Centre Revises FEMA Rules for Border-Country Investments

The Central Government has notified the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2026 on May 1, 2026, published in the Official Gazette on May 2, 2026, operationalising the revised regulatory framework governing investments from countries sharing land borders with India, including investments involving indirect beneficial ownership structures. The amendment incorporates into the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”) the policy changes introduced through the Government’s recent review of the FDI regime applicable to such investments.

Background

Press Note 3 (2020 Series), issued on April 17, 2020, had amended Paragraph 3.1.1 of the FDI Policy to require Government approval for investments from entities or citizens of countries sharing a land border with India, or where the beneficial owner of the investment was situated in or linked to such countries. The measure was introduced to curb opportunistic acquisitions of Indian companies during the COVID-19 pandemic.

Subsequently, a Cabinet-approved policy proposal reflected in the Press Information Bureau (PIB) release dated March 10, 2026, proposed a calibrated review of the existing framework. The proposal contemplated clarification of beneficial ownership criteria aligned with the Prevention of Money-Laundering Act, 2002 (“PMLA”) and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”), additional reporting obligations, and expedited processing timelines of up to 60 days for specified manufacturing sectors. The policy proposal also contemplated a limited relaxation for investments involving non-controlling beneficial ownership from land-bordering countries up to prescribed thresholds, subject to reporting requirements.

Thereafter, Press Note 2 (2026 Series), issued by the Department for Promotion of Industry and Internal Trade (“DPIIT”) on March 15, 2026, amended Paragraph 3.1.1 of the Consolidated FDI Policy Circular, 2020 and formally incorporated the revised beneficial ownership framework. The Press Note aligned the determination of “beneficial ownership” with Section 2(1)(fa) of the PMLA and Rule 9(3) of the PML Rules, while also introducing additional reporting requirements in the format prescribed under the Standard Operating Procedure (“SOP”) to be laid down by DPIIT.

The May 2026 FEMA notification now gives statutory effect to these policy changes by incorporating them into the NDI Rules.

Amendments Introduced by the FEMA Notification

The amendment substitutes Rule 6(a) of the NDI Rules, which governs investments in equity instruments of Indian companies, and provides that foreign investors may subscribe to, purchase, or sell equity instruments in the manner and subject to the terms and conditions specified under Schedule I of the NDI Rules.

Under Paragraph 3(a)(ii) of Schedule I, the “Government route” refers to the entry route under which investment by a person resident outside India requires prior Government approval and remains subject to the conditions imposed in such approval.

Beneficial Ownership Attribution Framework

The amendment aligns the concept of “beneficial owner” with Section 2(1)(fa) of the PMLA and Rule 9(3) of the PML Rules. Under this framework, a beneficial owner refers to the natural person who ultimately owns, controls, or exercises ultimate effective control over an entity or transaction.

The notification further introduces a detailed attribution framework for determining when beneficial ownership of an investment is considered to be vested in a country sharing a land border with India. Beneficial ownership will be attributed to such country where a citizen or entity of that country, directly or indirectly, individually or collectively:

• holds rights or entitlements above the applicable thresholds prescribed under Rule 9(3) of the PML Rules;
• exercises control over the investor entity; or
• exercises ultimate effective control over the investee entity.

The framework also recognises cumulative, indirect, and collective ownership or control structures, including situations where entities or persons may be acting together.

Indirect Transfers and Subsequent Changes in Ownership

The amendment further provides that any transfer of ownership of existing or future foreign investment in an Indian entity, whether direct or indirect, which results in beneficial ownership falling within the restricted category, shall require prior Government approval.

Accordingly, downstream transfers, internal group restructurings, or secondary acquisitions involving changes in beneficial ownership may also trigger approval requirements where the revised beneficial ownership tests are met.

Approval Triggers and Reporting Obligations

The revised framework distinguishes between investments requiring prior Government approval and investments that may proceed subject to enhanced reporting obligations.

The notification clarifies that investments into India from investor entities having direct or indirect ownership links with countries sharing land borders with India, but not otherwise requiring prior Government approval under the revised framework, shall remain subject to reporting requirements specified by the Reserve Bank of India.

Separately, Press Note 2 (2026 Series) also contemplates additional reporting disclosures in the format prescribed under the SOP to be issued by DPIIT.

From an implementation perspective, such reporting obligations are likely to operate in addition to existing FEMA reporting compliances, including:

• Form FC-GPR;
• Form FC-TRS; and
• Annual return on foreign liabilities and assets (“FLA”).

Specific Provisions

The amendment retains the existing restriction applicable to Pakistan, whereby a citizen of Pakistan or an entity incorporated in Pakistan may invest only through the Government route and only in sectors other than defence, space, atomic energy, and other sectors prohibited for foreign investment.

The notification further clarifies that a multilateral bank or fund of which India is a member shall not be treated as an entity of any particular country, nor shall any country be treated as the beneficial owner of investments made by such bank or fund in India.

Additionally, the issue or transfer of participating interest or rights in oil fields by Indian companies to persons resident outside India shall be treated as foreign investment and accordingly become subject to the conditions applicable under Schedule I of the NDI Rules, including applicable entry routes and attendant FEMA compliances.

Conclusion

The May 2026 amendment completes the implementation cycle initiated by Press Note 3 (2020 Series) and subsequently refined through the March 2026 policy reforms. While the framework continues to subject investments involving material beneficial ownership or control from land-bordering countries to the Government approval route, it also introduces greater regulatory clarity by formally aligning beneficial ownership tests with the PMLA framework and distinguishing between approval-triggering investments and reporting-based compliances.

The revised framework is expected to significantly increase the importance of ownership tracing, control analysis, and beneficial ownership due diligence in cross-border investments involving layered offshore structures, secondary transfers, and downstream investments into India.