On 10th March 2026, the Union Cabinet, chaired by Prime Minister Narendra Modi, approved a significant revision to India’s foreign direct investment (FDI) policy — one that has been closely watched by global investors, multinational corporations, and startup founders alike. The new framework introduced through Press Note 2 of 2026 and the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026, notified on 1st May 2026, modifies the restrictions earlier imposed under Press Note 3 of 2020. This had placed a blanket government-approval requirement on all investments from countries sharing a land border with India. The revised rules, effective from 1st May 2026, introduce a more calibrated approach — easing certain investment pathways while maintaining robust safeguards on national security and strategic sectors.
For businesses — whether Indian companies seeking foreign capital, global funds with minority stakes in Chinese entities, or multinationals planning to route investments into India — understanding the contours of this policy change is now a matter of commercial urgency.
Background: Why Was Press Note 3 Introduced?
Press Note 3 was introduced in April 2020 in the aftermath of the Galwan Valley border clashes between India and China. The policy sought to prevent what the government described as “opportunistic takeovers” of Indian companies during the COVID-19 pandemic, when valuations were depressed and Indian businesses were financially vulnerable. Under Press Note 3, any investment — direct or indirect — from a country sharing a land border with India required prior government approval. The seven countries affected were China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan.
In practice, this had a far wider impact than initially anticipated. Global venture capital and private equity funds with even minor Chinese connections found their investment proposals stalled. Indian startups reported significant delays in funding rounds. Industry bodies repeatedly flagged the policy as a deterrent to genuine investment flows, particularly in technology, deep tech, and manufacturing sectors.
Notably, the economic case against the blanket restriction was well-documented. The 2023–24 Economic Survey of India — the flagship annual publication of India’s Ministry of Finance — had argued in favour of FDI from China to boost local manufacturing and increase India’s participation in global supply chains. Despite this, political resistance to any relaxation remained strong until 2026.
What Has Changed Under Press Note 2, 2026?
The 2026 amendment does not eliminate the regulatory framework established by Press Note 3 — it refines it. The key changes can be understood across three dimensions:
Automatic Route for Minority, Non-Controlling Stakes
Foreign companies in which investors from land-bordering countries hold up to 10% of shareholding on a non-controlling basis can now invest in India through the automatic route — without requiring prior government approval — in all sectors where FDI is generally permitted. This directly addresses the concern of global funds with minor Chinese shareholding that were caught in the approval bottleneck.
The definition of “beneficial ownership” has been aligned with the Prevention of Money Laundering Rules, 2005, providing clearer standards for investors to assess their compliance position.
60-Day Expedited Approval for Priority Manufacturing Sectors
For investments that still require government approval — including those from entities directly registered in land-bordering countries, or those involving strategic sectors — the government has introduced a 60-day mandatory processing timeline for applications in priority manufacturing sectors, including:
- Capital goods
- Electronic capital goods and components
- Solar manufacturing inputs, including polysilicon and ingot-wafer
This represents a meaningful improvement over the previous regime, where approval timelines were indefinite and often stretched over many months, creating commercial uncertainty for deal timelines.
Insurance Sector: 100% FDI Now Permitted
Alongside the Press Note 2 amendments, the government issued the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2026, notified vide S.O. 2186(E) dated 2nd May 2026, permitting 100% FDI in insurance companies and intermediaries — including brokers, third-party administrators, and corporate agents. This removes the previous 74% ownership ceiling, enabling global insurers to pursue full ownership of Indian insurance entities without requiring a joint venture partner.
Two important carve-outs apply:
- The automatic route for the Life Insurance Corporation of India (LIC) remains capped at 20%.
- Either the Chairman or the MD and CEO of the insurance entity must be a resident Indian citizen.
What Has Not Changed — The Safeguards That Remain
The relaxation is calibrated, not wholesale. Businesses must be clear on what the revised framework does not permit:
- Entities directly registered in China, Hong Kong, or other land-bordering countries remain subject to the government approval route — the automatic route relaxation applies only to foreign companies that have minority shareholding from these countries, not to entities incorporated there.
- Majority ownership and control of any Indian investee entity must remain with resident Indian citizens or Indian-owned entities at all times.
- Sectors critical to national security — including defence, telecommunications, and media — continue to attract heightened scrutiny.
- Investors from land-bordering countries must provide detailed disclosures to the Department for Promotion of Industry and Internal Trade (DPIIT).
One clarification worth noting for global investors: multilateral banks or funds of which India is a member — including the Asian Development Bank (ADB), New Development Bank (NDB), and Asian Infrastructure Investment Bank (AIIB) — will not be treated as entities from land-bordering countries, regardless of the membership composition of those institutions.
The Numbers Behind the Policy
To understand the significance of this reform, it helps to look at the data. Between April 2000 and December 2025, India received total FDI equity inflows of USD 776.75 billion, with total FDI inflows (including reinvested earnings and other capital) reaching USD 1.14 trillion. Mauritius and Singapore together account for approximately 49% of equity inflows.
Against this backdrop, China’s direct FDI contribution has been strikingly small. As of December 2025, China accounts for just 0.32% of India’s total FDI inflows — approximately USD 2.51 billion since April 2000 — making it the 23rd-largest investor in the country. The practical impact of Press Note 3, therefore, was less about blocking large-scale Chinese investment and more about creating uncertainty for global funds with indirect Chinese connections.
Trade between the two countries, however, has moved in the opposite direction. In 2024–25, India’s imports from China rose by 11.52% to USD 113.45 billion, while exports fell by 14.5% to USD 14.25 billion — resulting in a trade deficit of USD 99.2 billion. This imbalance has been a key driver of the policy rethink: restricting Chinese FDI had not reduced import dependency; it had simply denied India the manufacturing investment that could, over time, reduce it.
Expert assessments suggest that the changes under Press Note 2, 2026, could help China regain a 2% share in total Indian FDI — a modest but commercially meaningful shift.
Practical Implications for Businesses
For Indian Startups and Growth-Stage Companies
The most immediate beneficiaries are Indian startups that had been unable to access global VC and PE funding because their prospective investors — funds with minority Chinese LPs or co-investors — were caught in the government approval bottleneck. The 10% automatic route threshold should unlock a substantial pipeline of previously stalled deals, particularly in deep tech, fintech, and electric mobility.
For Manufacturing and Supply Chain Businesses
The 60-day approval window for capital goods, electronics, and solar manufacturing inputs is a structurally important reform. India has long sought to scale high-tech manufacturing — a goal that Indian manufacturers themselves have acknowledged is difficult without Chinese component supply chains and technology. The expedited approval process creates a more predictable regulatory environment for joint ventures and technology transfer arrangements.
For the Insurance Sector
The removal of the 74% ownership ceiling is a landmark reform for global insurers. Full ownership is now possible without a mandatory Indian joint venture partner, and for the first time, mergers between insurance and non-insurance entities are permissible. This opens the door to structural transactions that were previously unavailable in the Indian insurance market.
For M&A and Transaction Practitioners
Deal teams will need to conduct careful beneficial ownership analysis on foreign investors to determine whether the 10% automatic route threshold applies. The alignment of “beneficial ownership” with the Prevention of Money Laundering Rules, 2005, provides a statutory reference point, but tracing ownership structures across jurisdictions will require detailed due diligence, particularly for complex fund structures. The DPIIT disclosure requirements for eligible automatic-route investments must also be factored into transaction timelines.
The Broader Strategic Context
This reform does not occur in a vacuum. It is part of a broader recalibration of India’s economic posture in response to global supply chain realignments — accelerated by high US tariffs and ongoing geopolitical tensions — and a recognition that India’s Atmanirbhar Bharat (self-reliance) agenda cannot be achieved in isolation from global capital and technology flows.
India is also competing directly with ASEAN nations — Vietnam, Thailand, and Malaysia — for supply chain investment that is relocating away from China. Vietnam’s electronics exports reached USD 165 billion in 2023, accounting for approximately 41% of its total exports. India’s ability to attract comparable investment requires not just competitive FDI policy but reliable and fast regulatory processes — which the 60-day approval window is designed, at least in part, to address.
The reform reflects what one senior legal expert described as “a nuanced recalibration rather than a wholesale liberalisation” of India’s FDI regime — reducing transactional friction for genuine investors while retaining overall sectoral safeguards.
Conclusion
Press Note 2, 2026 is a carefully calibrated step forward — one that acknowledges the practical costs of the blanket approval regime while preserving India’s ability to screen investments on security and strategic grounds. For businesses, the key takeaway is this: the automatic route is now available for a wider class of foreign investors, the insurance sector is fully open to foreign ownership, and the government has committed to faster processing for manufacturing-sector approvals.
However, the distinction between who qualifies for the automatic route and who still requires government approval is critical and will turn on careful analysis of beneficial ownership structures. Businesses and investors operating in this space should conduct thorough regulatory due diligence before structuring any transaction involving entities with connections to land-bordering countries.
