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India Clarifies Beneficial Ownership Framework under Foreign Investment Laws
- Publisher
- Nagashima Ohno & Tsunematsu
- Journal /
Book - NO&T Asia Legal Review No.117 (May, 2026)
- Reference
- Practice Areas
*Please note that this newsletter is for informational purposes only and does not constitute legal advice. In addition, it is based on information as of its date of publication and does not reflect information after such date. In particular, please also note that preliminary reports in this newsletter may differ from current interpretations and practice depending on the nature of the report.
Introduction
On May 1, 2026, India’s Ministry of Finance notified the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2026 (“2026 Amendment Rules”), amending Rule 6(a) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”). The amendments build upon the foreign investment restrictions introduced through Press Note 3 (2020 Series) relating to investments involving countries sharing land borders with India. Press Note 2 of 2026 subsequently clarified the implementation framework relating to beneficial ownership and reporting obligations. The 2026 Amendment Rules now introduce detailed statutory provisions regarding beneficial ownership determination, control analysis and reporting requirements under India’s foreign investment regime.
Key Changes
The substituted Rule 6(a) of the NDI Rules, among other things, provides that investments (i) by an entity or a citizen of a country, which shares land border with India※1, or (ii) where the beneficial owner of an investment into India is a citizen of any such country, or (iii) where the beneficial ownership of an investment is vested in any such country※2, shall require prior approval of the Government of India (“Government”).
Alignment with PMLA Framework
Explanation 1 of the substituted Rule 6(a) now provides that the expression “beneficial owner” shall have the meaning assigned under Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 (“PMLA”) and shall be determined in accordance with Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (“PML Rules”). Accordingly, the NDI Rules have now been expressly aligned with the beneficial ownership thresholds and tests under the PMLA regime.
Explanation 2 of the substituted Rule 6(a) introduces a broader attribution framework.
Beneficial ownership shall be construed to be vested in a country sharing land border with India where a citizen or entity of such country has the ability, directly or indirectly, individually or cumulatively with any other citizen or entity, independently or collectively with any other citizen or entity, whether acting together or otherwise, to hold rights and entitlements:
- in excess of the applicable thresholds specified under Rule 9(3) of the PML Rules over an investor entity which is incorporated or registered in a country other than a country sharing land border with India;
- which enables such citizen or entity or both to exercise control over the investor entity; or
- which enables such citizen or entity or both to exercise ultimate effective control over the investee entity in any manner.
The framework therefore extends beyond a narrow equity holding analysis and includes indirect rights, cumulative holdings and control-based assessments.
Transfers Resulting in Change in Beneficial Ownership
The amended Rule 6(a) retains the requirement for prior Government approval where any direct or indirect transfer of existing or future foreign investment results in beneficial ownership falling within the above restrictions.
Reporting Requirements
The amended Rule 6(a) further provides that investments from investor entities having any direct or indirect ownership by a citizen or an entity of a country sharing land border with India, but not otherwise requiring Government approval, shall be subject to reporting requirements prescribed by the Reserve Bank of India. As per the latest Standard Operating Procedures※3, the onus is on the Indian investee entity or resident Indian transferor/transferee, as the case may be. The reporting is to be made prior to the inward remittance of foreign capital. In cases which do not involve foreign capital inward remittances, the reporting is to be made prior to execution of the relevant transactions, including issuance/transfer of capital instruments, as the case may be.
Conclusion
The 2026 Amendment Rules introduce a detailed statutory framework for determination of beneficial ownership under India’s foreign investment regime. By expressly linking the analysis to the PMLA and PML Rules, the Government has clarified the applicable legal standard for determining when investments involving countries sharing land borders with India require prior Government approval. The introduction of a more detailed statutory framework is expected to provide greater regulatory clarity and consistency in beneficial ownership assessments, which may assist in reducing interpretational uncertainty in foreign investment transactions.
Endnotes
*1
Countries sharing land borders with India include Pakistan, China (including Hong Kong), Nepal, Bhutan, Bangladesh, Myanmar, Afghanistan.
*2
Items (i) and (ii) were already covered under the pre-amendment provision. The amended provision additionally extends the Government route requirement to investments where the beneficial ownership of the investment is vested in a country sharing a land border with India.
*3
Standard Operating Procedures set out a framework for online filing of applications seeking prior approval for investments in sectors or activities that require prior approval.
This newsletter is given as general information for reference purposes only and therefore does not constitute our firm’s legal advice. Any opinion stated in this newsletter is a personal view of the author(s) and not our firm’s official view. Given the nature of this newsletter as general information, statutory provisions and source citations may have been intentionally omitted. For any specific matter or legal issue, please do not rely on this newsletter but make sure to consult a legal adviser. We would be delighted to answer your questions, if any.
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