for global venture capital and private equity funds that had a limited level of investment from investors from land bordering countries. The problem has been that it has discouraged investments into Indian startups as well as emerging companies in the tech domain.

The 2026 Amendment: A Measured Policy Recalibration

While recognising the need to address the challenges posed as a result of the Press Note 3 introduced in 2020, while preserving national security safeguards, the Government introduced amendments to the Press Note 3 in March 2026.

1. Clarification on Beneficial Ownership

One of the most significant aspects of the amendment is the introduction of a clearer framework for identifying the beneficial ownership for an investment. The determination of beneficial ownership is now aligned with the standards prescribed under Rule 9 of the Prevention of Money Laundering Rules, 2005 which are framed under the Prevention of Money Laundering Act, 2002.

By aligning the FDI framework with existing anti-money laundering regulations, a better clarity in regulatory framework introduced while identifying the ultimate controlling interest behind foreign investments.

2. Relaxation of Minority Non-Controlling Investments

A major reform introduced by the amendment in Press Note 3 (2026 Amended Version) is that non-controlling investments from land bordering countries up to 10% can now proceed under the automatic route, subject to sectoral caps and applicable conditions.

Under the earlier regime, even minimal indirect ownership from a Land Bordering Country (LBC) mandated government approval. The amendment now allows up to 10% investments from LBCs to be approved under the automated route. The assumption is that minority non-controlling investments are unlikely to raise national security concerns. The amendment is expected to significantly reduce compliance burdens for global venture capital funds and institutional investors.

3.Fast Track Approvals for Strategic Manufacturing

The amendment has also introduced a expedited system for approval of foreign investments into strategic manufacturing industries such as electronic components, electronic capital goods, polysilicon manufacturing, ingot-water manufacturing, and solar cell manufacturing.

These amendments are expected to be approved within 60 days. This is a reflection of the Government's broader objective of enhancing India's manufacturing capabilities and integrating India into global manufacturing supply chains.

Moreover, it is noteworthy that this amendment has maintained a significant safeguard by ensuring that “majority ownership and control of the investee entity is retained by resident Indian citizens or by Indian entities owned and controlled by resident Indian citizens.”

Major Implications For India's Investment Ecosystem

The 2026 amendment is a significant shift in India's investment policy. The Government is moving away from a blanket approach to investment policy. Instead, it is moving towards a more risk-based approach to screening investments.

From a legal viewpoint, it is noteworthy that there is greater certainty now as to beneficial ownership. Moreover, investors are now able to rely on more predictable regulatory standards. Lawyers dealing with investment transactions are now able to provide more certainty as to compliance.

Regarding venture capital and private equity funds, the introduction of a 10% threshold will help to ensure greater flexibility, especially where funds have investors from multiple jurisdictions.

The amendment to Press Note 3 marks a major milestone in the evolution of foreign investment policy in India. What began as a reactive regulatory initiative in response to an unprecedented global crisis has now evolved into a more sophisticated investment screening policy.

The government's clarity on beneficial ownership requirements, the introduction of limited relaxations on minority investments, and fast-tracking strategic manufacturing sectors are positive steps towards striking a balance between national security requirements and the attractiveness of foreign capital.

If implemented successfully, these 2026 reforms may signal a major shift towards a more advanced regulatory environment; one that meets national strategic interests while maintaining its appeal to foreign investors.