Key Takeaways from Press Note 2 (2026): The end of the Knightian Uncertainty

Introduction

In April 2020, amid concerns regarding opportunistic acquisitions during the COVID-19 pandemic, the Department for Promotion of Industry and Internal Trade (“DPIIT”), Government of India, issued Press Note 3 (2020 Series) (“PN3 2020”). PN3 2020 fundamentally altered India’s foreign direct investment (“FDI”) framework by requiring government approval for investments originating from countries sharing land border with India, including cases where the beneficial owner of the investment was situated in or a citizen of such countries. Further, any subsequent change in beneficial ownership resulting from transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the aforementioned restricted ambit, also required Government approval.

The measure had an immediate and significant impact on cross-border investment flows, particularly affecting investments linked to China. Whilst PN3 2020 was aimed to safeguard Indian companies against opportunistic acquisitions, the absence of clarity around certain key concepts, most notably the meaning and scope of ‘beneficial ownership’, resulted in ambiguity and indecisiveness amongst the stakeholders.

As world’s fastest growing major economy, there was a growing concern against this ‘Knightian uncertainty’. The heat of PN 3 2020 was felt most by venture capital and private equity investors.

Nearly six years later, the Government of India has revisited this framework through Press Note 2 (2026) dated March 15, 2026 (“PN2 2026”). While the core restriction on investments from land-bordering countries remains unchanged, PN2 2026 introduces important clarifications regarding beneficial ownership, expands the regulatory test to include control-based considerations, and introduces additional reporting requirements. Taken together, these developments reflect a measured shift from the precautionary approach adopted in 2020 toward a more structured compliance-oriented framework.

Vide PN2 2026, the Government has now provided the following key clarifications:

1.Beneficial Ownership linked to the PMLA Framework

The most significant development under PN2 2026 is the alignment of the concept of “beneficial ownership” with India’s anti-money laundering framework.

This alignment introduces clear quantitative thresholds for identifying beneficial ownership. By linking the FDI Policy to an existing statutory framework, the Government has addressed the interpretational uncertainty that existed under PN3 2020 and introduced a clearer basis for determining whether an investment falls within the scope of the approval requirement.

2.Explicit Recognition of ‘Control’ and ‘Ultimate Effective Control’

Under the revised framework, beneficial ownership may be considered to vest in a bordering jurisdiction where citizens or entities of such countries possess rights that enable them to exercise control over the investor entity or exercise ultimate effective control over the Indian investee entity.

This clarification is particularly relevant in the context of venture capital and private equity transactions, where governance rights frequently play an important role in investment arrangements. The reference to “ultimate effective control” indicates a clear regulatory intention to capture substantive influence rather than merely formal shareholding thresholds.

3.Recognition of Indirect and Aggregated Ownership Structures

The revised framework recognizes that beneficial ownership may arise where citizens or entities of bordering countries are able to directly or indirectly, individually or cumulatively, hold rights or entitlements in the investor entity.

The provision effectively adopts a look-through approach, limiting the scope for structuring investments through intermediary jurisdictions to avoid the policy restrictions.

4.Introduction of a Reporting Framework

Under the revised framework, where an investor entity has direct or indirect ownership held by a citizen or entity of a land-bordering country, but the investment does trigger the Government approval under the revised regime, the investment will nonetheless be subject to reporting requirements to be prescribed by DPIIT.

Conclusion:

Whilst the Government has played out the introduction of PN2 2026 as an attempt to end the Knightian uncertainty brought in by introduction of PN 3 2020, it is hard to miss the linkage between the recent geopolitical developments and timing of this much awaited clarification on beneficial ownership and the trigger points for Government approval (for cases involving direct or indirect FDI from countries sharing land borders). Whilst PN 2 2026 is certainly a welcome step, it is likely that the Government, in the coming few months, will further relax regulations governing FDI from countries sharing land border in non-strategic sectors, and gradually move further away from an approval model to a more structured compliance-oriented reporting framework.

Authors:

Anuj Trivedi, Partner

Dakshita Arora, Associate

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