India eases FDI restrictions for investments from land-bordering countries

 The Union Cabinet chaired by Hon’ble PM Shri Narendra Modi has approved amendments to India’s Foreign Direct Investment (FDI) policy governing investments from countries sharing land borders with India (‘LBCs’). The changes modify the framework introduced through Press Note 3 (2020)*, which required government approval for foreign investments in India from LBCs.

*Background: PN 3 of 2020
The Government had introduced stricter regime for FDI from LBCs wherein the FDI is from LBCs or where the BO was a citizen of, or situated in, LBCs were subject to the Government approval route. Also, transfer of ownership (either existing or future FDI) in an entity in India resulting into the BO falling with the Investors from LBCs) were also subject to Government approval.

Revision in the existing policy:

1. Beneficial Ownership:
The revised policy formally introduces the concept and criteria for determining Beneficial Ownership (BO) aligned with the standards under the Prevention of Money Laundering Rules, 2005. Under the revised framework:

·       The beneficial ownership test will apply at the investor entity level.

·       Investments from LBCs having non-controlling beneficial ownership of up to 10% will now be permitted under the automatic route, subject to applicable sectoral caps, entry route and attendant conditions.

·       The investee entity will be required to report the relevant information / details to the Department for Promotion of Industry and Internal Trade (DPIIT).

This change is intended to address concerns that the earlier policy framework was adversely affecting investment flows from global funds (such as private equity and venture capital funds) where LBC investors may hold small, non-controlling stakes.

2. Expedited approvals

·       Investments from LBCs in specified sectors / activities (including manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer) will be processed within a 60-day timeline.

·       In such cases, majority ownership and control of the investee entity must remain with resident Indian citizens or Indian entities owned and controlled by resident Indian citizens.

·       The list of eligible sectors may be revised by a Committee of Secretaries under the Cabinet Secretary.

Key Benefits from the revised guidelines:
The amendments are expected to improve ease of doing business, facilitate faster and greatest FDI flows and bring a better clarity to the investors. The changes are also aimed at facilitating access to new technologies, expansion of domestic manufacturing capacity, and integration of Indian companies into global supply chains, while continuing to address national security considerations. This measure would contribute to strengthening India’s competitiveness and reinforcing its position as a preferred investment and manufacturing destination. Higher FDI inflows would complement domestic capital formation, advance the objectives of Atmanirbhar Bharat, and further support the country’s broader economic growth trajectory.