India’s May 2026 Foreign Exchange Management Act (FEMA) amendment has tightened the foreign direct investment framework by shifting focus from the source of capital to the identity of its controllers. Beneficial ownership, indirect stakes, and future changes in control are now under scrutiny, with Pakistan barred from sensitive sectors.
India’s new FEMA rules mark a decisive shift in its FDI policy. The government has clarified that investments from countries sharing land borders with India will continue to require approval through the government route.
This applies not only to direct investments but also to indirect holdings and beneficial ownership structures. The amendment introduces a sharper definition of beneficial ownership, aligning it with the Prevention of Money Laundering Act framework, ensuring that even minority stakes are examined for control implications.
A key change is the treatment of overseas companies with up to 10 per cent shareholding from land-bordering countries such as China. These firms can now invest under the automatic route, provided the ownership is non-controlling and subject to sectoral caps.
However, entities incorporated in China, Pakistan, or other neighbouring countries remain excluded from automatic approvals, reflecting India’s security concerns. Pakistan, in particular, has been barred from sensitive sectors, reinforcing restrictions already in place since 2020.
The amendment also mandates that any future change in ownership or control of an investing entity will require fresh approval. This ensures that Indian regulators retain oversight over evolving corporate structures, preventing circumvention through layered investments or shell entities.
Multilateral banks and funds, however, have been exempted from these restrictions, with India clarifying that no single country will be deemed the beneficial owner of such institutions.
The government has also streamlined timelines for processing proposals involving land-bordering country investments in critical manufacturing sectors such as electronic components, capital goods, and solar cells.
Proposals must now be cleared within 60 days, balancing national security with the need to attract capital into priority industries. This calibrated relaxation is designed to boost manufacturing while safeguarding against opportunistic takeovers.
The broader context of these changes lies in India’s experience since the COVID-19 pandemic, when opportunistic acquisitions by foreign investors from neighbouring countries raised alarm.
The 2020 Press Note 3 had imposed blanket restrictions, but the new rules refine them by distinguishing between passive minority stakes and controlling ownership. This nuanced approach is expected to encourage legitimate capital inflows while maintaining vigilance against strategic risks.
At the same time, India has liberalised FDI in other sectors, most notably allowing 100 per cent foreign investment in insurance companies and intermediaries under the automatic route, with a differentiated cap of 20 per cent for LIC. These parallel reforms show India’s intent to attract global capital while ring-fencing sensitive areas of national security.
The May 2026 FEMA amendment thus represents a dual-track policy: openness to foreign capital in growth sectors, coupled with strict scrutiny of ownership structures linked to border-sharing nations.
It signals India’s determination to balance economic liberalisation with strategic autonomy, ensuring that control, not just capital, defines the future of foreign investment in the country.
Agencies
