Lending clarity and predictability to foreign investemnt rules
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ipopba
The Union Cabinet’s March 10 decision to amend the guidelines on foreign investments from countries sharing a land border with India is one that fund managers, institutional investors and their counsel should pay close attention to.
This is the most significant change to the Press Note 3 (2020 Series) (’PN3’) regime since it was introduced — and it puts to rest a legal ambiguity that has hung over Indian deal-making for the better part of five years.
The wall built during Covid
To curb opportunistic takeovers during the Covid pandemic, the government amended the FDI Policy vide PN3 dated April 17, 2020. The effect was broad: any entity of a land-bordering country (LBC), or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, could invest only with prior government approval.
The scope was sweeping. Direct and indirect investments, controlling and minority stakes, fresh issuances and secondary transfers; all fell within the PN3 umbrella.
Before April 2020, Chinese technology investors were active participants in India’s start-up ecosystem. That era closed abruptly. The regulatory edifice that followed only hardened the framework, with rules framed by regulators amended to ensure strict compliance. This was compounded by a largely unfavourable approval record on the part of the government, which delayed or disapproved many of the applications.
The beneficial ownership gap
The central ambiguity in the PN3 architecture was the absence of any definition of ‘beneficial owner’ under FEMA or the NDI Rules. An interpretive position emerged the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA Rules). It became prevalent amongst authorised dealer banks that a 10 per cent threshold should apply on a look-through basis: if LBC ownership in an acquiring entity exceeded 10 per cent, prior government approval was required.
Crucially, however, this was practitioner-led interpretation, not the codified law. The government offered no clarification, and the result was a regime where regulatory risk could not be fully contained by legal opinions alone.
Take a practical example: a pan-Asian fund managed out of Mauritius, predominantly US and European LP capital, but with a Chinese entity holding a 9 per cent interest. Pre-March 2026, that fund’s Indian investments sat in a grey zone. Some AD banks were comfortable proceeding on the strength of the 10 per cent safe harbour; others insisted on a PN3 filing. The outcome depended less on the law than on which bank you were dealing with.
The 2026 revamp: What actually changed
The amendment does something practitioners have wanted for years: it formally defines ‘Beneficial Owner’, drawing on the PMLA Rules definition that the market was already using. The practical upshot is that investors with non-controlling LBC beneficial ownership of up to 10 per cent can now come in under the automatic route — subject to applicable sectoral caps, entry routes and attendant conditions. The investee entity will need to report relevant details to DPIIT, but the approval bottleneck is gone.
Importantly, the beneficial ownership test applies at the level of the investing entity — not traced through the Indian investee’s cap table. So a Singapore-domiciled fund with a 9.99 per cent Chinese LP interest investing into an Indian Series B round gets tested once, at source. That is a significant practical distinction.
The government’s stated rationale is straightforward: applying PN3 restrictions where LBC investors hold only non-strategic, non-controlling interests was choking off capital flows from global PE/VC funds, and that was a problem worth fixing.
What this means for funds
For most global funds, this is welcome but not surprising — it codifies the position that the better-advised end of the market had already been operating on. The real value is certainty. Foreign institutional investors carrying incidental beneficial exposure to Chinese entities no longer need to navigate the approval route or structure around it. Funds with structural flexibilities — side-car vehicles, parallel structures — can calibrate their LP exposure to stay within the threshold.
Those above 10 per cent still go through government approval, but that was always understood. In plain terms, this unblocks global blind pool funds with passive, non-controlling Chinese LP interest. For that category of investor, it matters a great deal.
The road ahead
This is not a wholesale reversal of PN3, nor is it window dressing. It is a targeted fix — one that codifies what the more sophisticated end of the market had long argued was the correct position, and formally closes a grey zone that cost Indian deal-making five years of avoidable friction.
For fund managers with sub-10 per cent Chinese LP exposure, the path into India just got materially clearer. And for the broader community of institutional investors and their counsel, the signal is worth noting: India’s regulatory framework is moving, meaningfully, toward predictability. In cross-border funds work, that counts for a lot.
Sharma is Partner, and Burad is Associate at Cyril Amarchand Mangaldas
Published on March 17, 2026
