India Eases FDI Rules for Neighbouring Countries: A Calibrated Boost to Regional Growth

For several years, foreign direct investment (FDI) from investors situated in countries sharing land border with India was subject to stringent restrictions, effectively limiting access to such capital.

In April 2020, against the backdrop of the COVID-19 pandemic, the Government of India introduced enhanced regulatory scrutiny through Press Note 3 (2020). This measure mandated prior government approval for all investments originating from land-bordering countries, irrespective of the investment size, with the objective of curbing opportunistic acquisitions of Indian businesses during a period of economic vulnerability.

While the policy was rooted in legitimate national security concerns, it resulted in certain practical challenges, including:

• Delays in capital infusion

• Increased compliance and regulatory burden

• Funding challenges for startups and growth-stage companies

  
  

Recent policy developments, however, indicate a more balanced and pragmatic approach, one that seeks to harmonise national security considerations with the need to facilitate investment, innovation, and economic growth.

Key Relaxations under the Revised Framework:

1. Up to 10% Non-Controlling Investments 

Minority investments, not exceeding 10% and without conferring control, may now be permitted under the automatic route. This significantly reduces friction in early-stage and venture funding transactions.

2. Clarification on “Beneficial Ownership”

   
   

The revised framework aligns the concept of beneficial ownership with the Prevention of Money Laundering Act (PMLA) Rules, thereby enhancing regulatory clarity and reducing interpretational ambiguity in ownership structures.

3. Fast-Track Approvals (60 Days)

Select sectors including electronics, capital goods, and solar manufacturing will benefit from an expedited approval process, enabling time-bound clearances within a 60 days window.

Continuing Safeguards

Notwithstanding these relaxations, the regulatory framework retains critical safeguards. Investments involving land-bordering jurisdictions must ensure that ownership and control remain with resident Indian citizens or Indian-controlled entities. Additionally, investee entities are required to disclose relevant beneficial ownership details directly to the Department for Promotion of Industry and Internal Trade (DPIIT).

Conclusion

This development represents a calibrated policy shift rather than a wholesale rollback of safeguards. It signals:

• Enhances ease of doing business

• Improved access to global capital

• Continued prioritisation of strategic and sensitive sectors

• A sustained push towards domestic manufacturing and self-reliance

  
  

For founders, investors, and legal advisors, these changes could open up new structuring opportunities, particularly in the context of minority investments and cross-border collaborations.