Press Note 2 of 2026: The 10% Beneficial Ownership Test That Decides If Your Foreign Funding Round Needs Government Approval

Last updated: 20 July 2026 | By CS Sapna Malpani, Practising Company Secretary, Bangalore

Between FY 2020-21 and FY 2021-22, investors filed proposals worth about Rs 75,691 crore under the Press Note 3 approval regime. Roughly Rs 13,625 crore came through. Deals sat for four to nine months while ministries traded files, and a large share of that friction hit companies whose actual connection to a land-bordering country was a limited partner holding two per cent of a Cayman fund. Press Note 2 2026 rewrites that test. It keeps the approval gate, but for the first time it says in writing who counts as a beneficial owner and at what percentage. If your last round closed before May 2026, or your next one closes after it, this is the paragraph your investor’s counsel will open first.

Why Press Note 2 2026 Matters More Than Any FDI Change Since 2020

Press Note 3 of 2020 was written in April 2020, three weeks into the first lockdown, to stop opportunistic buying of distressed Indian assets. It moved every investment from a land-bordering country to the Government approval route, and it extended that gate to indirect investments by capturing the “beneficial owner”. The intent was clear. The drafting left a hole: the phrase beneficial owner was never defined.

Six years of practice filled that hole with guesswork. Some banks applied a 25% test borrowed from the older PMLA rules. Some applied any-percentage. Authorised dealer banks refused to process Form FC-GPR filings where a fund’s investor list mentioned Hong Kong at all. A Singapore-domiciled fund with a 3% Chinese family-office LP and no board seat found itself in the same queue as a direct acquisition by a Shenzhen manufacturer. Global private equity and venture capital funds, which by design hold money from dozens of jurisdictions, were the worst affected, and several simply stopped looking at India-domiciled targets.

The Union Cabinet approved a revision on 10 March 2026. DPIIT issued Press Note 2 (2026 Series) on 15 March 2026 under F.No. 5(5)/2020-FDI Policy (Pt-1), amending Para 3.1.1 of the Consolidated FDI Policy. The press note itself says the decision takes effect from the date of the FEMA notification, and that came on 2 May 2026 through the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026, notified by the Department of Economic Affairs vide S.O. 2174(E). A further set of changes, the Non-Debt Instruments (Third Amendment) Rules, 2026, took effect on 12 June 2026 and widened the category of foreign individuals who can invest.

The Three Triggers: When Government Approval Is Still Required

Para 3.1.1(a) as amended holds the line. An entity or citizen of a country sharing a land border with India, or an investment whose beneficial owner is a citizen of such a country, can invest only under the Government route. A citizen of Pakistan or an entity incorporated in Pakistan sits under the Government route for everything, and is shut out of defence, space, atomic energy and the prohibited sectors altogether.

What Para 3.1.1(c) adds is the machinery. Beneficial owner now carries the meaning given in Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002, determined using the criteria in Rule 9(3) of the PML (Maintenance of Records) Rules, 2005. Beneficial ownership is treated as vested in a land-bordering country where citizens or entities of such a country, individually or cumulatively, acting together or otherwise, hold rights that meet any one of three tests.

Two points deserve emphasis because they are where deals go wrong. First, the tests are cumulative across holders, not per holder. Three unrelated land-border shareholders at 4% each add up to 12% and cross the company threshold. Second, control and ultimate effective control operate independently of any percentage. A 1% holder with a veto over the investor fund’s India allocation is caught, and so is a structure where a land-border person can steer the Indian company through side letters, management contracts or nominee arrangements.

The Thresholds That Now Decide Your Route

Rule 9(3) of the PML Rules was tightened in 2023, and Press Note 2 imports those tightened numbers wholesale. This matters: the operative percentage is 10, not the 25 that many advisers still quote from memory.

The Trap Most Founders Miss: Para 3.1.1(d) Reporting

Clearing the approval test is not the end of the exercise. Para 3.1.1(d) creates a fresh obligation for investments that carry any direct or indirect ownership by a citizen or entity of a land-bordering country and yet do not require prior Government approval. Those investments must be reported in the format laid down in the DPIIT Standard Operating Procedure, and the press note is explicit that this sits in addition to sectoral cap, entry route and attendant conditions.

Read that sequence again from a founder’s chair. The fund’s counsel confirms the land-border LP sits at 6% with no control. The round closes on the automatic route. Form FC-GPR goes in within 30 days. Everyone relaxes. And the company is still in default, because nobody filed the 3.1.1(d) disclosure. This is the sort of gap that surfaces two years later in an IPO diligence questionnaire or a strategic acquirer’s data room, at the worst possible moment and with no cheap way to fix it retrospectively.

What Changed in the Approval Process

DPIIT issued a revised Standard Operating Procedure dated 4 May 2026, replacing the 2023 SOP, to run alongside Press Note 2 and the amended NDI Rules. The dates below are the ones to put in front of your board.

The process is now fully paperless through the National Single Window System. The standard approval period is 12 weeks. Annexure VII of the 2026 SOP carves out an expedited 60-day track for six areas: capital goods manufacturing, electronic capital goods and electronic component manufacturing, polysilicon and ingot wafers, advanced battery components, rare earth permanent magnets, and rare earth processing. A hardware startup in any of those six lines should be pricing a 60-day gate into its term sheet, not a nine-month one.

What You Must Do Now: The Seven-Step Re-Audit

Step 1. Pull a complete ownership chart for every foreign investor on your cap table. Not the top holding company. The chain up to natural persons, with citizenship and jurisdiction of incorporation marked at each layer. For funds, this means the LP register or at minimum a certificate from the fund’s administrator. Build it once and keep it in the data room.

Step 2. Compute cumulative land-border holdings, not individual ones. The press note wording covers persons acting “individually or cumulatively, independently or collectively, whether acting together or otherwise”. Add every land-border strand together before testing against 10%.

Step 3. Read the control documents, not just the shareholding. Board nomination rights, affirmative vote items, quorum rights, information rights that amount to steering, management or advisory contracts, and side letters. Any of these can create control or ultimate effective control at a shareholding well under the threshold. This is where a Practising Company Secretary earns the fee, because the answer lives in the shareholders’ agreement rather than the register of members.

Step 4. Take dated declarations from each investor. A signed representation on land-border ownership and control, refreshed at every round and on every secondary transfer, is the only defensible record when the authorised dealer bank or a future acquirer asks. Tie it to an undertaking to notify the company of upstream changes, since Para 3.1.1(b) makes later shifts in beneficial ownership a prior-approval event and the company will otherwise never learn of them.

Step 5. Where a trigger is met, file on NSWS and plan the calendar honestly. Budget 12 weeks, or 60 days if you fall inside Annexure VII. Do not sign a term sheet with a 45-day outside date and a land-border approval condition. Board resolutions, the valuation certificate and the sectoral position should be ready before filing rather than assembled during ministry queries.

Step 6. Where no trigger is met but land-border ownership exists, file the Para 3.1.1(d) report. Use the DPIIT SOP format. Diarise it as a standing item alongside FC-GPR rather than treating it as a one-off.

Step 7. Close the FEMA loop. Form FC-GPR within 30 days of allotment through the FIRMS portal, valuation certificate on file, and the FLA return each July. A clean Press Note 2 position does not cure a late FC-GPR, and the two get examined together.

The Deeper Implication for Founders and Boards

According to CS Sapna Malpani, the shift here is from a jurisdiction question to an evidence question. Under Press Note 3 the answer to “do we need approval?” turned on where the investor was incorporated, which a founder could answer from a term sheet. Under Press Note 2 the answer turns on a percentage and a control assessment that sit several layers up a chain the Indian company does not control and often cannot see. The company carries the compliance risk either way. That asymmetry is the real change, and it is why the ownership chart and the investor declaration have moved from nice-to-have diligence artefacts to standing board records.

Two things will probably happen over the next two quarters. Authorised dealer banks will standardise a Press Note 2 declaration format, and merchant bankers will add a land-border beneficial ownership certificate to the IPO diligence checklist. Companies that build the ownership map now will hand it over in an afternoon. Companies that do not will spend six weeks reconstructing it from investor emails at the exact point their DRHP timetable has no slack.

Press Note 2 Compared With the Provisions It Is Confused With

Three regimes ask about beneficial ownership and founders routinely conflate them. They are separate filings with separate consequences.

The overlap is real but partial. A company can be clean under Section 90 and still be in default under Press Note 2, because BEN-2 asks about significant beneficial ownership of the Indian company while Press Note 2 asks about the nationality of beneficial owners in the investor’s chain.

Frequently Asked Questions on Press Note 2 2026

What is Press Note 2 of 2026?

Press Note 2 (2026 Series) is the DPIIT press note dated 15 March 2026 that amends Para 3.1.1 of the Consolidated FDI Policy, 2020. It replaces the undefined beneficial ownership concept introduced by Press Note 3 of 2020 with a statutory definition drawn from Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 and the thresholds in Rule 9(3) of the PML (Maintenance of Records) Rules, 2005. It also adds a reporting obligation for investments that carry land-border ownership but stay below the approval trigger. The policy took effect on notification of the FEMA (Non-Debt Instruments) (Amendment) Rules, 2026 vide S.O. 2174(E) dated 2 May 2026.

What is the 10% beneficial ownership threshold under Press Note 2 2026?

Press Note 2 does not itself state a percentage. It points to Rule 9(3) of the PML (Maintenance of Records) Rules, 2005, which after the 2023 amendment fixes beneficial ownership at more than 10% of shares, capital or profits for a company, more than 10% of capital or profits for a partnership, 10% or more interest for trust beneficiaries, and 15% for unincorporated associations. For a corporate investor, land-border holdings above 10% will normally push the investment into the Government approval route. Control and ultimate effective control are separate triggers that apply regardless of percentage.

Does Press Note 2 2026 remove the Government approval requirement for Chinese investment?

No. Investments where the investor is an entity or citizen of a land-bordering country, or where the beneficial owner is a citizen of such a country, still need prior Government approval. What changed is the test for identifying that beneficial owner. Diversified funds with small, passive land-border limited partners below the Rule 9(3) thresholds and without control rights are no longer swept in by default. A Pakistani investor remains restricted to the Government route and is barred entirely from defence, space, atomic energy and prohibited sectors.

What is the new reporting requirement under Para 3.1.1(d)?

Para 3.1.1(d) covers investments from an investor entity that has any direct or indirect ownership by a citizen or entity of a land-bordering country but does not need prior Government approval. These have to be reported in the format laid down in the DPIIT Standard Operating Procedure. The obligation sits on top of the usual sectoral cap, entry route and FC-GPR reporting. An Indian company can therefore clear the approval test and still be non-compliant if it skips the disclosure.

How long does Government approval take under the 2026 SOP?

The revised DPIIT Standard Operating Procedure dated 4 May 2026 runs the process on the National Single Window System on a paperless basis. The standard timeline is 12 weeks. Annexure VII prescribes an expedited 60-day timeline for six specified areas: capital goods manufacturing, electronic capital goods and electronic component manufacturing, polysilicon and ingot wafers, advanced battery components, rare earth permanent magnets, and rare earth processing.

What is the penalty for taking foreign investment without approval?

The exposure runs under Section 13 of FEMA, 1999. Where the amount is quantifiable the penalty can go up to three times the sum involved, and where it is not quantifiable up to Rs 2 lakh. A continuing contravention attracts a further penalty of up to Rs 5,000 for every day the default continues. The Reserve Bank can also direct unwinding of the investment. Most cases settle through compounding under Section 15 of FEMA, but compounding is discretionary and the shares stay in limbo until it concludes.

Do I need to re-audit my existing cap table after Press Note 2 2026?

Yes, for two reasons. Para 3.1.1(b) requires prior Government approval where a later transfer of ownership, direct or indirect, pushes beneficial ownership into the restricted category, and that includes changes upstream in an investor fund the Indian company may never be told about. Separately, the reporting obligation under Para 3.1.1(d) is triggered by any direct or indirect land-border ownership, so the company needs a current picture of its investors’ ownership chains to know whether it must file at all.

Sources and References

• DPIIT, Press Note No. 2 (2026 Series), F.No. 5(5)/2020-FDI Policy (Pt-1), dated 15.03.2026
• DPIIT, Revised Standard Operating Procedure for FDI proposals, dated 4 May 2026
• DPIIT, Press Note 3 (2020 Series), dated 17.04.2020
• Cabinet approval of changes to land-border investment guidelines, 10 March 2026
• Prevention of Money-laundering (Maintenance of Records) Rules, 2005 — Rule 9(3)
• India Code — Foreign Exchange Management Act, 1999, Sections 13 and 15
• SCC Online, FEMA (Non-Debt Instruments) Third Amendment Rules, 2026 explained
• Bar & Bench, Beyond Press Note 3: Analysing Press Note 2 (2026), 18 June 2026
• AZB & Partners, Amendment of PML (Maintenance of Records) Rules

This article is general guidance on Press Note 2 2026 and is not a substitute for advice on a specific transaction. Verify the current position against the primary sources before acting.